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The Consulting Conundrum: CCAR Results 2017

Date: 23 August 2017

The results of this year’s Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress tests (DFAST) were met with enthusiasm. It was the first year the Federal Reserve Board did not object to any of the banks’ capital plans (although Capital One will resubmit its plan by the end of the year). All 34 banks met the quantitative assessment, and the 13 banks subject to the qualitative assessment were given the green light to proceed with their plans.1

These results indicate that the regulatory landscape in Finance is far stronger today than it was 10 years ago, and while many in the industry are busy toasting their success, the real heroes are the Risk and Regulatory groups which have continued to grow year-on-year, utilizing increasingly more sophisticated systems and models, and becoming more effective.

Dipping into the Talent Pool

From the perspective of the Big Four (Deloitte, Ernst & Young, KPMG and PwC), the recent busy regulatory environment has bolstered their position in the market. According to a report by consulting market analysts Source Global Research, Risk and Regulatory consulting grew by 7.8% to $14 billion in 2015.2

As Financial Services companies look to meet regulatory requirements and conduct prudent investments and trades, the high demand for competent risk professionals is being met by the world’s top universities. These universities produce strong candidates who continue to raise the bar in terms of how much an individual can impact business success.

Relaxing the Rules

CCAR and DFAST were introduced to prevent another financial crisis, and despite boosting confidence in the financial system, they are not popular with banks. Criticized for being overly complex and time-consuming, there have been many calls for greater transparency and clarity surrounding the tests.

The current US government has also made significant overtures so far, and proposals currently on the table include reducing the number of firms subject to CCAR and DFAST requirements, running the tests every two years, and even doing away with them entirely.

In addition, the largest financial institutions have reached the desired level of self-regulation; therefore, the need for targeted expertise from Risk consulting firms, including the Big Four, will decrease. These potential changes spell an uncertain landscape for Risk professionals in a future that either has less of a need for their skills, or one advanced to such a degree as to require less people, but better software and models.

As a result, many in the Big Four have started to send their resumes out into the market, and the already-high turnover rate looks set to reach even greater heights.

Flexibility Over Tradition

This is exacerbated by additional factors that are not new in the industry, but certainly do not ease the worsening situation. Relatively smaller consulting firms such as Crisil, Copal Amba, Duff & Phelps, have been chipping away at Big Four market share (in part due to the cheaper platform they oper on), both financially and in terms of brand reputation and employer desirability. Amidst growing concerns that auditing standards have been falling, KPMG and PwC have both just been hit this week by multi-million dollar fines ($6.2 million & $6.5 million respectively) for audit failures, with all of the Big Four having been involved in accounting scandals over the past 12 months.

Also, the increasing emphasis on work-life balance in today’s workforce means that a significant portion of candidates find themselves shunning “traditional” options, like the Big Four post-graduation, in favor of smaller firms that offer better working hours, flexible work situations such as working from home 1 day a week and a less “corporate” atmosphere.

And it is not just smaller firms that are luring talent away from the Big Four. Investment banks, valuing candidates with consulting backgrounds for their broad exposure and client-facing skills, are also attractive for candidates looking for fixed-team situations, and to be “closer to the business and markets”. These offer them immediate promotions and managerial responsibilities, along with a host of other benefits.

Comparative Advantages

Even so, the Big Four continue to enjoy stellar reputations globally, and attract international candidates seeking brand-name experience in droves. Many of our international candidates create career maps with clearly-defined stepping stones, and a common path has them starting off in the Big Four before moving on to a top investment bank, spending a few years at each, and then heading back to their home country.

One of the main reasons for starting off in the Big Four is their high base salaries, which often surpass their investment bank counterparts by a significant margin. Fresh graduates thrust into financial independence for the first time place a much greater value on offers promising higher guaranteed salaries, and this starting amount raises the threshold for future offers as well. And yet, this effect can also have a negative consequence. Candidates looking to move directly to an investment bank, for example, may have to accept a lower base salary if their current amount falls outside their allocated range, which is tied to their level of seniority. Their total compensation would still technically increase; however, as investment banks are able to offset this by offering a much larger annual performance bonus than the Big Four.

One advantage the Big Four do have specifically over smaller, risk-focused consulting firms is their cross-industry reach, allowing them to move resources from the Risk and Regulatory space to other areas they already cover such as Accounting and Management Consulting. If deregulation does indeed occur – and at a large-enough scale – the Big Four could easily shift their focus towards more profitable industries, leaving their Quant Risk Advisory & Regulatory Groups in the lurch.

To learn more about these market trends, and how hiring may be impacted going forward, get in touch with Selby Jennings today.





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