The Pandemic Will Leave a Changed Financial Sector

2020/10/15

The Pandemic Will Leave a Changed Financial Sector

Work-from-home creates an entirely new set of stakeholders, vulnerabilities, and opportunities

 

By Matthew Fulco and David Stinson (Project Research Fellow of TABF)

 

During the coronavirus pandemic, the transformation of the financial sector has been fast-tracked. Social distancing measures have forced financial institutions and their customers to move online and make greater use of the cloud. In some cases, the transition has been bumpy, but for the most part, the process has been smoother than expected. Years from now, COVID-19 will probably be remembered as the genesis of a number of lifestyle changes.

At the C-level of banks and financial institutions, however, innovations aren’t like levels in a video game, which can be unlocked in turn. Instead, executives think more about the higher-level effects of major events: how do they change the relationship between finance and society? Or our thinking on risk? Or the way business is done?

These were the types of issues senior leaders tackled at the 10th Annual City Week Financial Services Forum, held online from September 21-22. During the forum, financial services executives, senior regulators and other senior officials discussed the state of banking in 2020, with a focus on London and Europe. In addition to the pandemic, other major themes included green finance, Brexit, digital transformation, financial crime, and skills development. Each of these areas, however, was linked in some way to the impact of COVID-19.

 

Work-from-home remains controversial

The most important change in the financial sector this year has probably been the widespread adoption of the work-from-home model (for which the acronym WFH has become widely used). In retrospect, we were technologically ready for WFH about ten years ago, making its application seem somewhat late. On the other hand, given that the last pandemic of this scale occurred a century ago, one could alternatively say that the technology arrived just in time.

WFH has forced a broad rethink of operational resilience. Peter Bevan, Global Practice Head of the Financial Regulation Group at the law firm Linklaters, noted, “Operational resilience has become COVID resilience.”

The vulnerabilities are not necessarily what one might expect. Sam Woods, CEO of the Prudential Regulation Authority, the quasi-governmental UK banking regulator, stated that cloud services may in fact be more secure than the bespoke services companies might otherwise use. This however only applies after secure login has been completed – he also noted an uptick in ‘phishing’ attacks designed to compromise systems by taking advantage of confusion over identity.

Opinions differed on the results of the WFH model. On one end of the spectrum, Bryan Stirewalt, CEO of the Dubai Financial Services Authority, stated that “We are still an office-based organization – it brings consistency to our work." Beatriz Jiménez, UK CEO of UBS, said that WFH can be made to work but requires greater effort in personnel management – such as proactive efforts to facilitate communication. Others suggested ways that current arrangements could be improved. Barnabas Reynolds, Partner at the law firm Shearman & Sterling, expressed hope for a remote work tool that could simulate the experience of walking down a hallway and casually encountering other colleagues.

Anne Richards, CEO of the investment management company Fidelity International, on the other hand, called WFH a productivity improvement. She said that Fidelity International had become more systematic about its skills management, setting up a skills-matching database to expedite selection of staff for projects. Furthermore, the WFH model allows banks to expand the definition of personalization from a customer to an employee orientation. Her institution is letting staff members themselves choose which skills to improve, rather than specifying it for them, improving buy-in from trainees.

It’s worth noting that if City Week had not been held as an online conference and expo, it’s likely that the Taiwan Banker wouldn’t have been able to attend the London-based event. Nevertheless, even those who were positive towards remote work acknowledged that it works better for extending existing businesses than creating new ones.


New risks

The “S” component of ESG (environment, society, and governance) has undoubtedly been strengthened in the wake of the pandemic, but the other two elements will also be affected. In in some of the most historically aware remarks of the conference, Sir John Kingman, Chairman of the multinational financial services firm Legal & General, noted that governments have tended to put more pressure on civil society following wars and other major upheavals. In some ways, this result-oriented posture can be an improvement over business as usual, but it can also lead to more of an emphasis short-term thinking. Kingman further observed that although this time the banking sector isn’t the villain (in contrast to 2008), the situation could eventually change as banks are forced to find solutions to dispose of the bad debt accumulated during this period.

One area of continuing public interest is financial crime. David Lewis, Executive Secretary of the Financial Action Task Force (FATF), said that the pandemic, along with virtual assets, are their top concerns at the moment. The FATF, being the global anti-money laundering watchdog, has a comprehensive overview of the problem. Lewis referred to the FATF by its reputation as “the most powerful agency you’ve never heard of.”

One of the areas of the most extensive cooperation with broader society is the environment, which was the subject of several panels. The connection between the environment and disasters like the current pandemic is indirect, but may be significant. Similar to the way that financial crime thrives on disruption, climate change acts as a “threat amplifier” that upends longstanding environmental equilibria and deeply rooted human institutions, said Dr Hoesung Lee, Chair of the Intergovernmental Panel on Climate Change.

Much of the discussion on sustainability issues focused on issues related to disclosure. Part of the problem is a result of regulatory fragmentation – which could be made worse by the upcoming Brexit. Another part of the problem is more fundamental: disclosures are more useful when they are forward looking, and scenario-based, rather than based on audits of past results. This more subjective approach however hampers efforts to make compliance mandatory. In a sense, environmental compliance starts to look more like the risk-based approach used for financial crime.

At the same time, efforts on the environmental front don’t necessarily need to involve the government. Several participants mentioned that the primary motivator for green finance is coming from investors themselves. European activist investors and Chinese new money, as well as Japan’s Government Pension Investment Fund and Taiwanese retail investors, were all mentioned as demand drivers.


Starting from home

For all of the focus on both WFH and the environmental impact of the financial sector, one point that received less attention was the connection between the two. This is unfortunate. Transport is responsible for almost 30% of the EU’s carbon emissions, of which 60.7% comes from cars, according to 2016 data from the European Environment Agency. Aviation also accounts for disproportionate emissions based on passenger miles. Reductions in the number of miles travelled is one of the better ways to address the environmental impact of transport. 

On some level, this lack of attention is understandable. Whether talking about either the financial or environmental bottom line, cost reduction tends to be less exciting than value growth. There are limits on the amount of time busy executives can spend on concepts that don’t scale. The scaling mechanism that the financial industry is most familiar with is credit, but its operations management may be an overlooked additional method.

An alternative proposition is that if the financial sector can implement WFH, any sector can. To be sure, other industries have more valuable intellectual property. For a physical industry like manufacturing, however, this information isn’t transmitted on a daily basis by most employees – and in this case the WFH model was questionable to begin with. Some industries, like software, were already online-ready, but their trade secrets still aren’t nearly as easy to monetize as money in the bank. Because it accesses moderately-to-highly sensitive information on a frequent basis, the financial sector can serve as a model for other industries.

Europe has a very different culture from almost anywhere else in the world in terms the way it considers the broader impact of business on society. WFH could reshape many aspects of work, and in the longer term it could even affect geographic factors like infrastructure and real estate. All of that however depends on first ensuring that it’s feasible from an internal standpoint.

Perhaps this time next year, it will no longer be necessary to hold an international conference online. That would be a relief, no matter what marginal improvements may have been made recently – but it’s still possible that some lasting changes will come from the experience.