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COVID-19 represents one of the greatest ever shocks to our economies and, in consequence, to the business models of financial institutions and the way they do business. While many changes to business processes and operations were already taking place prior to the pandemic, COVID-19 has given many added impetus and urgency. Decision-makers must choose between adapting a wait-and-see approach or implementing more proactive strategies to safeguard and, if possible, grow their businesses.

In recent months many lawyers, consultants, academics and commentators have spoken and advised on the immediate impact of lockdown and business interruption, and a great deal of time has been spent by several organizations telling businesses what they already know about current circumstances. Not enough time or thought has been committed to other compelling questions.

Finding Balance: The Post-COVID Landscape for Financial Institutions seeks to map the post-pandemic environment that financial institutions need to navigate as we move to the new normal. We look at how different industry sectors are experiencing profoundly distinct impacts on their balance sheets and markets, with very different timescales and pinch points. We also consider how the global economy will be impacted directly and indirectly in the years ahead. Drawing on analysis and resources from beyond the legal sector — media commentary, economic analysis, consultancy, political insight — and reflecting our clients’ own views on what’s happening to their businesses in various jurisdictions and areas of business, Baker McKenzie’s legal experts consider the challenges and opportunities that lie ahead for financial institutions.

Over the coming weeks, in this series of briefings, our experts will discuss their expectations for each of four industry subsectors: (1) banking, (2) insurance, (3) financial sponsors: asset management, private equity and sovereign wealth funds and (4) financial market infrastructure. We also take a look at five of the industry’s most compelling trends — (1) rising global indebtedness, (2) shadow banking, (3) increasing regulatory scrutiny, (4) impact of new technology and (5) sustainable financial institutions — and analyze how COVID-19 is impacting them.


Trend: Impact of New Technology on Financial Institutions

The business models of financial institutions are changing: how services are delivered, the ways in which they can earn revenue and the search for new ways to monetize value. COVID-19 has accelerated the take-up of digital transformation due to the need to conduct more business remotely through digital channels. Simultaneously, customers have shown a greater willingness to use technologies in which previously they may have lacked confidence.

Read our ninth installment focused on the impact of new technology on financial institutions.

Trend: The Phenomena of Rising Global Indebtedness and Alternative Financing

The risks arising from unsustainable indebtedness to which both traditional and alternative financing sectors have exposure are higher in emerging economies, where the debt burden is much more elevated generally and whose borrowers are more susceptible to default if (as is expected), US dollar interest rates rise. Emerging economies with less policy intervention, monitoring and regulation are more vulnerable than advanced economies.

Read our eighth installment focused on the phenomena of rising global indebtedness and alternative financing.

Finding Balance

Trend: Increasing Regulatory Scrutiny of Financial Institutions

Regulatory scrutiny refers not just to the extent of and exigency of regulation, but to the expectations of regulators and the likelihood of supervisory and enforcement action. The expanded regulatory architecture put in place after the 2008 financial crisis is generally seen as successful in the face of stressed markets and the financial strain on the economy caused by COVID-19.

The effects of the pandemic have bolstered the trend for regulators to proactively intervene in consumer markets, requiring financial institutions to act in their customers’ best interests — challenging strict terms and conditions that may be perceived as unfairly disadvantageous to customers.

Read our seventh installment focused on increasing regulatory scrutiny of financial institutions.

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Trend: Sustainability in Financial Institutions

Financial institutions are critical players in the transition to a carbon-neutral economy. Because of their role in allocating capital, they can act as catalysts to achieving better environmental, social, and governance (ESG) outcomes in society generally.

Sustainability has seen a tremendous rise in awareness since 2015 with the COVID-19 pandemic providing added impetus, yet progress is slowed by the lack of common and consistent international standards over disclosures and classifications. In common with other sectors of the economy, there is increasing commercial and competitive pressure from investors and those in positions of stewardship to favor green and sustainable investment. Financial institutions also need to adopt high standards of transparency in the process.

Read our sixth installment focused on sustainability in financial institutions.

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Financial Infrastructure

Financial institutions rely upon market infrastructure to ensure the provision of financial services. While this subsector is very diverse, for this installment, we will focus on financial infrastructure providers (FIPs) such as exchanges, clearers and depositaries, as well as payment providers and systems. To date, the subsector has shown itself to be resilient in light of the stresses from COVID-19.

Over recent years, it has been highly acquisitive with increasing levels of leverage resulting from in-market consolidation or growing ancillary business lines. Digitalization and fintech are also transforming business models. Big tech is investing heavily in payment products in partnership with established payment firms and in emerging market economies with less tradition of banking.

