Deloitte’s European Centre for Regulatory Strategy’s (ECRS) 2020 Financial Markets Regulatory Outlook identifies a number of themes that are particularly relevant in the Covid-19 pandemic.
This year’s report has identified four medium-term trends and ten cross-sector themes of strategic significance, as well as a number of additional themes specific to each of the banking, capital markets, insurance and investment management sectors.
Building on the themes from 2019, it is striking that all are relevant for the financial services industry in Guernsey and are definitely on the agenda of our local regulator, the Guernsey Financial Services Commission (GFSC).
What is even more striking is how the themes highlighted in the report, ranging from good customer outcomes to climate change risk and stress testing, all remain relevant to our economy and environment under the seismic impact of Covid-19.
The most urgent priority set out in the report is operational and cyber resilience. This has been tested in recent weeks in a way that not even the regulators could have predicted.
The move from workplace to home and disaster recovery site has been challenging for some and has been a true test of resilience. In terms of cybersecurity, the coming weeks and months will determine whether staff cyber training has been effective and test the monitoring capability of regulated businesses.
Deloitte cyber intelligence has tracked a significant uptick in cyber activity since the crisis began and businesses may be more vulnerable due to distracted staff and new working arrangements. The regulatory cyber focus will be shifting from preparedness to supporting licensees in responding to actual threats and incidents.
On the theme of operational resilience, European and local regulators will be monitoring how the operational risk framework has been adapted to remote working environments and how the board of regulated businesses will be receiving timely and effective assurance from the second and third lines of defence.
Another theme for 2020 – culture, governance and accountability – now feels even more relevant in light of the current pandemic. The culture of regulated business will be tested over the coming weeks and months. The manner in which firms support their people, their clients and their communities will be judged not only by the regulators but by their governments and their people.
A sharp focus on effective governance over the coming weeks and a well-considered and documented response to the hard decisions businesses are facing will be particularly crucial. Another theme identified – of good customer outcomes – is also worthy of focus in the coming weeks and months. Stakeholders are expecting financial services businesses to be flexible and understanding in their response to clients facing hardship and financial difficulties. Policymakers, governments and regulators have already set out high expectations in relation to customer outcomes and support.
Not all of the themes show risk levels increasing, however. Some of the themes have been positively impacted by Covid-related events. Climate change risk has benefitted in many ways over the past weeks and months. Environmental, social and governance (“ESG”) themed investments have shown themselves to be more resilient in the recent market downturns and national lockdowns on carbon emissions and air pollution have generated staggering improvements across both areas. As a recent WHO article said, ‘the Covid-19 crisis shows us that it is possible to make transformational changes overnight’ and we can all choose to take advantage of this period of disruption and change for the benefit of the climate.
You can read the Deloitte 2020 Regulatory Report here.