Chris Harvey Managing Partner Global Financial Services Industry Practice

1. Global Financial Services Harnessing the forces of change Chris Harvey Managing Partner Global Financial Services Industry Practice

2. The forces of change COMPLIANCE CAPITAL Diminished short-term funding AML New Regulation Liquidity FATCA Solvency II IFRS Basel III Consolidation Consumer Protection New Product Demand New Entrants Cross-Sector Buying Behavior Emerging Financial Centers Trust & Reputation CUSTOMERS COMPETITION

3. The forces of change COMPLIANCE CAPITAL • Operating models • Risk management • Governance • M&A • Product development • Talent • Strategy • Finance transformation Forces of change impacting decisions in all areas of business, e.g.: CUSTOMERS COMPETITION

4. Compliance Forces of Change Foreign Account Tax Compliance Act (FATCA) • Requires institutions to identify and document all US account holders • Failure to comply = 30% withholding tax on US-source income and sales proceeds • Applies to all payments made after December 31, 2012 • Still uncertain regulatory environment • highlypoliticized process • inconsistent approach between countries • operational details remain vague • Sovereign states pursuing tax revenue • increased reporting requirements • threat of significant penalties • Lack of trust between governments and financial institutions • lobbying & influence continues • threat of regulatory arbitrage remains

5. JP Morgan Chase estimates that the US Dodd-Frank financial legislation will cost the bank almost $1 billion in lost revenue. Compliance Impact of Change • Compliance ‘flexibility’’ is now critical • compliance a process not an event • product development a moving target • extra cost of compliance • FSIs facing conflicting regulations • no ‘one size fits all’ fix across borders • significant downside risk • Negative impact of resisting change • could lead to more penalties • spotlight on sensitive areas, e.g. executive compensation

6. Compliance What will be your focus on regulatory compliance as you prepare for the recovery? Harnessing Change • Develop agile compliance solutions • scalable/flexible data collection • greater training/compensation for compliance function • Balance compliance risk & reward • anticipate and budget for penalties • quantify competitive advantage of flexible compliance function • Scenario planning on ‘tipping-points’ • what triggers a move in location • what triggers a product exit • alternative compensation plans

7. Capital Forces of Change • “Analysts have predicted that if all the proposed regulations were enacted it would require banks to add an additional $221billionin capital.” • The New York Times • Capital is no longer a ‘commodity’ • cost of capital has increased • decreased use of short-term funding • true value of liquidity now recognized • New capital standards introduced • Basel III for banks • Solvency II for insurers • Definitions of capital have changed • stricter Tier 1 definition • minimum common equity levels increased

8. Capital What will be your institution’s focus regarding LIQUIDITY? Impact of Change • Has made some products unprofitable • products relying mis-match funding have largely disappeared • increased cost of capital has erased the margins on other products • Greater care in deploying capital • targeted use to ensure risk-adjusted return on capital is maximized • Stable sources of funding now vital • diversified capital sources favored • new liquidity ratios now mandated

9. Capital What will be your institution’s focus regarding CAPITAL? Harnessing Change • Focus on capital efficient products • identify products most capital efficient • target market leadership in these products; exit non-efficient products • Improve measurement of capital use • use data analytics and modeling to better understand capital performance • data-mine historical data for insight • Target liquidity creating business • higher cash flow businesses attractive • diversify into retail-style areas of the industry to boost liquidity

10. Customers What do you anticipate will be the most pronounced change in CUSTOMER’S behavior? Forces of Change • Economically damaged • fewer big ticket financial transactions • need to ‘catch-up’ retirement investment plans • More educated about risk • more scrutiny on financial products • flight to quality • Loss of trust with institutions • remain ‘suspicious’ of institutions • threat of customer mobility remains

11. Customers Impact of Change Percentage of customer indicating they will not switch banks this year • Reduction in fees • fewer mortgage transactions, insurance policies, etc. • customers more price sensitive • Products need to withstand scrutiny • clearer value proposition within each product offering • improved risk management to identify higher risk customers • Customers ‘stickiness’ reduced • increased willingness to change providers J.D. Power and Associates 2010 U.S. Retail Banking Satisfaction Study

12. Customers Harnessing Change What key steps will your institution focus on in order to rebuild TRUST & REPUTATION • Fight to preserve margins • extend efficiency efforts • target less-price sensitive segments • Focus on quality • exist lower quality products • focus on individual customer risk • leverage brands • Rebuild trust & reputation • promote economically constructive activities (e.g. increased lending, etc.) • educate employees on the value and importance of corporate reputation

13. Competition Forces of Change What positive opportunities have emerged from the financial crisis and economic downturn? • New entrants • non-traditional providers leveraging their service expertise (e.g. Tesco) • entry dependent on attitude of local regulators (e.g. Europe vs USA) • Consolidation • ‘bargain’-driven acquisitions • acquisitions for capital scale • Emerging market players • growing brand presence and sophistication of local providers • regional ambitions of national providers

14. Competition Impact of Change Number of global financial institutions >$50bn market capitalization • Improving the customer experience • traditional providers need to improve service responsiveness 45 2007 • ‘Dumb-bell’ shaped sectors • larger leading institutions • fragmentation and specialization at lower end • Erosion of experience advantage • ‘western’ providers cannot rely simply on superior industry experience 28 2010

15. Competition Harnessing Change What will be your institutions focus regarding TECHNOLOGY? • Return to service innovation • leverage service technologies • recruitment of market facing talent • focus on service training • Strategic acquisition/divestments • decide which end of the market to focus on • target acquisitions/focus on PMI • Boosting emerging market operations • investment to take emerging market operations to the next level • defensive tactics in strategically important regions

16. Conclusion Forces of Change Harnessing Change COMPLIANCE • Develop flexible compliance solutions • Balance compliance risk & reward • Scenario planning on ‘tipping-points’ CAPITAL • Focus on capital efficient products • Improve measurement of capital use • Target liquidity creating business CUSTOMERS • Fight to preserve margins • Focus on quality • Rebuild trust & reputation COMPETITION • Return to service innovation • Strategic acquisition/divestments • Boosting emerging market operations