Read our fifth installment and listen to the accompanying podcast featuring Sue McLean, a partner in our London office. Sue provides a deeper look into FIPs and touch on important considerations related to digitalization, as they plan their respective renewal strategies.

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Insurance

Despite fears early on in the crisis that COVID-19 could be the most expensive insurance event ever, insurers encountered relatively moderate business disruption and travel insurance claims, although there is scope for higher payouts and litigation in the future.

Existing trends such as digitalization and ESG have received new impetus from COVID-19, accelerating change significantly. Productivity has not grown in the sector since the 2008 financial crisis with premium growing less than GDP. Digitalization and insurtech will reduce future costs, providing the opportunity to improve profitability but requiring investment. While climate change poses significant risks to the prudential soundness of insurers, it is creating badly needed opportunities for insurers as long-term investors – if issues around prudential regulation can be resolved.

Read our fourth installment and listen to the accompanying podcast featuring Martin C.W. Tam, a partner in our Hong Kong office. Martin talks about trends, developments, and key considerations for insurance companies, as they plan their respective renewal strategies.    

Financial Sponsors – Private Equity/Credit Funds, Asset Management, and Sovereign Wealth Funds

At a high level, while organizations are still relatively well capitalized and liquid, the position could deteriorate. Financial sponsors have, to date, demonstrated considerable resilience during the pandemic. In the case of private equity managers, after initially focusing on portfolio company triage, most have now turned their attention back to investing, adapting their approach to deal making in light of the new realities of travel restrictions and government lockdowns.

Clearly, however, there are sectors of the market —  retail, hospitality, luxury goods, energy, healthcare services, office and retail real estate — which continue to suffer. For managers investing heavily in these segments, the road to recovery will be slow. Questions remain as to how much support private equity and other real asset funds will need to provide to their portfolio companies and assets, with those in the worst affected sectors of the economy incurring significant losses and/or liquidity constraints during lockdown.

Read our third installment and listen to the accompanying podcast featuring Michael J. Fieweger, a partner in our Chicago office. Mike talks about observations and key considerations for financial sponsors as they plan their respective renewal strategies.     

Banking – Retail, Commercial and Investment

The trends that the sector faced pre-COVID-19 — increasing global indebtedness, the growth in shadow banking, the disruptive but innovative impact of new technologies and the move to a more sustainable economy — have all been accelerated. Moreover, in the aftermath of a crisis, enforcement and compliance activity usually increases. There is the analogy of the tide going out to reveal wrongdoing that was hidden by as-usual business activity. This means that while such activity is currently low — in part because supervisors are focusing on other priorities (e.g., ensuring customers are protected, that markets continue to function well, financial stability and the availability of liquidity) — this is likely to change quickly when business begins to recover.

Read our second installment and watch the accompanying video featuring Karen H. Y. Man, a partner at our Financial Services Group. Karen talks about our findings and addresses key considerations for banks in planning their renewal strategies.    

Setting the Scene

Financial institutions must now navigate not only an economy in recession, but one where COVID-19 is disrupting business models and accelerating existing trends such as digitalization and the importance of environmental, social and governance factors.  

Read our introductory publication and listen to the accompanying podcast featuring Jonathan Peddie, Global Chair of the Financial Institutions Industry Group, being interviewed by Ying Yi Liew, a local partner and an expert in our financial services practice from the Singapore office. They talk about our findings and address some tough questions businesses need to ask and consider in planning their renewal strategies.

Author

Jonathan chairs the firm's Financial Institutions Global Industry Group and is a partner in the London Dispute Resolution practice. Jonathan has deep experience in advising boards, executive teams and individuals dealing with issues of market integrity, ethics, brand and reputation impact, conduct risk, whistleblowing, market misconduct, systems and controls failings and remediation, public statements and investor relations, financial crime, fraud, regulatory investigation and enforcement, public policy, public law and civil and criminal litigation. Jonathan's substantial in-house experience delivers a highly strategic and commercial focus aimed at re-establishing confidence in the brand and individuals. Jonathan joined Baker McKenzie from Barclays Bank PLC. Spanning a decade of unique pressure in the financial sector amidst the global financial crisis, he led the global litigation, investigations and enforcement function and established the bank's financial crime legal team. Jonathan was responsible for a series of high-profile regulatory and criminal investigations in EMEA, the US and Asia Pacific regions and led a significant portfolio of wholesale and retail litigation. Supporting the bank's risk and compliance functions, he implemented and improved systems and controls in respect of money laundering, bribery and corruption, fraud and international sanctions. Jonathan worked with UK and US law enforcement and government intelligence agencies on counter-terrorism, organised crime and other domestic and international security initiatives. Jonathan is the contributing author to a number of leading legal and sector publications, including: Banks and Financial Crime: International Law of Tainted Money (Oxford University Press 2008, 2016); Global Investigations Review - The Evolution of Risk Management in Global Investigations (GIR 2016, 2017, 2018); and Risk.net's annual Top 10 Operational Risks (2018-2022).

