Every year, Duff & Phelps surveys key stakeholders from a wide range of global financial institutions on the current regulatory landscape.
Not at All
Have COVID-19 related restrictions impacted regulatory risk at your firm?
It is difficult to know whether we should be more surprised that half of financial firms have an ESG policy or that a similar number do not.
On the one hand, from a compliance perspective, regulation of ESG is at an early stage, although regulators around the world are beginning to clarify their expectations.
On the other, even where ESG regulatory regimes are some time away from being formalized, stakeholder pressure and investor demand means many firms are not waiting to be compelled before they act. That’s particularly true in asset management, where many large investors such as pension funds won’t (and sometimes can’t under their rules) invest with managers without ESG policies. In private equity, where we find ESG policies common, almost nine out of ten say investor demand has had a moderate (47%) or significant (42%) impact on their strategy. ,/p>
Overall, six out of ten in our survey say investor demand has had a significant (26%) or moderate (36%) impact on their ESG strategy. Only a third (34%) said it had no impact.
Leading the Charge
What role has investor demand played in influencing your firm’s ESG strategy?
Before COVID-19 took the headlines, 2020 began with climate activist Greta Thunberg addressing the World Economic Forum in Davos. In May and June, even the virus could not subdue the Black Lives Matter protests sweeping the globe. Against this background, this year’s Global Regulatory Outlook also asked firms about their environmental, social and governance (ESG) policies.
We found 48% saying their firm already had a comprehensive ESG policy and related compliance procedures with 46% saying they didn’t. Add in at least some of the remaining 6% who may be in the process of implementing a policy, and it’s likely to be more than half of senior-decision makers in financial services that are making serious headway in terms of addressing ESG issues. Already it includes over half (53%) of those working in banks and almost three quarters (74%) in private equity.
That proportion is likely to only grow in future.
The Rise of ESG
Has your firm devised a comprehensive ESG policy and related compliance procedures?
Other countries are also likely to see their financial centers grow, chief among them is India. About one in six (16%) say the country has the greatest potential to be the next big global financial hub.
The numbers are perhaps partly explained by national pride (around 11% of those surveyed came from India and more than half of them named it). But there are grounds to believe that their optimism isn’t misplaced and there is potential for significant growth in India’s financial services sector.
First, the country has seen a number of recent government reforms to free up the market and strengthen its regulatory regime. In the future, that should promote growth in the country as it provides a counterbalance to China, and an alternative for those nervous of potential sanctions from operating or listing there.
Second, there are significant opportunities for India from the emergence of China as a global financial center, as well as a competitor to it. Over the past two decades, Luxembourg and Dublin have flourished as hubs for administrative services and back office work that London-based firms were happy to outsource.
As China grows in importance, India could look to their example. With its well-educated workforce, India could fulfill a similar role, providing a servicing hub to the region that may in time become a world-leading hub for financial services administration.
Other Emerging Hubs
Leaving the EU will strengthen London’s position as a global financial centre
Leaving the EU will weaken London’s position as a global financial centre
It won’t make any difference either way
It’s too early to say
How do you see London’s prospects as a global financial centre once Britain leaves the EU?
With the end of the transition period and Brexit formalized, it’s inevitable that London will continue to lose ground in the battle to be the world’s leading financial center. Fewer than a third (31%) in the survey named London as today’s world leader, down further from last year (34%). New York continues to cement its dominance, with 60% of senior decision-makers globally now naming it the top financial center, up from 56%.
More than half (51%) said Brexit would weaken the UK’s position as a financial center, including 55% of respondents from the UK; only 12% said it would make it stronger. Even among the UK-based respondents, only a third think London will be the preeminent center in five years.
What’s more striking is who isn’t gaining, however. Despite Brexit, there’s been no rush to Europe. The number of senior decision-makers in financial services citing Paris or Frankfurt as the top financial center is negligible, and that’s not expected to change in the medium term.
In part, that’s not surprising; a wholesale move across the Channel was never a realistic short-term prospect given London’s history, its well-established financial and professional services ecosystem, expertise and regulatory environment. The UK is still the world’s favorite regulatory regime, for instance, named by 31% of those surveyed, compared to 25% for the U.S. and the same for Singapore.
In the first half of 2020, Brexit created an estimated 3,000 jobs in Frankfurt according to the Frankfurt Main Finance Lobby Group—not an insignificant number of jobs created, but not the exodus some feared either. Banking alone employs over half a million in the UK, according to the British Bankers Association. London will be a leading financial center for some time to come, with the potential to forge a more independent future
than may have been possible with the UK part of the EU. It remains to be seen what the city hopes to achieve with that newfound independence.
Impact of Brexit
Another significant finding of our research is that growth in financial centers is expected not in Europe, but much further east from it.
China is poised to become the preeminent financial center among the emerging markets. Almost two thirds (64%) in our survey marked it as the most likely candidate, and that future may be with us sooner than expected. China is quickly gaining a reputation as belonging to the world’s preeminent financial hubs.
When asked to name the next preeminent global financial hub in five years, 11% said Shanghai and 7% Hong Kong. Taken together, that’s the same proportion who named London (18%) as the most likely leading global financial center in five years. New York, too, is expected to lose ground over this time frame, but not by as much. Half of senior decision-makers in financial services say it’s still likely to be the world’s leading financial center in five years.
China is benefiting from a growing middle class and an economy that has recovered quickly from the pandemic, while its services sector remains largely insulated from trade tensions with the U.S. Fewer than three in ten (29%) say their firm’s regulatory risk has been impacted by the U.S./China trade disputes (although that rises to 60% in Hong Kong).
The Rise of China
What percentage of your overall
2020 revenues was spent on
What percentage of your overall 2021 revenues do you expect will be spent on regulatory compliance?
