We’re now well into the first quarter of 2020, and despite the global economy stuttering following months of trade tensions and Brexit uncertainty, and the more recent impact of the global coronavirus pandemic, existing trends in the banking sector continue to march on. In this article, partners Paul Gair, Harry Parker, and Tim Waller from UK law firm TLT give their views on what we’re likely to see across three areas shaping banking at the start of this new decade.
LIBOR – the end of the road
In the run-up to the end of LIBOR in 2021, there has been a marked increase in communications from regulators and the Bank of England since the start of 2020, with the expectation that firms should have‘ clear evidence of engagement’ to ensure that they are ready for the changes. This means that firms are, or at least should be, progressing through their plans for the transition to avoid undue regulatory scrutiny. It is therefore imperative for firms to first understand how the end of LIBOR will impact them and avoid the temptation of adopting a ‘wait and see’ approach.
While regulators have provided a degree of clarity about the timeline for the next two years, some pieces of the puzzle are still to be put in place. For example, firms are still awaiting infrastructure upgrades to enable the transition to RFRs and additional guidance on several key issues, such as how to deal with so-called ‘tough legacy contracts’.
Over the course of this year, firms will have to address the implications of the end of LIBOR on them, most notably in loan markets where progress is less advanced. In an uncertain environment, firms will need to implement robust communication strategies, address their books of existing LIBOR-linked contracts and consider whether their internal governance structures will still be fit for purpose.
It goes without saying that amending the wording of existing loans agreements to ensure that they remain effective after 2021 will be a substantial undertaking for firms, requiring significant time and resource to ensure it is completed satisfactorily given the regulatory scrutiny. Each of these areas will need to be taken seriously and firms will no doubt be looking for clarity as they consider each area in turn.
It is not an understatement to say that the transition to RFRs for firms will present a huge challenge, but with the right support, all affected firms can now accelerate their plans to ensure they are ready for the switch at the end of 2021.
Employee relations and diversity –challenges and opportunities
The coming year will see the fruition of several years’ worth of regulatory development and cultural change, driven by both popular and industry demand and compounded partly by broader macroeconomic developments both domestically and globally.
Now that part two of the Senior Managers and Certification Regime (SMCR) has been rolled out, it will remain to be seen how solo regulated firms at the smaller end of the spectrum prepare operationally for the new compliance requirements. Whilst they should have the implementation of the SMCR regime in hand, many will lack the legacy back office capabilities of the banks and insurers, including HR and special counsel, to deal with the potentially problematic employee relations arising out of the new rules.
Whereas in the past, employee disciplinary measures or investigations have been an internal matter only, new requirements to disclose individuals to the regulator, and to provide regulatory references to prospective employers, may prompt outgoing employees to take pre-emptive defensive action against their employer to try and avoid any adverse disclosures which may affect their future employability. This will surely cause a headache to those smaller firms lacking the resources to deal with such issues, causing potential tension between employees and employers not previously seen, with only the most astute firms getting their houses in order to mitigate the considerable risk this poses.
We should also expect a growing industry wide re-think about how talent is attracted and retained, with diversity being a major area of focus. We need only look at the latest report out of the Financial Services Skills Taskforce which concluded that workplace changes driven by globalisation, technological and demographic shift are forcing the hand of firms to readjust their entire approach to recruiting talent. Not only are there increasing regulatory pressures demanding diversity in the workplace, but firms are rapidly waking up to the reality of gender equality being a business necessity, with the data to prove this.
2020 may prove a landmark year where we see commercial drivers and compliance rules going hand-in-hand, with increased diversity being the key to ensuring that the financial services sector’s talent needs are met.
The year of open finance
2020 will no doubt see an acceleration of developments in the retail banking and finance sector. Open banking, open finance, challenger banks and fintech will continue to be the buzzwords that define the market and will begin to bear fruit following several years’ worth of regulatory implementation.
Though mooted for some time as the next big thing in retail banking, there is a likelihood that 2020 really will be the first year that open banking is realised. Two years on from PSD2 and after a paucity of consumer of awareness, with new Payment Initiation Service products few and far between, the introduction by Barclays of open banking capabilities on its app in March is one of the first big steps towards something tangible for the consumer and is sure to drive awareness.
We should be also watchful of open finance maturing out of the open banking model this year. The FCA’s Open Finance Advisory Group set up in late 2019 and the results of the Open Finance Call for Input closing in March 2020 will give us a clearer picture of the situation from an industry perspective. Industry and consumer concerns about liability will need answering, with a major focus on whether Third Party Providers (TPPs) are regulated, as they are in open banking – if they are not, it will be difficult to see if a framework of liability could be enforced, which may pose a risk.
Investment across challengers, fintech and TPPs will likely continue as open banking continues to proliferate – many of these innovative companies would not exist without it. In the first quarter of 2020 we’ve already seen countless high-value investment rounds across the sector, the highest-profile being Revolut’s £387m round in February, but at all levels, including TPPs, we should expect to see deployed investment to continue at pace as innovative products are brought to market. However, as mainstream clearing banks are now catching up, upgrading legacy platforms and innovating with their own digital products (such as the Barclays app), and retaining digital market share, the likelihood is that there will not be a huge need for bank investment and an involvement with fintech incubators for the foreseeable future.
There is no doubt that 2020 will present many challenges and opportunities for the banking and financial services sector. Shifting geopolitical tensions, macroeconomic headwinds and technological advances will affect virtually all industries, but when coupled with a human capital deficit, the overhaul of a long held currency benchmark and a relentless drive to innovate, the financial services sector in 2020 is certainly going to be a vibrant one to watch.