Author

Stephanie Magnus heads the Firm's Financial Services Regulatory and FinTech Practice in Singapore. She has significant experience in compliance, fintech in the financial services, insurance and commodities sectors. Her practice also includes mergers and acquisitions in the financial services sector. Stephanie is named in Chambers Asia Pacific for her "timely, practical and business oriented" advice, with a "deep understanding of the regulatory regime."

Author

Jiro Toyokawa heads the Firm's Corporate/M&A practice group in Tokyo and he has over 20 years of experience in legal practice. He has been listed as a leading individual in Japan for Corporate/M&A in Chambers Asia-Pacific for a decade (2010-2020). Prior to joining Baker McKenzie, he was a partner at Linklaters.

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Sue is a partner in Baker McKenzie's IP, Data and Technology team based in London. Sue specialises in major technology deals including cloud, outsourcing, digital transformation and development and licensing. She also advises on a range of legal and regulatory issues relating to the development and roll-out of new technologies including AI, blockchain/DLT, metaverse and crypto-assets. Her IP and commercial experience includes drafting, advising on and negotiating a wide range of intellectual property and commercial agreements including IP licences and assignment agreements, long-term supply and distribution agreements. She also assists clients in preparing terms of business and related documentation for new business processes and offerings and coordinating global roll-outs. Sue is also a key member of our transactional practice, providing strategic support on the commercial, technology and intellectual property aspects of M&A transactions and joint ventures, including advising on transitional services agreements and other key ancillary IP and commercial agreements. Sue is ranked as a leading lawyer in Chambers for Information Technology & Outsourcing and Fintech Legal and in Legal500 for Commercial Contracts, IT & Telecoms, TMT and Fintech. Clients say of Sue "Sue is outstanding", "She is a really good and very committed lawyer", "Excellent…. Very capable, wouldn’t hesitate to use on IT/TMT/Outsourcing matters." Sue was named in the Standout 35 of the Women in FinTech Powerlist 2020.

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Christoph Kurth heads the Investigations, Compliance & Ethics practice of the Swiss offices. Further, he is a member of the EMEA Steering Committee Compliance & Investigations and co-leads the EMEA Financial Institutions Industry Group. He has been recognized by Legal 500 as a leading individual for compliance, regulatory and investigation matters. Before joining the Firm, Christoph was global head of Litigation & Investigations and general counsel in Asia for a large Swiss bank. For over 10 years, he has led complex regulatory and criminal investigations as well as high stakes litigation across the US, Europe and Asia, and has advised on transformational regulatory developments and wealth management products and services across Switzerland and Asia. In his roles, Christoph has worked closely with business leaders, government authorities and the media, navigating businesses through regulatory and other challenges. Prior to this, Christoph was a litigator in leading practices in Switzerland and the US. Christoph also teaches post-graduate courses in 'Crisis Management' and 'Risk Governance' at the Europa Institute at the University of Zurich.

Author

Juan Carlos de los Heros is the managing partner of Estudio Echecopar and Chair of Latin America Capital Markets Steering Committee. He focuses mainly in the areas of banking and finance, and infrastructure. He has been listed in International Who's Who of Professionals, Chambers & Partners Latin America and Legal 500 as a leading lawyer in project finance. Prior to joining the Firm, Juan Carlos was an international lawyer in the global project finance group of an American law firm.

Author

Michael Fieweger represents private equity and venture capital funds, institutions, family offices and hedge funds and strategic acquirers in their formation and global acquisition and investment activities. Michael has a background in corporate finance, having previously served as a commercial lending officer with a division of JP Morgan Chase in Chicago. He is the chairman of the Firm's Global Private Equity Practice Group.

Author

Amy serves as the Co-chair of Baker McKenzie's North American Financial Regulation and Enforcement Practice, which provides our clients with a full range of regulatory advice and enforcement counseling. Amy also serves on the steering committees of the Firm's Global Financial Services Regulatory and Global Financial Institutions Groups. Previously, Amy has served as chief litigation counsel at the US Securities and Exchange Commission's (SEC) Philadelphia regional office and managed a team of lawyers overseeing a wide variety of enforcement matters.

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