Split Stream

When Cees Maas, John Hele’s predecessor as ING’s CFO retired in April 2007, after 15 years in the job, it had been decided some time before that the CFO role needed to be divided.

"Maas had seen ING grow. He started when the insurance company merged with the bank. In those days the CFO function was a lot simpler in terms of regulation. As he was heading towards his retirement he saw unbelievable complexity growing with Basel II and IFRS coming along, the common accounting framework, Solvency 2 and new accounting for insurance on the horizon together with major high level directives such as Sarbanes Oxley and huge regulatory oversight. He was very clear that he thought the finance function was going to be too big for just one person, when considering banking, insurance and asset management."

Therefore, the job was split between finance and risk and two deputies were appointed to shadow Maas during his last year in office. Hele was one and the other was Koos Timmermans who is now ING’s chief risk officer.

Reflecting on the division of responsibilities, Hele says, "Timmermans and I are working extremely closely together. The drawback was that when they split the organisation, the human tendency was to say, ‘We are part of a different group, team A or team B,’ we had to proactively work together and show that we didn’t have a split organisation. It has required additional work but it has bedded in."

DOUBLE INDEMNITY

An early payback for the arrangement, says Hele, has been that, as the credit crisis kicked in, having two executives working on it has been of great benefit to ING. "At the same time, we have just received approval for our registration of Basel II." Hele adds that he has been surprised by comments that Basel II has been responsible for the present crisis. "To my mind, the problems were caused by Basel I which didn’t measure very well off-balance sheet risk and many of these projects ended up on the balance sheets of banks. Under Basel II these risks would have been captured and measured."

On the wider regulatory issues, Hele believes that they present a huge issue worldwide, both in banking and insurance: "At times, we have conflicting directives and at other times supervisory authorities who do not talk to one another. That can create difficulties and frictions within an organisation and, of course, the people who pay for it in the end are the consumers."

The challenge for ING as an international business is that, to the regulatory and supervisory commitments for banking, insurance and asset management activities that it has to fulfil in Europe and North America, are added the requirements of other regions. "The key, of course, is that we try to work with regulators worldwide," says Hele, adding, "If they co-operate more and we work harder at this, there is some opportunity for us to be better at it. At the moment the diverse regulatory picture is very complex."

Given the regulatory diversity, the risk of falling foul of one rule or another is, says Hele, very real. "We spend a great deal of time ensuring that we find the right way out of all this. It can be very inefficient and costly."

The key is to engage legislators and regulators at an early stage of new proposals. It is something, says Hele, at which ING and the wider industry is getting better, even though there are still conflicting voices. He is particularly focused on backing industry bodies that have already been able to make key points to regulatory authorities.

ING is working in particular with the Institute of International Finance IIF (where his old boss Maas is vice chairman of the IIF Committee on Market Best Practices) on accounting and risk. ING is also, says Hele, involved with the CFO Forum where accounting standards have been raised up the agenda in recent years, not least because of their impact on the European insurance industry and also the Geneva Association which dedicates itself to risk and insurance economics and research.

"These organisations are engaged in various debates with regulators. Frankly we are not where we want to be, but at least we have begun to get discussions."

He points to the great similarity between IFRS and US GAAP with different nuances on how items are reported. However, he questions whether the rules always capture the way companies run their business, if for instance they held assets in trading books, available for sale or at fair value through the P&L.

"To the investment community, this causes confusion. It is important to understand how or why the assets are held. I think the most important aim is that reporting for accounting and regulators needs to be focused on the intent of the business. If you have assets that you are trying to sell off, it is right to record them as fair value through the P&L. But if you are planning on holding them, it is important for investors to know."

CONFLICTS OF INTEREST

Hele expresses some sympathy for regulators that often have to meet conflicting demands. "It is hard to be a regulator these days and we see various problems. But then we will always have risk. The question always has to be, ‘Is there enough capital to support that type of risk and is it reliably measured?’ We have been using various measures of risk for some time." While meeting its mandatory regulatory capital requirements, Hele says ING operates its own economic capital assessment, being its own realistic view of the amount of capital it needs to cover its risks.

"We have been using economic capital on the banking side for about ten years and on the insurance side for the last three years and we now deliver it throughout the entire organisation. Economic capital is a measure that tries to talk about the totality of risk and measures it from different dimensions. That is why we like our economic capital. The process of implementing economic capital measurement has been evolutionary. We do modify and improve it from time to time. It is not perfect but it is a lot better than Basel I or Solvency 1."

Reviewing the application of principles-based regulation, Hele comments, "If you have a strictly rules-based system, people figure out how to be just inside the rule. On the other hand, principles-based regulation with no governance can be equally ineffective. What’s needed is a principle framework at a higher level with detailed governance that makes it clear the extent to which you should be doing the right things.

"You cannot escape because there is a principle underpinning it. The principles-based regulations are trying to evolve. It does take some time and it is a lot more work. But I think the solution is in between the two bases, the principles framework with some detailed guidance."