OUTLOOK 2021
Financial Institutions
Regulatory uncertainty as a result of Brexit
Change will be a constant consideration for the sector as it watches how the UK government positions itself alongside the EU in the regulatory sphere, having already intimated an intention to deviate from the existing EU regulatory framework. Onshoring is only the starting line, not the finish.
Although the FCA has provided a grace period until March 2022, this offers limited ease. Both UK and European regulators have made it clear they expect firms to be prepared for what might come and to plan and consider a full range of scenarios.
So what does that mean for firms? For those with EU operations, the focus will be on ensuring those operations are robust and don’t fall foul of EU regulators’ expectations of effective establishment. Firms will be busy further developing plans to ensure continuity of customer service and care and planning to do so under a range of scenarios. This could include a harsher data sharing landscape, assessing the options and associated risks of outsourcing across the EU, and managing, acquiring and retaining talent. Planning for change, without knowing what that will look like, will be all-consuming for firms. It will be one of the defining features of 2021.
Digitalisation and the rise of crypto assets
COVID-19 accelerated digitalisation in financial services. This trend will continue in 2021 and beyond as financial institutions, their clients and regulators, implement more and more technology solutions. Solutions that were previously adopted only by market challengers will increasingly be adopted by traditional market players. With this move to digitalisation, there will come increased scrutiny, formulated at an international level, but implemented in a fragmented way across the G20 and beyond. Key focus areas will be over-reliance by financial institutions on BigTech, the adoption of digital tools by regulators, and crypto assets: how to protect investors and ensure financial stability without stifling innovation.
Currently we’re seeing more reputable financial services businesses start to launch credible crypto assets products. This, combined with the rise in interest in Central Bank digital currencies, is fuelling a renewed interest in the sector from the established players. With bespoke regulation on the way across the EU and the UK providing more of a framework within which entities can safely build crypto products, this represents opportunities for large regulated entities.
Event driven special situations – the continuing impact of the pandemic
If growth rates and interest rates remain at historic lows, or even turn negative, this will present both challenges and opportunities.
Clients will be looking for better returns and we expect they’ll particularly look towards more highly leveraged, private equity and infrastructure products. As investor appetite continues to drive financing costs lower, sellers of less high-quality portfolios will be tempted to test the market.
We’re already seeing opportunities for acquisitions in the real estate, corporate and private equity space. Financial institutions will also look to new and exotic products to increase returns. This will require careful handling with regulatory oversight to mitigate risk exposure. We also expect to see an increase in the refinancing of debt due to the lower interest rates.
However, on the flip side, cyclical and industry-wide structural changes will lead to an increase in restructuring in the affected sectors prefacing an inability to meet loan repayments. This will present opportunities, particularly in distressed debt, non-performing loan portfolios and securitisation. We may well see more regulatory guidance on how to resolve these issues.
Expected increase in corporate action
Corporate action will be a key theme that emerges in a post-COVID world whether it’s for diversification, re-invention, enhancement, creating larger scale operations to compete with global peers or efficiency reasons - strategic buyers will be actively looking to enhance their offering. We expect to see financial institutions looking for opportunities to expand into new revenue streams either geographically or by product/service. We’re also expecting to see greater activity in strategic bolt-on acquisitions including FinTech M&A. Financial institutions will look to FinTech M&A as part of their strategy to endure the period of low interest rates through the re-design of their business models.
On the flipside, we’ll see consolidation due to prolonged pressure on balance sheets. Struggling FinTechs may be forced to explore acquisition by larger financial institutions as funding opportunities become challenging. One area where we are seeing activity, and predict that there’ll be much more, is in relation to the asset management arms of banks and insurance companies looking to defend profit margins, particularly in relation to disposals and reorganisations.
Managing risk and resilience
We’re expecting to see a spotlight on post-COVID behaviour, particularly in relation to government support, employee treatment and supply chain management. The pandemic crisis has highlighted the need to build resilience across all sectors. Sustainability and social goals have become a key focus of government, regulators, investors and consumers. Corporate reputations aside, financial institutions face significant regulatory and litigation risk, including claims arising from the mis-selling/greenwashing of ESG products, data breaches, issues with internal culture and conduct, directors' liabilities and reporting, and inadequate due diligence.
We expect to see increasing numbers of internal and regulatory investigations around environmental, social and governance issues in regulated entities as regulators around the world focus on sustainability and other ESG goals.
Many financially stressed companies have been given waivers and extensions during the pandemic. Some have also been kept afloat by government support schemes. As the pandemic comes to an end, enforcement on defaults and close-outs of positions will accelerate. We also expect risk-sharing arrangements between financial institutions and their lawyers to proliferate in 2021.