Overseen by Prime Minister Margaret Thatcher, the Big Bang set the stage for a wave of consolidation among banks, brokers and other types of financial services firms. And, I think, it also set the stage for the creation of the discipline of operational risk.
The Big Bang, and similar reforms that took place in the US and other countries, set the financial markets free to evolve into the dynamic and exciting places they are today. But at the same time, it changed the culture of the firms involved, it changed the 'unwritten' rules of employment, and it forever altered the kinds of products and services that were on offer.
Financial services firms used to be, well, smaller. Dare I say it – everyone knew everyone else. Officers ate in special dining rooms with real silver and glass. They had probably worked for the firm for decades. Their clients had probably worked for their firms for decades. Someone who performed a risk management function – remember, risk management hadn't really been invented as a discipline yet – based his decisions not just on numbers, but on years of accumulated knowledge about the individuals he was working with, or going to do a deal with.
Now, this system certainly had its downside. It created a very conservative culture at most firms. There weren't many risk management tools available, except for insurance. But many of the substantive operational risks that firms face today – regulatory risk, reputational risk etc – could be managed by simply knowing your employees and clients, and managing them well.
And, given that a senior executive would probably have known most of the people under him since they joined straight out of school, this was not as challenging as it might be today.
Indeed, today people in the financial services arena change firm at a fairly regular pace – studies differ but many say an average length of service is five years. People in industry – the clients of financial services firms – often change just as regularly. This fluidity creates mobility – which is a good thing. But it also creates substantial risks.
How well do you know the people you work with? How well do you know your clients? How much easier would it be for your firm to manage a number of the operational risks it faces if it had deeper – and longer – relationships with the individuals involved?
I certainly don't want to advocate rolling back the clock. But perhaps, just perhaps, there are lessons to be learned from the pre-Big Bang world.
6 December 2006
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