As we struggle with the acute tactical challenges of COVID-19, we should not forget the key strategic hurdles that our industry still faces. Hopefully some, if not all, of these will be debated at the iconic, albeit virtual, Network Forum meeting next week. Personally, I would focus on four key strategic challenges. The burdens of the regulatory process, the hyping of technology, the deteriorating quality of client connectivity, and the core competitive realities.
It is over ten years since I warned, at a NEMA meeting, about the danger that the market was drowning in regulation. Since then, the situation has deteriorated. And it is the fault of the market place. With a demand for detail, worthy of the most assiduous of auditors and lawyers, the market wants to have, enshrined in regulation, the minutia of handling operational processes. As a result, the regulatory handbooks, which once were once minimalist have now become longer than War and Peace, the complete works of Tolstoy and indeed almost any other written metric we could imagine. This is lawyer and accountant leading business. If the volume brought clarity it would be beneficial if onerous. If practitioners understood regulation, or indeed the possible personal implications of a failure to comply, they would leave the industry. But we have the worst of all worlds; regulation that is subject to arbitrary interpretation in legal systems that are hardly banker friendly if it comes to judgement calls, regulation that requires legal, audit and compliance intervention in too many incidences and regulation that in quantum is beyond the capacity of management to really understand more than the top layer, or the principles, of the gargantuan pile of rules and instructions. Logically, we would accept that the system may be biased against the banks in favour of the private investor, logically we should accept that regulators want efficient markets and are not antagonists and logically we need more accountability and good faith in interpreting rules and regulations. It is too late to redraw the map, but we need to find a medium between short and clear principle-based regulation and the mass of confusing directives we have at the moment.
My second strategic issue is technology. I am no luddite and see value in much of the actions being taken and am impressed by the strategic positioning of some firms. But the solution to problems is not a glorification of Fintech. Fintech can be a partner and part of a process. But the industry needs to get data right first, for processing is no longer its product. Efficient movement of, and action on, data is the key to success. There is too little work being undertaken around the sources and uses of data. There are too many pools of data being collected, hopefully purged and then collated in the eponymous data lakes. We need to go to the sources of data and assess our infrastructures for reliability, resilience and efficiency. Where is our golden data sourced from in a firm, how is it sourced and, as we change our product scopes, does the new environment add to data confusion or contribute to data consistency? Fintech solutions will give fast to market interfaces where many dots are joined together and that may be the appropriate intermediate solution. But running parallel platforms creates problems even if they are joined at the hip by a masterclass gizmo created in a sandbox by a team of technology superstars.
COVID-19 has seen a deterioration in client connectivity. In the retail sector it is used as an excuse for poor service with home working being cited as the cause for all sorts of inefficiencies. As the COVID-19 situation improves, and hopefully we avoid any second or subsequent waves, we need to get the balance right so that service quality and client connectivity return at least to pre-Covid levels. But we also need to find ways of enhancing home working as this makes both economic and social sense. So, again turning to technology, how do we make access to information at home or at work equally secure in an age of enhanced cyber-crime? Or is there a blended process we need to adopt between home and office location to achieve this? But, until we can meet up with clients and colleagues in a workable environment rather than a cavernous facility allowing social distancing, how do we retain personal relationships with those colleagues and clients and how do we communicate product, structural and infrastructural change or regulatory re-interpretation? How do we explain the impact of the inevitable 10-20% minimum job cuts that are likely given both market conditions and also the need to compensate for the incremental costs of COVID-19? And how would we handle a second wave of the epidemic for that remains a strong likelihood?
The market needs to recognise the stark realities of the post-COVID world. It is clear that event risk has been redefined and pandemic risk is worse than the traditional events that we catered for. It is clear that costs will increase. It is clear that small units, especially in low or limited technology communities, will have less contingency space than larger ones if forced to work in a distributed environment. It is clear that securities services are no longer a stand-alone product but an integral component of the bank to financial institution experience. It is clear that technology solutions need an expensive transition involving the re-engineering of core legacy environments if they are to be effective. This implies that small businesses will not be viable longer term quite simply because they cannot generate the requisite financial surplus for investment; scale is needed. Businesses run on a simple geographic rather than a global basis will be redundant as the architectural change of their product would be too complex and costly for them. In other words, albeit with a few exceptions due to unique complexities of some local markets or regulatory barriers used to protect local players, consolidation is an imperative. At infrastructure level, we need to cull the number of CSDs. At corporate level, we should see consolidation of businesses, even if the economic value of a securities services’ firms may be enhanced in the face of the new product and associated revenue reach of front to back environments. But we still need to remove costs to achieve some realism in product pricing as regulatory focus pushes down revenues at the buy side. And, although the very largest may be impeded by competition law from mergers, there are partnership or full acquisition strategies available for the bulk of the top twenty players. And some will need them to achieve the unit cost of production which is so critical for their success.
Change is inevitable but today we have an industry that is floundering to some extent with the challenges of regulation, technology, client service and the changing competitive environment. We need to move ahead and overcome these hurdles, or others may become the data masters of our universe leaving us as the insurers of an ever more intangible series of risks.