The Globe and Mail - 02.11.2019

B4| REPORTONBUSINESS OTHEGLOBEANDMAIL | SATURDAY, NOVEMBER 2, 2019

O-INIONH
N
L<SIS

DILBERT

T

here’s been a changing of
the guard at Canada’s big-
gest investment bank.
Derek Neldner took the reins
as group head of RBC Dominion
Securities Inc. on Friday, and he’s
got his work cut out for him.
Make no mistake: RBC’s capi-
tal-markets arm still defines the
big leagues on Bay Street and is a
Top 10 global investment bank.
But these days, its bankers have a
little less reason to swagger. Cor-
porate clients are more cautious
about deal making and borrow-
ing because of uncertainties
stemming from a slower U.S.
economy, Brexit and high-profile
trade spats.
While those trends are weigh-
ing on investment banks around
the globe, RBC’s bragging rights
are also in shorter supply because
of its own foul-ups. A spate of reg-
ulatory smackdowns, mostly
south of the border, are creating
new reputational risks for RBC’s
capital-markets division that
once prided itself on being the

Boy Scout of investment bank-

ing.

Mr. Neldner, 46, has plenty of

cred on the Street. But he still

faces a formidable challenge. Not

only must he propel new revenue

growth without excessive risk

taking, he must also keep his

bankers and traders on a tighter

leash. And if that wasn’t enough,

his outspoken predecessor, Doug

McGregor, will still be looking

over his shoulder – at least for the

time being.

Mr. McGregor, 63, spent more

than a decade at the division’s

helm, and during that time,

earned a reputation for his blunt

talk and imposing personality.

On Friday, he became chairman

of RBC’s capital-markets division

and will remain in that job until

he retires on Jan. 31, 2020.

It’s hard to imagine Mr. McGre-

gor holding his tongue, especially

given the division’s challenges.

During its fiscal third quarter, net

income and revenue from RBC’s

capital-markets division fell –

both year-over-year and quarter-

over-quarter.

Results were hurt by lower in-

vestment-banking revenue, low-

er equities-trading revenue, a

slowdown in mergers and acqui-

sitions activity and bigger provi-

sions for impaired loans.

While Mr. Neldner can’t con-

trol those macro trends, share-

holders will expect him to im-

prove certain financial metrics.

For starters, the capital-markets

arm’s return on equity of 11.1 per

cent is sagging relative to the

bank’s other divisions including

personal and commercial bank-

ing (28 per cent), wealth manage-

ment (17.2 per cent) and insur-

ance (39.2 per cent).

There will also be more pres-

sure to control costs, including in

the way RBC pays its bankers and

traders. The capital-markets divi-

sion’s ratio of total compensation

to revenue – which includes a va-

riety of compensation costs in-

cluding salary, benefits, stock-

based compensation and reten-

tion bonuses – stood at 37.9 per

cent during the third quarter.

Mr. Neldner, meanwhile, is al-

so heir to other headaches, in-

cluding the fallout from cultural

and conduct problems.

Last year, RBC abruptly dismis-

sed Blair Fleming, then-head of

its U.S. capital markets business,

after an internal investigation

found he allegedly violated com-

pany policies pertaining to work-

place relationships.

Mr. McGregor later encouraged

employees to “speak up” when

they see improper behaviour, an

obligation that Mr. Neldner now

inherits as regulators sharpen

their scrutiny of misconduct risks

at banks.

The division’s compliance is-

sues have come to the fore again

in recent months. In August, RBC

agreed to pay a $13.55-million fi-

nancial penalty to the Ontario Se-

curities Commission to settle

charges that it failed to supervise

foreign-exchange traders over a

three-year period.

Regulators alleged that traders

used electronic chatrooms to

share confidential customer in-

formation with their peers at oth-

er companies between 2011 and

2013. What’s more, the Ontario
      Securities Commission alleged
      that RBC didn’t completely cor-
      rect its chatroom compliance
      problems until 2015. (Toronto-
      Dominion Bank separately
      agreed to pay the OSC $9.3-mil-
      lion.)
      And just last month, the Com-
      modity Futures Trading Commis-
      sion (CFTC) slapped RBC with a
      US$5-million fine for “failing to
      meet its supervisory obligations,
      which resulted in hundreds of
      unlawful trades and other viola-
      tions” from late 2011 through
      May, 2017. This was despite the
      fact that RBC was punished for
      similar compliance violations in
      2014, when it was ordered to pay
      a US$35-million penalty for en-
      gaging in illegal futures trading.
      There’s no understating how
      harmful blunders such as these
      are to RBC’s brand, especially af-
      ter the Michael Lewis bookFlash
      Boyslionized the bank’s do-good-
      er culture.
      The bank made public-rela-
      tions hay from the publicity for
      years. Perhaps, its executives’ big-
      gest mistake was believing their
      own PR.
      Mr. Neldner, who has worked
      his way up the ranks at RBC since
      1995, is now responsible for mop-
      ping up such messes. The bank
      cannot afford more hits to its rep-
      utation. His troops will have to
      fall into line.

