International Insurance Society 44 th Annual Seminar, 14 July 2008 CEO Panel I: Regulators’ Perspective: Consumer Issue

1. International Insurance Society44th Annual Seminar, 14 July 2008CEO Panel I: Regulators’ Perspective: Consumer Issues and Natural Disasters Simon Topping, KPMG China

2. A Banking Regulatory Perspective on Consumer Issues • Traditionally, banking regulators have been concerned primarily with systemic stability • But systemic stability is heavily dependent on depositor confidence, and so there has always been an interest in consumers/customers on the liability side of the balance sheet at least • These days, many regulators – but not all - are increasingly concerned with the treatment of consumers/customers on both sides of the balance sheet (i.e. borrowers as well as depositors) • But this is adding to the conception that the industry is over-regulated

3. A Banking Regulatory Perspective on Consumer Issues • Examples of the sort of consumer/customer issues arising in banking include: • Customer complaints re service quality/pricing • Mis-selling (e.g. of investment products) • Lack of clarity/disclosure on product features • Inappropriate customer selection • Aggressive marketing • Data security issues • System integrity of e-banking/stored value cards • Social responsibility (e.g. right of access to banking services/delivery channels)

4. A Banking Regulatory Perspective on Consumer Issues • But the most serious and problematic consumer/ customer issue arising in banking is clearly that of deposit protection/insurance • A measure of protection is necessary for unsophisticated investors, but how much? • Potential moral hazard of insulating investors from the consequences of their actions/decisions • Potential moral hazard of insulating bank shareholders /management from the consequences of their actions/ decisions • Who foots the bill, the public or the industry? Is DP “insurance” for depositors, or for the public good?

5. A Banking Regulatory Perspective on Consumer Issues • Increasing interference by regulators/politicians in the bank/customer relationship is regarded by some as: • Adding a cost/compliance burden which is adding significantly to the cost of financial services to consumers • Discouraging innovation • Discouraging diversification • Affecting the relative attractiveness of foreign markets to internationally-active banks • Heightening tensions in the bank/customer relationship – and the bank/regulator relationship

6. A Banking Regulatory Perspective on Natural Disasters • Clearly, natural disasters can potentially have some major effects on the banking industry: • Disruption to markets • Disruption to payment systems • Demand for emergency finance • Possible credit/liquidity squeeze • Negative effect on borrowers’ repayment ability • Concerns about the ongoing viability of institutions which are heavily exposed • The effect which is generally most serious to banks, long-term, however, is economic slowdown/collapse

7. A Banking Regulatory Perspective on Natural Disasters • Banks don’t need a natural disaster to get into these sorts of difficulties, however; they are well capable of generating their own major “disasters”: • Sub-prime crisis • Société Générale loss • Northern Rock • What lessons can be drawn from these recent episodes, e.g. which may be of relevance to a wider (insurance) audience?

8. A Banking Regulatory Perspective on Natural Disasters • 1. Stress-testing • Heightened importance should be attached to (sophisticated) stress-testing • Need to challenge assumptions, e.g. re market behaviour/business models • Need to consider more extreme scenarios • 2. Contingency planning • Needs to be more robust and needs to drill down to an operational level • Needs to cater for the simultaneous occurrence of a number of unfavourable events

9. A Banking Regulatory Perspective on Natural Disasters • 3. Over-reliance on models • Models are only as good as the underlying data/assumptions • Models are a tool, not the be-all and end-all • Need to focus more on “tail events” • 4. Valuation uncertainties • Need plausible alternatives when markets are inactive • Avoid reliance on sole sources; build up alternatives/cross-checks

10. A Banking Regulatory Perspective on Natural Disasters • 5. Disclosure • Greater transparency/disclosure required – but of exactly what is at present a bit uncertain • 6. Basel II • Still “a good thing” • Some refinements needed o/a capital treatment of complex products/securitisations/commitments • Supplemented by new requirements on liquidity risk • The onus should be on the banks themselves – not on the regulators – to bring forward the necessary risk management improvements

11. Presenter’s contact details Simon Topping KPMG China +852 2826 7283 simon.topping@kpmg.com.hk www.kpmg.com.hk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2008 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Hong Kong.