PROJECT M
 
Cathy Weatherford
Peter De Proft
Wolfgang Friedrich Ischinger

Conference Call: Redefining trust

What is the state of public trust in the financial sector? On both sides of the Atlantic it has plummeted, but there is a basis for optimism in some sectors

Conference Call: Redefining trust

What is the state of public trust in the financial sector? On both sides of the Atlantic it has plummeted, but there is a basis for optimism in some sectors


Wolfgang Friedrich Ischinger

Thank you both for joining me. If I may, let me go straight to the heart of the matter. Whether you read American or European publications, the common diagnosis is that trust in the financial services industry in general and banks in particular has suffered. What is your take on that and is it affecting your industry?

Cathy Weatherford

There is definitely a new consumer mindset. People who are planning for their financial futures have been through four years of extreme market volatility. In America, we’ve had this sluggish recovery, which means people who are trying to decide where to put their money have no clear picture of where is safe and what the future looks like as far as rate of returns. As a result, the consumer and the investor now have a new definition of trust that we are grappling to understand. How we talked to and worked with our customers pre-meltdown has changed and, I think, will remain changed for decades to come.

Peter De Proft

Speaking for the asset management industry, there has certainly been spillover from the crisis. There’s a lot of mistrust, people are very wary of all types of institutions – political, economic and social – as a result of the financial crisis.

Wolfgang Friedrich Ischinger

So you think this mistrust is justified?

Peter De Proft

Well, it is understandable. The public is bombarded the whole day long about how banks have been misbehaving and the massive bailouts involved, but then they hear about the bonuses being paid. I think it will be a long time before trust is re-established in the financial system.

Wolfgang Friedrich Ischinger

If asked by a CEO facing these challenges – distrust by the public, doubts about the financial services industry in general – what would you suggest to do differently to win the customer back?

Cathy Weatherford

I’m bullish on the life insurance industry, so if I were advising the CEO I would say that we have the best story to tell from the entire financial services sector. The life insurance industry is well capitalized, it has strong equity and, I think, has survived the economic crisis very well.

Peter De Proft

In what ways exactly? Cathy, can you explain a little?

Cathy Weatherford

You see the impact of an economic meltdown in an immediate way in regards to banking institutions. The insurance industry conservatively invested its assets, has the mandate of risk-based capital ratios and is more conservatively regulated. This gave it more time to analyze and reassess business strategies. I think this is why our industry is in a well-capitalized position and still able to serve our consumers. I would suggest that the CEO in Wolfgang’s question also emphasize that there was not one annuity payment missed throughout this entire meltdown. From an institutional perspective, these insurance companies, which have been around for 100-150 years, are standing strong today and will be the institutions that many consumers come to trust with their long-term retirement investments.

Peter De Proft

Well, investor confidence is the number one priority for EFAMA, but rebuilding investor trust in the entire finance industry will take a while. First of all, we need to emphasize the security of regulation. Funds tend to have risk-management processes, and they are a very good product to invest in. Second, we have to educate people that, despite the economic crisis, they need to save and save all the time if they want to have any hope of securing their financial future. In this regard, funds are a good product because of the regulation of their operation, and due to the risk management that is included. Third, the CEO and others within his industry must continually emphasize to regulators and legislators that we have to save for pensions and that there has to be a system in which pension saving is, at least from the EFAMA perspective, obligatory.

Wolfgang Friedrich Ischinger

Given the fact that saving for a pension is one of the biggest acts of faith anyone can make in the future – we’re talking about a time frame up to 50 years – how can I have faith in the system that I’m going to get anything out?

Peter De Proft

That is one of the big questions. What we’re seeing as a result of the crisis is that some of the assumptions about post-Second-World-War social systems, and I’m talking here about Europe, are being thrown into question. The promises made by Bismarck as far back as the 1880s on retirement, for example, which became widely accepted, are being questioned. People are living longer, and pay-as-you-go public systems are coming under increasing stress. Second pillars also face challenges for a host of reasons: it is clear that the individual will have to be more prepared to take care of their own retirement than in the past, but the framework has to be implemented to support them in this.

Wolfgang Friedrich Ischinger

Peter, earlier you touched upon distrust in all sorts of institutions. What is your concern?

Peter De Proft

Well, Europe is in internal turmoil, far more so than the United States, and it is distressing the markets. Politicians here seem to be losing the faith of the public, particularly concerning the euro.

Peter De Proft

Elephants have a short memory compared to people when it comes to money.Peter De ProftSo, my question to you, Wolfgang, is: What has to be done to re-establish faith in the European vision?

Wolfgang Friedrich Ischinger

Trust is a precious commodity. As you know, I come from the world of diplomacy, and what I learned in over 35 years, and this is not different in the business world, is that trust takes a long time to establish, but you can lose it overnight. One Lehman Brothers event can destroy trust. Rebuilding it again takes a long time. Why do I mention this? Because there is no quick-fix solution to the question of how the European public will again re-establish a sufficient degree of trust in their governments’ ability to handle this. It is a long- term issue, and what needs to be done is that governments have to behave with the same degree of transparency demanded by them of regulators and financial companies.
Governments have had the luxury, by and large, that they did not need to be as transparent, at least internationally, as those who are regulated by national or EU regulations for the business community. Transparency, openness, factual accuracy: these are the things that matter now and, if applied over time, hopefully will rebuild trust.

Peter De Proft

Yes, good point. I hope it is applied.

Wolfgang Friedrich Ischinger

Let me also add that, as with any crisis, this particular one also offers huge opportunities for our industries and these opportunities need to be seized. We should be out front showing the way, don’t you think?

Cathy Weatherford

Absolutely. Our time is now. In the insurance industry, we know about the aging demographics around the globe, about people who need to secure their financial futures, and our very financially sound industry has the products to assist. I do believe it is the right time to seize the opportunity and that people who work with clients – the financial planners and advisors – are taking the appropriate position in an effort to ensure their customers have a good and sound portfolio.

Peter De Proft

Cautiously, I agree with you both, but the United States and Europe are in different places. In Europe, we seem to be questioning the fundamentals of government and the whole European institution, which is destabilizing the industry. People have the impression that the backbone of the EU is under attack. So, of course, instead of putting their money into funds, people are saving, under the motto “Let’s see what comes!”
There is uncertainty, followed by agreements, but then we have new elections and governments saying, “We are not going to respect the agreements.” That is not a message that instills trust or comforts people. Elephants have a short memory compared to people when it comes to money, you know.

Cathy Weatherford

The situation is not dissimilar in the United States. Yes, there is continued participation in our marketplace, although I do believe that we have maybe $1 trillion to $2 trillion formerly invested that is now on the sidelines. It is sitting in cash because people don’t yet have a clear picture of the future and are skeptical of the equity marketplace.

Wolfgang Friedrich Ischinger

Thanks you both for your insights, it has been a pleasure.

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