Financial Services Risk & Compliance in 2021 : What do the next 12 months have in store?

Andrew Rogers Financial services, Risk & Compliance, Market Insight...

After a tumultuous start to the decade, what do the next 12 months have in store?

Few need reminding of the upheaval that events in 2020 have brought to the world. With a new year only weeks away, families, businesses, and governments eye the future cautiously. Much of their anxiety hinges on the hopes that promising vaccination and anti-viral developments will succeed in slowing the Covid-19 pandemic. Whilst the combined effects of government stimulus, rallying markets, and the easing of essential restrictions to daily life are hoped to deliver a salve to ailing, economies the world over.

As developed economies have shown this year, the rule book, especially on national debt levels has been thrown out. Deficit shy politicians, in governments across the political “west”, perhaps learning from the backlash of propping the wealthy in 2008 and 2009, have issued record-breaking financial safety nets for the poorest and businesses hardest hit by a downturn, not of their making. As some of those measures overrun their initially forecasted timeframes, the pressure is on, not only to continue that support where it is needed but to reimagine the social security infrastructure that we maintain once a recovery crystallises. Paying for both the rescue and a fairer society will not come cheaply.

With economic hurdles as large as a pandemic, waning global travel, fractured supply chains, and deteriorating international trade conditions, it's easy to imagine that deregulation and cutting corners could become a key feature of the post and inter-pandemic returns to growth. But should that be the case?

In this article, I’ll explore what the outlook could be for the economy, how regulators in the financial services sector will manage their obligations, and discuss some of the key actions that the state and businesses can and should take.

Predicting the Unpredictable

The final months of this year promise a rollercoaster of social and political change. All at once the Australian economy, heavily indebted and partially in stasis, will begin to see a resurgence of activity, precipitated by the cautious reopening of Victoria, tentative tourism in the form of trans-Tasman visitors, and the inevitable retail largesse of December. Further afield, presidential elections in the USA, the fallout from Brexit, and the risks of further waves of Covid-19 infections across the developing world and a northern hemisphere in winter will all have implications. The consequences for 2021 remain uncertain.

Early 2020 saw the commencement of major changes to the Australian financial services industry. Damming findings in the Banking Royal Commission prompted a wave of recommendations and requirements that were to become a priority, not only for those found to have been at fault, but also for new businesses entering the market and many who sought to be ahead of the curve in meeting customer and regulatory expectations in future.

Understandably, as the global tragedy worsened, regulators with major change, supervisory, monitoring, and enforcement agendas had to quickly adapt to the economic crisis, borne of the emerging pandemic. Stepping into the breach, The Treasury, APRA, ASIC & the RBA had to rapidly redeploy their resources to shore up the markets and banks, whilst supporting consumers and planning efforts to drive a recovery. Enforcement activity has continued but much else has rightly been stalled. Pragmatism has been key to effectively managing Australia’s first recession in nearly 30 years.

Looking ahead, although 2021 is cast with uncertainty, we can expect H1 to continue the trend of crisis management from regulators, but as recovery efforts show signs of success, regulators may find that new types of malpractice and predatory behaviour have become apparent, triggering yet more enforcement and remediation work to add to their already stretched capacity.

Maintaining Order

Among the changes that 2020 had been expected to bring was a major improvement in managing and mitigating cyber threats to the financial infrastructure of Australia. Projects to service this need across APRA, ASIC and indeed many of the key institutions that make up the financial services sector are critical. With many services and the day to day operations of FS businesses moving further away from bricks and mortar to cloud-based solutions, the risks are escalating rapidly and were doing so prior to the pandemic.

Regulators and federal institutions must ensure that not only their own systems and infrastructure are protected but that they are working closely with regulated bodies to educate and protect consumers against fraud, scams, privacy breaches, and outright cyber-attacks.

Financially, deposit takers face higher demands on their balance sheets. The strong capital buffers that have been built during Australia’s record bull market must be used and be encouraged to be used, for issuing vital credit and liquidity to stretched but viable businesses. They will need regulatory support to manage this effectively and rebuild as markets improve.

This year has already seen many large financial services groups divest or announce divestments of their wealth businesses. As these restructures take shape and others go to market, regulators will need to carefully consider any prospective tie-ups, so that competition and consumers are being prioritised.

Finally, outstanding new regulatory requirements, particularly those from the Royal Commission must be implemented swiftly but when appropriate to do so. Regulations need to be clear and without undue complexity, ensuring that they do not inadvertently favour larger players with the scale and resources to navigate them in an already heavily concentrated market, stifling competition.

The Recovery & Beyond

In the face of extreme pressure Australian banks, super funds, and insurers have shown excellent resilience and this is in no small part due to strong governance and risk management. With that said, federal programs to allow early access for consumers to their pensions, lower deposit rates, industry-led forbearance on debt repayments and unemployment among consumers have all stretched them significantly.

To manage the recovery, firms can and should take advantage of their capital reserves, thereby protecting consumers and providing a lifeline to businesses.

As economic growth returns, financial institutions must build on the same discipline that has insulated them this year. Prudent capital controls must run parallel with robust risk management and compliance frameworks, not only to meet regulatory and operational challenges but to anticipate and mitigate future pandemic and natural threats to stability. Markets must also anticipate and adapt to the rising influence of environmental, social, and governance-related performance, which will play an increasing role in influencing investor behaviour and returns.

Employment Outlook

Across the labour force, the pandemic has had winners and many losers. Some lost jobs will never return and although government efforts to finance education and cross-training for out-of-work professionals will help, businesses should consider addressing their own talent shortages as being part of the solution.

Jobs in areas such as technology, risk, and compliance all suffer from a lack of available candidates. Larger businesses that are planning to build out teams in these areas could benefit from recruiting and cross-training individuals with transferrable skills to access untapped talent.

For professionals working within governance, risk, and compliance the next 12 months will be turbulent and challenging. Candidates watching the markets for new opportunities will likely see growth in financial crime, market risk, conduct risk & compliance, regulatory compliance, and more novel risk management opportunities to better equip firms with pandemic / natural disaster resilience. With unprecedented change and risk across the financial services industry, opportunities for professional growth are bound to follow.

Finally, maintaining sensible flexible working practices and ensuring that those with commitments outside of the office are supported properly to meet them, will aid staff retention and motivation. For those with families, the government should consider extending subsidised childcare to encourage parents to return to the workforce, avoiding the erosion of skills and knowledge in workers whilst boosting tax receipts. The Nordics have seen substantial success with similar schemes and with many women still assuming the role of primary caregivers within families, businesses would undoubtedly gain access to an enriched and more diverse talent market.


For more details or for a confidential conversation about the Risk & Compliance market, please contact Andrew Rogers, Senior Consultant Risk & Compliance Taylor Root Australia.