In our survey, 29% of senior decision-makers in financial services estimate that their compliance costs in 2020 were more than 5% of their firm’s overall revenues. Only 14% said compliance spending was lower than 1% of their firm’s total revenues. That’s a massive investment for any business—and reducing these costs in 2021 is not likely to happen. With the impacts of COVID-19 and the challenges of a remote workforce, investment in compliance will continue to be a top priority for financial services firms this year. Almost a third (32%) predict the total cost of compliance would be greater than 5% of revenues and 12% expected to see costs lower than 1% of revenues in 2021. High levels of spending seen in 2020 will continue.
That is despite the fact that in some respects, the spiraling upward trend in overall compliance costs seems to be moderating. In the U.S., for example, an increasing number of people training in compliance has largely addressed previous shortages, and upward pressure on salaries for some roles has eased. Our survey suggests that regulatory compliance will remain a core cost of doing business across geographies. For sectors and businesses without significant compliance issues, however, controlling those costs may become somewhat easier.
The Cost of Compliance
Other countries are also likely to see their financial centers grow.
There are significant opportunities for India from the emergence of China as a global financial center, as well as a competitor to it.
Even where ESG regulatory regimes are some time away from being formalized, stakeholder pressure and investor demand means many firms are not waiting to be compelled before they act.
The ESG agenda is one of the few areas of work not entirely overshadowed in the last year by the pandemic response.
While only 15% of survey respondents expect the new Biden administration in the U.S. to impose stricter financial regulation, enforcement could well be strengthened.
Nearly one in five (19%) still say compliance remains the biggest risk to their business.
The pandemic has had, and continues to have, a profound impact on populations, economies and businesses everywhere. Governments, industries and markets have faced unprecedented challenges responding to a crisis that posed significant threats to lives, but also valuations, liquidity, compliance and solvency. With the roll-out of vaccines, we may soon see an end to the virus. But many challenges exposed by the outbreak will linger. Just as the consequences of the financial crisis of 2007 and 2008 are still felt more than a decade later, the events of 2020 will have consequences for years to come.
In the financial services sector, the challenges and crises of 2020 seem likely to reinforce existing trends rather than mark a point of disruption or transformational change, however. This year’s Global Regulatory Outlook shows the direction of travel remains similar, but the pace of transformation is getting ever quicker.
Duff & Phelps received input from 250 senior executives working in financial services across banking, asset management, hedge funds, private equity, broker-dealers and other market participants. Our respondents come from the U.S., the UK, Europe, India and China.
Their views suggest a future financial services market that could be significantly different from today. In the 2021 edition of our Global Regulatory Outlook, we look both forward and back to identify what patterns and themes might persist after the pandemic, and how financial services firms can prepare for the future.
Top Line Findings
Fewer than a third (31%) named London as today’s world financial leader. New York continues to cement its dominance, with 60% of senior decision-makers globally now naming it the top financial center.
China dominates within the emerging markets this year with almost two thirds (64%) of respondents predicting it will be the next major financial hub.
In 2021, almost a third (32%) of respondents predict the total cost of compliance will be greater than 5% of their revenues. Only 12% expected to see compliance costs lower than 1% of revenues.
When asked about their firms’ environmental, social and governance (ESG) policies, 48% of respondents said they already had a comprehensive ESG policy and related compliance procedures in place. Just over six out of ten respondents (62%) said investor demand had a significant or moderate impact on developing their firm’s policy.
The ESG agenda is one of the few areas of work not entirely overshadowed in the last year by the pandemic response by businesses. With cases still high this winter and lockdowns in place in the UK and other European countries, the pandemic will continue to concern firms for some time to come.
More than six in ten (62%) in the survey say that pandemic restrictions have impacted their regulatory risks.
Most of these risks result from remote working—both in terms of the potential for market abuse and cyber security—and will ease when restrictions do. However, some longer-term consequences will remain.
First, the appetite for remote working is unlikely to disappear completely, even after restrictions ease. That will present challenges for businesses to accommodate it where possible, but also opportunities; trading might have to come back in-house, but the last months have shown that some compliance and support functions do not need to be based in expensive office locations.
Second, the improvements many have made in monitoring and surveillance to compensate for the lack of day-to-day visibility of traders and other frontline staff will remain. Even in a post-COVID-19 world, that should benefit compliance.
Business as Unusual: The Post-Covid Climate
Considered the world’s preeminent financial centre today
Finally, even after the pandemic eases, concerns in the coming year will bear much of its influence.
On the one hand, governments’ push for growth to drive post-pandemic recoveries may limit appetite for heavy handed regulation, with increased regulatory focus on ESG likely to be a notable exception. In fact, the Biden administration in the U.S. has already signaled that it will review an order from the prior administration that placed hurdles on fiduciaries for retirement plans to invest in ESG-focused investment vehicles.
While only 15% of survey respondents expect the new Biden administration in the U.S. to impose stricter financial regulation, enforcement could well be strengthened. Chairwoman of the U.S. House Financial Services Committee, Maxine Waters, and Biden’s pick for Chairman of the SEC, Gary Gensler, are both veterans of the financial crisis era and have a history of being tough regulators.
On the other hand, the biggest risks financial services businesses see in the next year bear the clear hallmarks of the last. Chief among them is volatility (39%), while liquidity (14%) and valuations (9%) are also identified as risks.
Nevertheless, nearly one in five (19%) still say compliance remains the biggest risk to their business. Managing that risk and controlling the costs of doing so in an uncertain economic environment will be an ongoing challenge.
Can you identify the biggest risk your firm faces during the next twelve months?
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Considered the world's preeminent financial centre in 5 years
Shows the most potential of becoming one of the next global financial hubs