Financial services: flexible, agile, transparent
COVID-19 RESOURCE HUB | Financier Worldwide
FINANCIAL SERVICES SECTOR
The economic and financial ramifications of the COVID-19 crisis will be significant and no sector will escape unscathed. The financial services industry is no different. Though the issues it faces will be shared across the wider economy, it is also beset by many unique challenges.
Forced closures have led to a jump in unemployment and disrupted the working lives of millions. The financing requirements of individuals and businesses will only increase as lockdown measures persist. Banks are working with governments to try to deliver essential funding.
Reduced interest rates, along with any suspension of loan repayments such as mortgages and credit cards, will change the paradigm for the industry, at least in the short term.
Meanwhile, financial regulators are reacting to the ‘black swan’ event of COVID-19 which has upended entire sectors and stalled economies. In the UK, the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have taken steps to protect markets and consumers and evaluate contingency plans.
In Europe, the European Central Bank (ECB) has adopted a package of temporary collateral easing measures to broaden the scope of eligible assets accepted as collateral in the permanent framework of Eurosystem refinancing operations, aimed at increasing risk tolerance during the crisis.
In the US, members of the Financial Industry Regulatory Authority (FINRA) in a March guidance (Memo 20-01) were “encouraged to review their BCPs to consider pandemic preparedness, including whether the BCPs are sufficiently flexible to address a wide range of possible effects in the event of a pandemic in the United States. These effects may include staff absenteeism, use of remote offices or telework arrangements, travel or transportation limitations and technology interruptions or slowdowns”. FINRA also said that “banks might need to alter policies for supervising traders who are relocated to remote offices or working from home because of the spreading virus”.
Financial services firms need to be flexible, agile and transparent in their operations during the crisis. They must act decisively in response to the challenges that COVID-19 has posed.
It will be important to strike a balance between providing services to customers and safeguarding the wellbeing of employees. Remote working and technology will be key, though this will require financial institutions to keep a close eye on cost structures and balance sheets as new working arrangements are adopted.
The pandemic presents other challenges to traditional banking. As banking skews toward online virtually overnight, established banks will need to ensure their internet banking infrastructure can continue to deliver services and meet demand.
At the same time, new challenger banks, such as Monzo and Revolut, may receive a boost. The situation could also create deeper relationships between incumbent banks and start-ups, as some legacy applications prove unfit for purpose. Certainly, it will accelerate the rush toward digitalisation of the financial services space.
But that trend will also intensify cyber security concerns for financial institutions. Cyber criminals look to exploit weaknesses, and the COVID-19 crisis presents huge opportunities. Remote working, for example, may make employees more susceptible to social engineering efforts. Fraud and money laundering crimes may also spike as customer due diligence processes are harder to carry out.
Financial institutions must be vigilant to guard against malicious actors. Experts also suggest they work with regulators and each other to share experiences and ideas. In addition, they need to communicate openly and honestly with customers about attacks and be steadfast in their defences.
Financial institutions cannot allow the current crisis and the disruption it has caused to distract them from their compliance responsibilities. Maintaining capital levels, undertaking appropriate reviews, reinforcing controls and reporting suspicious activity remain priorities.
Ultimately, the financial services sector is more robust now following the global financial crisis of 2007-08. The structural reforms put in place as a result of that crisis resulted in increased oversight, larger reserves and greater systemic stability.
The sector will suffer due to the COVID-19 crisis, however it may be changed for the better through increased digitalisation and enhanced cyber security.
© Financier Worldwide
BY
Richard Summerfield