RB
’sNeldnerfacesformidablechallenge

Newcapital-markets

headmustpropel

revenuegrowthwhile

keepingbankers,traders

onatighterleash

RITA
TRICHUR

OPINION

Make no mistake:

RBC’s capital-

markets arm still

defines the big

leagues on Bay

Street and is a Top

10 global investment

bank. But these

days, its bankers

have a little less

reason to swagger.

lmost 3^1 ⁄ 2 years after Britain
voted to leave the Europe-
an Union, absolutely noth-
ing has been resolved. The long
goodbye has left Britons and
their politicians divided between
Remainers and Brexiters. They
have no sense what relationship
Britain will have with the EU af-
ter Brexit, or whether Brexit will
be hard and nasty like a viper
bite or soft and gentle like a kiss
goodbye.
They have no sense whether
their country will remain intact
after Brexit – Scotland and
Northern Ireland, both on the
Remain side, could forge their
own destinies. Depending on the
outcome of the Dec. 12 election,
the third poll since 2015, there is
even some chance, although only
some, that Brexit will be kicked
down the road for another few
years or even cancelled. The peri-
od between 2016 and today could
be called the Lost Years.
What is certain is that the Brit-
ish economy has already made
up its mind about Brexit and it’s
a big thumbs down. The econo-
my has taken hits since 2016 and
the prospects are grim no matter
who wins the election.
A Labour win, under Jeremy
Corbyn, would install a socialist
government with an expropria-
tion agenda in the form of mass
nationalizations of trains, water
and other utilities. A Conserva-
tive government, under Boris
Johnson, would deliver a poten-
tially catastrophic hard, or har-
dish, Brexit while launching a
regulatory and tax race to the
bottom in his bid to turn Britain
into a cold-water Singapore. Ei-
ther would spend with abandon,
based on party platforms and
election pledges, potentially
trashing Britain’s reputation for
fiscal prudence.
No matter what scenario
emerges, Brexit would be costly.
And for what?
Before the referendum, almost
no one in Britain considered EU
membership a fighting issue. It
simply wasn’t on the agenda, in
spite of amusing stories in Bri-
tain’s anti-EU press about regu-
lationsgoverning banana curves
and other nonsense. Britain had
the best of both worlds. It had its
own currency, wasn’t a member
of the passport-free Schengen
zone, and opted out of pretty
much any EU legislation it didn’t
like, among them security and
justice laws. Yet it had open ac-
cess to the world’s biggest free
market. Britain had its cake and
ate it.
The then-prime minister, Da-

vid Cameron, risked all these

goodies by launching the referen-

dum on EU membership, for no

other reason than to quell a re-

bellion among the few Tory

members who considered the EU

a sovereignty-robbing monster

(it never occurred to him that

Brexit would win).

The British economy did not

fall off a cliff after the referen-

dum, but the economy turned

sluggish as domestic and foreign

companies, faced with uncertain-

ty, put their investment plans on

hold. Some big companies pulled

out, although none of them was

so rude as to blame Brexit for

their exodus. Honda is closing its

lone British factory, Ford is end-

ing production at its Welsh en-

gine plant and Nissan cancelled

plans to expand production at its

northeast England assembly

plant. Airbus’s enormous wing

factory in England, which em-

ploys 13,000 and lies at the heart

of the country’s engineering in-

dustry, is vulnerable. Airbus chief

executive Guillaume Faury said a

no-deal Brexit would be “a disas-

ter” for the company.

Fans of Brexit should not be

surprised if British manufactur-

ing gets hollowed out fast if Bri-

tain makes a clean break from

the EU. Manufacturing is, gener-

ally speaking, a low-margin activ-

ity that depends on the just-in-

time delivery of parts and suppli-

es. Anything that disrupts the

even flow, such as trucks backed

up for hours for border checks,

could destroy profits virtually

overnight. Under that scenario,

why wouldn’t they pack up and

leave the country?

In spite of assurances from To-

ry Brexit fanatics that Brexit’s ec-

onomic pain will be minor for a

while, followed by a great flour-

ishing of trade as Britain strikes

deals with all the bits of the plan-

et that used to be coloured pink

on the empire maps, the econo-

my is already suffering. This

week, the non-partisan and high-

ly respected National Institute of

Economic and Social Research

estimated that the the economy

is 2.5-per-cent smaller now than

it was in 2016 because of the

Brexit vote, and that Mr. John-

son’s tentative Brexit deal would

leave the economy 3.5-per-cent

smaller over the long run (gross

domestic product shrank by 0.2

per cent in the second quarter,

suggesting that Britain may al-

ready be in, or close to, reces-

sion).

The Institute for Fiscal Studies,

an independent British think

tank, said in October that “busi-

ness investment has witnessed

the most sustained period of

weakness outside of a recession

and is now the lowest in the G7.”

That is no surprise.

This dire performance is hap-

pening even before Britain hits

the road. Imagine what will hap-

pen under a hard-Brexit scena-

rio.

Sadly, even a win by Labour –

unlikely, according to the polls –

would provide no economic re-

lief. Labour would also pursue

Brexit, albeit with the promise of

a deal with the EU, and imple-

ment tax hikes and a nationaliza-

tion campaign that could cost

£200-billion or more, according

to some estimates.

So what has been accom-

plished by the referendum?

Nothing, so far, but political and

social division and economic un-

certainty that could easily morph

into economic calamity. Viewed

from afar, Brexit seems so point-

less.

Lostyearsof4½½’slonggoodbyelikelyaforetasteofadrawn-outdecline

ERIC
REGULY

OPINION

ROME

The Victoria Tower, left, stands next to the under-renovation Elizabeth Tower, which holds Big Ben, at the Palace of Westminster on Friday.

The uncertainty surrounding an election on Dec. 12 has put additional pressure on the British economy.ALBERTO PEZZALI/ASSOCIATED PRESS