The tipping point of 2020 for organisational resilience: financial services sector

Successful organisational resilience relies heavily on the four sights: insight, foresight, oversight and hindsight. Unfortunately, anticipating and preparing for sudden disruptions is not an exact science – despite our best efforts, we can’t always accurately predict everything that will happen or be needed in the future.

Take the medium-term trends forecasted by Deloitte for the financial services sector in 2020, for example, without the luxury of foresight’s frustratingly smug sibling, hindsight, they - and everyone else who tried - were unable to foresee a devastating event that was lurking around the corner.

• Political trends and uncertainty: following the Conservative Party’s landslide election victory, the key question was: how financial services regulation will evolve after the UK departed the EU?
• The role of central banks: low interest rates across Europe have precipitated concerns about the impact of monetary policy measures on the profitability and viability of financial services firms – particularly banks and insurers.
• Technological change: the significant difference between the speed of technological innovation – such as robotics and AI – relative to the speed of legislative and regulatory change is a major concern.
• Socio-economic transformation: the EU has signalled that the financial sector has a role to play in financing sustainable economic development and society’s risk management efforts – such as climate change.

Yes, the potential impact of these trends warranted major consideration - and continue to do so - however, the four sights couldn’t prepare us for what happened next: fast-forward to March 2020, and concerns around issues such as climate change were put on the back-burner after society was blindsided by the escalating COVID-19 pandemic.

The COVID-19 conundrum

The announcement of nationwide lockdown restrictions across the globe reshaped the workplace landscape overnight: home working suddenly became a forced necessity for most businesses in the financial services sector, rather than a convenient and occasional alternative. If this sudden transition from bustling offices to makeshift workstations at kitchen tables wasn’t challenging enough for risk leaders, the economic impact of global lockdowns has been nothing short of catastrophic.

As countries imposed tight restrictions on movement to halt the spread of the virus, it wasn’t just people that were brought to a near-standstill; economic activity practically ground to a halt as well. The resulting damage has been so profound – even in the world’s strongest economies – that it represents the largest shock to the global economy in decades.

This has amplified one trend that was already firmly on the sectors organisational resilience radar: monetary policy. Central banks around the world have proactively intervened to calm markets, implementing stimulus measures on an unprecedented scale – such as record interest rate cuts.

Talking of interest rates: elements of the UK financial market’s transition from the LIBOR rate benchmark to SONIA by the end of 2021 are being hampered by the pandemic. While progress has been made in the sterling bond market, the loan market is experiencing difficulties. The economic and social effects of the pandemic have combined to put operational pressures on lenders and their customers, jeopardising the fourth quarter 2021 target.

The impact of the pandemic on FMIs is a concern for the Bank of England, which has extended its consultation papers on Operational Resilience until 1 October. The delays - which are intended to alleviate the burden on FMIs in the wake of the pandemic - mean these financial networks won’t need to meet requirements resulting from the consultations before the end of 2021, following guidance at the European level.

The current landscape

So, how has the global pandemic refocused organisational resilience planning in the financial services sector?

For employees, businesses must be proactive in their support of new performance targets and working arrangements for employees – liaising with regulators to ensure that compliance expectations are adhered to. For customers, reputation is vital, so where possible business must:

• Provide liquidity and support to customers undergoing financial difficulties.
• Provide regular reassurance on the continuity of service delivery.
• Provide effective digital services.
• Provide regular updates on how they’re dealing with related issues e.g. health and travel insurance.

In terms of liquidity - unprecedented central bank measures have reduced the cost of borrowing, meaning businesses must understand their available capital and liquidity resources - and assess the resilience of these.

You must assess which third-party suppliers are most likely to be impacted by the pandemic, which are critical to ongoing business operations, and where they need to mitigate risks posed by these relationships.

As for communication and transparency, businesses must mitigate the impact of the pandemic by communicating effectively with multiple stakeholders: employees, customers, shareholders and regulators.

Finally, businesses must attempt to understand the challenges to society and economies posed by the pandemic and how they will impact the interconnected financial system.

Remember the big picture

The pandemic is undoubtedly a historic event with wide-ranging repercussions for risk leaders to understand and learn from as quickly as possible. However, financial services firms must also strike a balance between prioritising these emerging risks and continuing to manage established risks.

Take the long-term threat of cyber crime for example: the pandemic has left us so distracted and disoriented that our defences are down, even as we depend more than ever on all things digital. In August, Interpol reported an “alarming rate” of cyber attacks, coupled with a shift in targets from individuals and small businesses to large organisations, further enhancing this continued trend faced by large organisations.

It certainly goes further than just cyber risks and with such a boom in digital first business models, the c-suite are under pressure not to overlook risks associated with their wider digital risk domain. This was a view shared prior to the pandemic by John Wheeler, senior director analyst at Gartner, when he spoke at last year’s FAIR Conference in Maryland, but something that is even more pertinent now.

Regulators are also trying to fulfil their obligations and take into consideration the external environment. In the wake of the pandemic, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) announced their expectations of solo and dual-regulated firms regarding Senior Managers and Certification Regime (SM&CR). This recognises that firms directly affected by the pandemic need to keep their governance arrangements under review.

Where possible, the FCA and PRA intend to provide flexibility around report timings, but the requirement remains.

Technology to the rescue

Business solutions are vital tools for managing emerging and established GRC risks, strategies and projects. The challenge is integrating software that can drive meaningful decision-making from a risk perspective using data that’s aligned to business objectives and KPIs. Achieve this and you will go a long way to achieving the holy grail of aligning risk management and people management with the strategic objectives of the business. This will ensure you are well-placed to adapt and be resilient during normal business operations and through disruptive events.

With integrated solutions in risk, strategy, projects and people our business software will help you make the right decisions, manage risks and align the talents of your organisation. We're excited to discuss how Camms’ solutions can assist with your risk management practices.

Find out how Camms support their customers in the Financial Services sector here. Read the latest whitepaper here.

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