Comparing last year’s 1LoD Annual Report & Benchmark Survey results to those for 2019 builds a picture of a 1st line that is growing in responsibility, headcount and efficiency.
Reflecting on the past year, Todd Sullivan, Managing Director and Head of Risk Management for Fixed Income, Americas at Morgan Stanley in New York, says: “There has been no ZIP code change. We haven’t moved to a totally new place.”
A year ago, 75% of respondents said that they expected a small expansion of the mandate over the coming 12 months and 15% expected a significant expansion, while 10% said they expected no significant change. In reality, for the same 12-month period 37% indicated there had been a large expansion and 43% a small expansion in the mandate. Meanwhile 9% highlighted there had either been a small reduction (3%) or large reduction (6%) in the mandate over the past 12 months.
The high water mark has not yet been reached, it seems, but control officers stress continually that cost pressures are building.
Wearing many hats
One of the reasons for growth is that the 1LOD is performing quite a few more roles than it did last year. Of the firms surveyed, the 1LOD is now doing more incident management than it was (53% of firms versus 35% in 2018), and a lot more control assurance testing. It seems that the 1LOD has continued to take over many responsibilities traditionally done in the 2LOD.
The 1LOD is also doing appreciably more supervisory training and control remediation, while the 2LOD does a lot less in these regards. Indeed, there is no area of responsibility in the 2LOD that has grown over the last year.
This corresponds to what senior 1LOD officials say about the way in which the wind is blowing at their firms. “There might be a slight uptick in the size of our team – we are taking on new responsibilities as people see we do things well,” says one.
The migration of controls from the 2LOD to the 1LOD accounts for slightly less of the expansion in head count than it did last year; 30% of those polled saying it remains a factor, compared to 38% last year. The impact of regulation remains a large component of the reasons the function continues to expand, while 9% of respondents cited financial pressure as a reason the 1LOD might decrease in size compared to none last year.
The number of people working in the 1LOD control functions varies considerably, which is to be expected given the considerable variation in the complexity and size of banks that responded to the survey. The largest numbers reported were 300 in the UK, 320 in Asia (including control utilities in lower cost centres) and 150 in the US.
The largest front office markets business in London reported by those polled is 3,500, and the average is 824. In New York, however, the biggest number of sales/trading staff reported by any one bank is 4,000 but the average number is significantly lower at 691. In the Asian market, meanwhile, both numbers are lower: the maximum is 1,400, and the average is 300.
The ratio of front office control staff to sales and traders also varies significantly by region. The lowest ratio is in Asia, with each member of front office controls supporting ten sales and trading resources on average, followed by the UK with 17. The highest ratio is found in the US, where the average member of front office controls supports 25 members of sales and trading.
Dedicated control chief
There has been a subtle, but interesting, shift in reporting lines over the past year, away from a chief operating officer and towards a chief controls officer. In 2018, only 11% said the front office controls function reported to a chief controls officer, while 53% said it reported to a chief operating officer. For another 21%, it reported to a head of markets and a further 16% said it reported to a chief administrative officer.
In 2019, however, more than double that figure (24%) now say that there is a chief controls officer at the head of the 1LOD pyramid, while the number reporting directly to a chief operating officer (without a subordinate chief controls officer) has dropped to 32%.
So, clearly, there is a bit of restructuring going on. But bankers are keen to stress that while the role of one overall head of controls might be for some banks, it’s not for all. The major global banks that have that model – Barclays and HSBC – are, however, increasing within that minority. Only 35% of firms surveyed indicated that they have an overall chief controls officer compared to 30% in 2018.
Efficiency has been a key driver in the last year, which is highlighted in the significantly decreased number of controls that supervisors have to sign off. Last year, the average minimum number of controls across all respondents was 14, and this has sunk to nine. Unfortunately, this reduction has not translated into a reduction in how long supervisors spend on reviewing their controls, with an increase of those spending over 15 hours a week reviewing their controls from 10% to 17%.