Financial services industry executives say that the cost, risk and burden of regulatory compliance are top concerns, according to a survey of nearly 400 senior finance executives at the third annual PricewaterhouseCoopers Finance Executives Forum held here this month.
When asked what the biggest challenge for the industry as a whole would be over the next two to three years, the top response given was the "decline of U.S. competitiveness in the global marketplace" followed by "competition for talent".
Concern about the decline of U.S. competitiveness has increased significantly since last year's forum, when it ranked fifth on the list of future industry concerns.
"Financial services firms operate in an increasingly complex and heavily regulated environment, one in which the bar is high, by design, to ensure the highest level of investor protections. The rigor of compliance and controls has helped make our capital markets system one of the strongest in the world," said Timothy F. Ryan, chairman of the U.S. Financial Services Industry Practice of PricewaterhouseCoopers.
"Despite our strength, however, there is concern that the United States may be losing its dominance for reasons that are not necessarily due to our regulatory environment," added Ryan. "It faces new competition that never existed in the global capital markets system. We must work to identify the true root causes of the perceived decline of U.S. competitiveness and propose solutions that do not undermine confidence in the capital markets."
The PricewaterhouseCoopers Finance Executives Forum brings together finance executives from across the financial services industry including banking, capital markets, consumer finance, real estate and asset management firms. It is the largest industry gathering of its kind and provides a forum for discussion of the major technical financial and accounting issues taking place in the industry.
Fair Valuation Poses the Great Accounting Challenge
A number of projects by the Financial Accounting Standards Board (FASB) are having a significant impact on the financial industry, with the biggest issue for finance executives being fair valuation. When asked which current FASB initiative will have the greatest impact on theeir business or finance team in the coming year, 34 percent said "Fair Value Measure" (FAS 157) and 28 percent said "Fair Value Option" (FAS 159).
FASB issued FAS 157 "Fair Value Measure" in September 2006, applying a new standard to use whenever other standards either require or permit assets or liabilities to be measured at fair value. Compliance with FAS 157 and 159 puts additional strain on finance departments and may require new skill sets. When asked how they are resourcing this work, nearly half (46%) of survey respondents said they are relying on their own internal finance department, and 21 percent are using existing valuation experts. One-quarter, however, have turned to third-party valuation professionals.
Focus on Simplifying Financial Reporting
When asked what business performance issue will have the most significant impact on their organization's business or finance team over the next 12 months, nearly one-third (32%) said "simplifying financial reporting", the top answer given. Approximately one-quarter said either "operationalizing risk management" (26%) or "systems integration" (22%).
Convergence of Global Financial Reporting and Accounting Standards
The SEC's decision to eliminate reconciliation requirements for foreign issuers is the latest in a series of action to streamline financial reporting through the convergence of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP).
Nearly nine in ten (88%) PwC survey respondents agreed that there should be a single global set of financial reporting standards. Yet more than two-thirds (68%) said they are not prepared to give up control of established U.S. accounting standards. When asked specifically what the reporting standard should be, about one-third (34%) said IFRS, the standard used largely by the rest of the world outside the U.S. Forty-four percent suggested keeping two standard setters in the world, but continue to work toward converging standards, and 13 percent said standards should be something other than either U.S. GAAP or IFRS.
Over half (55%) of survey respondents said they expect there to be a single global financial reporting standard by 2015. Another 22 percent don't expect convergence until 2020. Only 6 percent expect convergence by 2010 and 7 percent think that true convergence will never take place.
"Requiring reconciliation between the two standards has been viewed by some as an enormous burden on foreign issuers," said Raymond J. Beier, partner and leader of strategic analysis and policy, PricewaterhouseCoopers LLP. "Yet the world is shrinking and it is only a matter of time before the two most dominant standards converge."
Views on Subprime Mortgage Market and Broader Economic Issues
One in five financial services industry executives said they believe that the U.S. economy will enter into a recession within the next 12 months. While only 10 percent said that the decline in the housing market would be the biggest challenge their organization will face in the year ahead, 30 percent said that they were concerned or extremely concerned about the adverse impact that subprime mortgage market issues could have on their organization. The majority (49%) were only somewhat concerned about the subprime issue, and 21 percent said they are completely unconcerned about it
The 3rd annual PricewaterhouseCoopers Finance Executives Forum is a one-day forum of discussion about the future of the financial services industry, best practices emerging from finance and compliance departments and technical issues in the changing financial services industry. Survey respondents were finance executives representing Banking (39%); broker/dealers (6%) Insurance (24%), Investment management (24%, of which 10 percent were from traditional asset management firms and 14 percent were from alternative investment/private equity firms) and Real Estate (7%).