The future of managing relationships in a socially distant environment
In relationship-driven activities such as network management, market participants are gradually accepting that their roles, duties and traditional ways of working will be totally transformed because of the Covid pandemic. SGSS examines how the custody industry will need to evolve as we settle into this new reality.
In the space of a few weeks in March, nearly all participants in the financial services industry were suddenly confined to their homes as a result of Covid-19 lockdown requirements. In relationship-driven activities such as network management, market participants are gradually accepting that their roles, duties and traditional ways of working will be totally transformed because of this pandemic. Few network managers are confident they will be permitted to return to the office in the next six months, let-alone travel. Societe Generale Securities Services (SGSS) examines how thecustody industry will need to evolve as we settle into this new reality.
Remote working: Managing and Maintaining relationships
Unable to travel, network managers cannot perform on-site visits, either for due diligence or service provider review purposes. Although frustrating, network managers have adapted accordingly and are increasingly using online communication platforms to engage with their sub-custodians. While network managers are precluded from physically seeing their providers, the volume of phone calls between clients and sub-custodians has increased significantly. It is essential that regular communication is maintained between providers and their clients if the relationships are to continue thriving.
A likely legacy of Covid-19 is that business travel will become far more infrequent with network managers avoiding visits to low risk countries or markets where they have limited exposures to. This will be driven by a combination of factors including costs and corporate policies, but it could also happen if some people within the industry – for whatever reason – refuse to travel altogether. This potential trend does pose longer-term problems for the industry. The ability to effortlessly transition to remote working initially was made possible by the fact that a number of network managers and their sub- custodians have deeply entrenched relationships, some of which span back many years.
The same applies to sub-custodians and local regulators. A huge amount of effort and resources at SGSS are spent on cultivating domestic regulators and sharing critical information with them about industry best practices. These partnerships have been strengthened through social interactions, sometimes at industry gatherings such as The Network Forum and SIBOS but often in bilateral meetings and market working groups. Establishing new relationships with prospective clients and domestic regulators in a world dominated by strict social distancing and travel restrictions may not be as straightforward. While we shall likely see an irrevocable increase in digitalised networking and advocacy, only time will tell if these models can yield equivalent positive results.
A new technology model is needed
The industry has made remarkable progress in facilitating automation and straight-through processing [STP] for settlements, an achievement which helped make the migration to home working much easier. Nonetheless, there are some notable deficiencies that have created operational headaches. Several jurisdictions refuse to accept or process legal or tax documents in anything other than hard copy. A handful of regulators and counterparties also insist that certain documents have wet signatures instead of digital signatures, creating all sorts of logistical problems. That these rules are not harmonised often makes client onboarding and account openings difficult in specific markets. In order to expedite the onboarding and set-up process, there needs to be wider move to digitalisation from issuer through to investor.
Equally, investment into disruptive technologies – such as application programming interfaces [APIs], artificial intelligence [AI] and robotic process automation [RPA] – should also be maintained. This recent crisis has demonstrated how integral robust technology systems and infrastructure are to ensure operational resiliency. With regulators – including those in the US and UK – likely to further scrutinise the operational resiliency of third-party providers, it is imperative that sub-custodians, market infrastructures and global custodians continue investing in their technology programmes. Recent conversations with clients indicate there is likely to be an acceleration towards adopting new technologies to mitigate the risks associated with the decentralisation of processing operations, such as payments or striking net asset values.
Getting more serious about BCP
As the crisis unfolded, sub-custodians were inundated with ad hoc due diligence questionnaires from network managers making inquiries about their BCPs (business continuity plans). Although the AFME (Association for Financial Markets in Europe) due diligence questionnaire template does make numerous references to BCP, network managers will likely redouble their focus on providers’ outsourcing arrangements, a lot of which has since been offshored to markets such as India, Malaysia and the Philippines for cost purposes. This model could face scrutiny post-Covid 19 as more providers potentially look at adopting a split country approach.
In the case of India, the overnight imposition of lockdown caught market participants unaware with many people simply ill-equipped to work from home, causing significant delays processing trade settlement. This prompted some banks to temporarily re-onshore operations so as to ensure trades actually settled. The entire episode could spark debate about whether it is prudent to concentrate so much operational risk in a single market, especially given the wider systemic implications. While offshoring can lower costs, contingency measures to re-onshore certain back office processes are often lacking. This could require banks to diversify their outsourcing or offshoring arrangements across multiple markets.
Securities services: The future of working
Extensive column inches have been devoted to whether or not the high-rise city office will be consigned to the past. In the immediate term, the need to pay for premium real estate is likely to diminish, especially if it is difficult to cajole people back into the office. Moreover, other staff may not want to use public transportation or risk exposure until the Covid-19 situation stabilises.
However, there are limitations to home working. A number of colleagues have reported internet connectivity issues at home, making it harder for them to perform their roles. A middle ground is likely to emerge over the mid-term. This compromise solution could see some banks supporting flexible working, but also opening up decentralised offices outside of major cities and making them available to employees local to that area.
Where do we go from here?
Few people could have foreseen what would transpire in 2020. The securities services model has weathered Covid-19 so far, but its long-term implications are not yet fully understood. The sad reality is that network teams could have to conduct meetings with their providers remotely for a long time. As the industry familiarises itself with this new normal, it will have to evolve, and quickly.