What Does the Bear Market Hold for Financial Compliance?

By Dhanum Nursigadoo of ComplyAdvantage

Since the 1980s a charging bull sculpture has made Wall Street its home. A symbol of financial optimism and prosperity. However, the bull has bolted. Thanks to Covid-19, the financial world is now facing a bear market.

The UK is about to enter the next phase of the COVID-19 pandemic. As the virus still impacts countries and economies around the world, businesses will begin to open and lockdown rules relaxed. The UK Prime Minister Boris Johnson has raised the starting gun and this is due to go off on the 4^th July.

It is perhaps fitting that this ‘new normal’ will begin on the date celebrated as Independence Day in the United States. For as we have seen with the last financial crisis it is where the US leads that the rest of the world – including the UK – usually follows.

Unemployment in the USA has already affected a staggering 40 million people and the UK shows similar signs with 2.1 million. It seems to be a worldwide problem even with countries that have been praised for their handling of the pandemic in the short term. Take Singapore for example who have currently recorded 26 deaths but still experienced the biggest unemployment spike since SARS.

The monthly increase of unemployed in the UK is at its highest since records began – and worryingly this is with the furlough scheme in place. If the ‘new normal’ signals the start of pubs and businesses opening, then it also brings with it the end of the unprecedented government support of the last few months.

It’s because of this type of government support that means the fallout will be very different from what happened after the 2007 financial crisis. Governments have already used up a great deal of their cash reserves when propping up the economy during sweeping lockdown measures. This potentially means there will be no bailouts and maybe there isn’t a single business that is too big to fail now.

But what part can financial institutions play in the bear market?

So far, financial institutions have already been working to prevent companies from going under and to make sure the economy is supported. The distribution of government funds has been working through schemes such as the UK’s Coronavirus Business Interruption Loan Scheme (CBIL) which has been specifically set up for small and medium-sized businesses and makes up to £5 million worth of loans and finance available.

Dhanum Nursigadoo

How financial institutions have already acted during the tougher lockdown restrictions will also determine who is trusted going forward. Through CBIL financial institutions have been able to build important and key relationships with both old and new clients. Those who have been able to act quickly – and crucially not provide false hope to customers at a time of heightened vulnerability – will have earnt a lot of goodwill and loyalty. We are already seeing in the UK that businesses are potential targets for public ire depending how they acted during the initial stages of the pandemic – and financial institutions are not immune from this behavior. It may be that those financial institutions that increased lending and reduced interest rates to keep cash flowing will benefit.

This next phase will see people and businesses try and operate in a world where physical distance is key. Therefore, making interactions and processes effective in a socially distant way will hugely benefit financial institutions. Some of the groundwork has already been done with measures such as ‘electronic Know Your Client (eKYC)’ as the move to digitalization continues. Now to be able to verify someone’s identity electronically is not just about being as secure as possible to combat fraud, but also about operating as safely as possible in a world in which working remotely is the accepted way to behave.

If this is the way that the bear market will differ from what we’ve seen before, there is still one trend that is most likely to be repeated again. Following the global financial crisis, we saw financial institutions being hit by regulation after regulation – over ten years later it can be argued that this is still happening. It is highly likely that the regulatory burden will continue to increase.

There is currently a consensus from looking at the USA and UK economies that this recession is likely to have a slow recovery time. Therefore the importance of compliance functions that are capable of handling new regulations cannot be overstated. This will benefit those institutions who have treated compliance not just as a burden, but something that enhances and strengthens businesses.

Financial institutions have shown over the last few months how they can keep the economy going. As we settle into the bear market it is imperative that they adapt to the situation, whether that’s building on existing processes such as eKYC or developing new partnerships out of unprecedented schemes like CBIL.

After all, it is this that will keep the economy going during a bear market, and be remembered when the bull charges again.