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By Daniel Selywm, Tom Rich and Christopher Chan, Business Consultants at BJSS
The COVID-19 pandemic that has spread across the world has impacted all aspects of everyday life, and the social, economic and cultural legacy is likely to be felt long into the future. This has created a unique set of threats to the worldwide economy, and firms across all industries are having to navigate and adapt to these challenges as best they can. The Financial Services industry is undoubtedly feeling the pressure, and we have already seen some extraordinary measures taken by firms, regulators and government bodies alike which underline the gravity of the situation we currently face.
To provide some insight into what’s happened to date and what the future could, and should, look like for the Finance industry, we spoke to BJSS’ experts to gain their views and analysis. Here's what they said:
How have Financial Services Firms responded to the Initial Short Term Shock from Covid-19?
Tom Rich: A toxic combination of fear and uncertainty coupled with supply and demand-side shocks has shaken the industry, and it’s no surprise that we have seen a lot of volatility in the markets. Financial Services firms have swiftly mobilised to allow themselves to function as close to normal as possible. We’ve seen extended customer support and client outreach services, the rapid deployment and adoption of new remote working technology and a slowly improving communication strategy. There’s a lot more to do and a lot of uncertainty still out there, but the early signs have been promising.
Dan Selwyn: Let’s make no mistake; Financial Services firms have a considerable part to play in supporting the economies across the world, not just within the UK. Across Financial Services there is currently a lot of coordination and re-shuffling of programmes of work. There’s been a focus on providing new products and services in conjunction with the vehicles to deliver those services quickly to the businesses needing financial aid. This may lead to a heightened focus on innovative strategies and routes to market, which could ultimately have long term positive impacts on the customer and the experience they receive from these businesses.
Chris Chan: In my opinion, Financial Services firms have been too slow in their response. Looking at the crisis timeline, the first patients tested positive at the end of January and yet communications from FS providers to their clients and the public only started mid-March. In a time where the world is following the progress of this crisis daily, if not hourly, the release of communications must be timely to be valuable and impactful. The firms need to be more proactive and show their support for their clients in these uncertain times.
What effects are you Expecting to see Over the Longer term?
Chris Chan: No economy can go on a halt for months on end with such a drastic reduction in consumer spending. Layoffs due to redundancies have already begun across all sectors, including the Financial industry. Many small businesses have had to close their doors, some potentially for good. This widespread drop in spending is leading the economy into a recession, and potentially even a depression if the end of this isn’t in sight soon. For businesses to restart operations, rehiring personnel and re-strategise their objectives, it might be a while before we get back to normal.
Dan Selwyn: I agree with Chris. The overarching fact of a global recession is inevitable. However, I can see some positives for the industry in the longer term. I think we will see a boom in the applicability of working from home and using heightened levels of collaborative working techniques. There will be increased use and visibility of the value of workflow and documentation tools such as JIRA, Confluence and a surge in communication-based ceremonies such as daily stand-ups.
What should FS Firms Focus on to Mitigate and Control the Initial Impact?
Dan Selwyn: Most importantly, this is a time for Financial Service companies to hone in on their customers’ needs. A significant amount of life-changing decisions will be made by Financial Service firms such as banks, insurers, credit firms and the importance of having customer outcomes at the heart of decision making may be the difference between which businesses survive and which ones don’t, in the long term. Firms also have an obligation to their staff, and they need to maximise their working from home capabilities or put in precautionary measures to enable social distancing and follow the humanist guidelines given by the Government.
Tom Rich: I think it’s essential that banks and other FS firms continue to fulfil their social mission in providing the liquidity and services required to keep the economy functioning. Shutting off support is not an option, and banks can go some way to restoring their public image through a set of collaborative actions such as payment moratoriums and quick to access credit lines. I also want to echo Dan’s point on staff. FS firms need to ensure the health and wellbeing of their employees is central to anything they do and its paramount that firms provide the tools and support people need to operate in the difficult and extreme circumstances that we find ourselves in.
Are we Expecting to see Further Responses from the Government or Regulators?
Chris Chan: Governments have already set out a series of measures to support the economy during this crisis, such as a job retention scheme, deferral of tax payments, numerous grants and funding to small businesses. Furthermore, central banks have cut interest rates down to all-time lows. Such extreme measures are in no doubt necessary to keep what remains of the economy afloat, and more importantly, for its people to survive. With such extreme measures already taken, the Government has used all if not most of its ammunition, and I don’t believe there’s much more left it can do financially. All that is left is hoping that the actions taken by the Government are enough to sustain the effects of this crisis, as well as the after-effects in the months to come.
Tom Rich: As Chris touched on, with central banks slashing their interest rates, there is now very little space in which to deploy the main monetary levers to stimulate the economy. Is there a possibility then that we will see negative interest rates in the UK as we have seen elsewhere in Europe? It seems unlikely, but in these crazy times and with the full scale of the economic impact mounting by the day, I don’t think we can rule it out. It would be a historic move.
Dan Selwyn: New regulatory standards will be and, some already have been, deferred. I expect there to be a heightened focus on financial crime mechanisms as new policies, processes and procedures are developed and cascaded out with haste by the Government, in conjunction with mortgage providers, consumer credit, insurance firms and banks to support businesses large and small alike.
Do you think there are Specific Areas of the Financial Services Industry that will Face Greater Levels of Challenge?
Dan Selwyn: I think the consumer credit area will be super interesting. Due to the incoming recession I expect the subprime lending area to see a spike in activity. The banks could potentially strike partnerships and utilise these companies as vehicles to deliver much needed short-term loans without the much-hated interest rates that come alongside payday loans. What we need to remember is that the reason those interest rates are so high is that the recovery cost is high and those that are lent to are at high risk. With an expected large percentage rise to the people in the UK within this bracket, the area may see drastic growth in the short term.
Chris Chan: With the crisis bringing many businesses to shut down for an undetermined period, companies and households across the country are expected to fall behind on their loan repayments. Consequently, for retail banks, many of these loans will be reclassified as non-performing loans. This not only leads to a reduction of interest income along with additional management costs from a financial perspective, this will also impact their balance sheet on the asset side where they will likely have challenges meeting statutory capital requirements.
Tom Rich: I would say it’s the insurance industry, which has considerable challenges to face in terms of what the impact is going to be on its portfolio, how it manages an influx of new claimants and queries, especially with staff absent or working from home, and to do all this whilst still managing its strict regulatory and solvency requirements. It could be a bumpy ride.
The current situation has thrown ‘business as usual’ out of the window, and the Financial Services industry is scrambling to acclimatise to the new normal. Firms’ priorities must lie in ensuring clients’ needs are met and supporting their staff alongside continued efforts to analyse and assess the impacts on key performance metrics. As we move forwards from this crisis, it’s vital that firms take stock of what has and hasn’t worked during this period and then apply these learnings to drive growth and ultimately to build a stronger and more resilient economy. That, at least, would provide a silver lining to what is a terrible and unprecedented humanitarian crisis.