Q4 2020 Results
2020 required huge efforts just to keep operations running. But all the time, the shifts in customer expectations and impact of technological disruption continued to gather pace. As we move into 2021, the need to rethink business models and accelerate transformation is more urgent than ever.
The world has changed and financial services organisations have to change with it. The organisations out in front have already decided where and how their business is going to compete in the future and are pushing ahead with the operational reconfiguration needed to deliver. Others risk being left behind.
The pick-up in financial services (FS) sentiment continued in Q4 2020. Business volumes also returned to growth for the first time in over two years. However, the survey was carried out before the move back into national lockdown and the tightening of restrictions. This is likely to temper the positive outlook in the findings.
As advisers, investors and sources of finance, FS organisations have a vital role to play in leading the UK economic recovery.
The results illustrate the strength and resilience of the insurance industry. As rates harden and the claims environment remains relatively benign, general insurers are the most confident of the FS sectors about returns over the next three months. Amidst uncertainty over the economy and investment returns, life insurance is one of the least optimistic sectors.
*Results in the above graphic relate to General Insurance
Investment and corporate bankers are more confident about their prospects than those on the retail side. Sentiment within investment and corporate banks has been buoyed by the strong demand for M&A, restructuring and market-making services.
By contrast, retail banks anticipate a significant dip in both volumes and returns. A potential increase in non-performing loans (NPLs) over the next three months could impede lending capacity and ability to support the recovery. We won’t know the full extent of debt impairment for some time. Much depends on how quickly the economy can recover and whether government subsidies for businesses and jobs can be sustained.
From both a balance sheet and social responsibility perspective, key priorities include identifying early warning signs of impairment and stepping in before difficulties become irreversible. Some lending may not be feasible. But banks can still provide advice and access to alternative funding as part of a collaborative platform model.
Private equity firms anticipate a larger rise in volumes and returns than the investment management sector as a whole. Many investors are looking to private equity and other alternative funds to boost yields. Acquisition opportunities for private equity are also increasing.
Investment managers have the funds at their disposal to accelerate economic turnaround. This includes the wall of dry powder within private markets funds. With bank funding constrained, the openings include a stronger role for alternative lenders in supporting small businesses and other engines of recovery. With government funding constrained, infrastructure funds can step in to help bridge some of the investment gap.
For private markets managers, the challenges include weighing up investment opportunities against the increased public scrutiny that would come from a more prominent role in socially-critical areas, such as small business finance and infrastructure development.
Disruption has moved up a gear over the past year. And with it the need to accelerate change.
The survey raises questions over whether FS organisations are moving fast enough to keep pace. In particular, operational resilience is the number one priority. To achieve this responding to changes in customer expectations and the move to more digital and platform delivery models need to be at the top of the agenda.
The businesses out in front know how their business model will need to change to stay relevant in this fast-changing landscape. They are also ahead of the curve in investing in digital and implementing the technologies, skills, ways of working and cyber safeguards needed to deliver. This is reflected in both progress on upskilling and the transition to cloud.
Acceleration in digital transformation is as much about people, culture and organisational design as systems and technology. The organisations out in front are developing the skills and fostering the buy-in within their workforce to make the most of new tools and technology. In doing so they are creating an optimised and operationally resilient workforce equipped to deal with future challenges and opportunities.
A lot of upskilling is rightly focused on digital skills and enabling employees to harness data analytics in their decision making. As automation gathers pace, the distinctively human capabilities that can’t be replicated by machines such as creativity and empathy are also set to become more important. Other rising skills demands include ESG, both in specialist areas such as green finance and through engagement with governments and communities.
ESG is crucial in keeping pace with customer and investor demands, while capitalising on fast growth markets such as green bonds and ESG-orientated investing. Many FS organisations recognise the need to make their business more diverse and sustainable internally but the impact on product development is less well developed.
With increasing pressure to deliver real change from customers, investors and society, it's now more important than ever to bring ESG considerations to the fore. By firmly embedding ESG strategy into frontline products, as well as back office operations, FS organisations have a real opportunity to act as the bridge between investors and other industry sectors, drive sustainable finance into the mainstream and lead the way in driving positive change more widely.
Our analysis suggests that ESG is the most important development in asset management since the creation of exchange traded passive funds two decades ago.
A growing number of institutional investors are planning to move away from non-ESG products altogether.
The challenge of keeping pace is highlighted by the 40% of investment managers surveyed who cite constraints on internal resources as a barrier to delivering their ESG agenda.
The ‘greening’ of the global economy demands finance and expertise. As such, it could provide a hugely valuable growth opportunity for the City.
Key ESG challenges include supporting customers whose jobs and businesses have been affected by the downturn.
Strategies are coming together - only 4% of banks report that lack of clarity over objectives is holding up the delivery of their objectives. But 68% report that constraints on resources is a barrier.
While most FS organisations that operate internationally have put in place the necessary contingency plans to continue to support their clients, in many cases, these are currently tactical rather than strategic. In some areas obtaining equivalence would enable a more efficient and cost effective way of doing business.
Operating from different domiciles creates additional demands in areas such as separate reporting and dealing with distinct compliance requirements. As the survey findings highlight, there is still some work to do in areas such as staff location and migrating of contracts.
Beyond operational challenges, it’s clear that business has been lost to other European centres. This underlines the importance of exploring new markets and investing in innovation in the months and years ahead.
Rather than a temporary shift, the changes we’ve seen in how and where people work as a result of COVID-19 now look like they’re here to stay.
The upward trend towards redefining or reconfiguring office space points to a changing role for the office in line with new ways of working. Rather than a place for day to day working, there’s a move towards it being more of a collaboration space and a place for instilling the values and culture of a business. The office also has an important role to play in key functions such as onboarding new staff and bringing people together to foster innovation, share ideas and learn from each other.
A review of office space does not necessarily mean empty space. Instead, a change in footprint for some of the larger companies opens up potential for others to fill the space. This could leave room for smaller companies that might not have been able to afford premium real estate to take up portions of the space previously occupied by just one large company.