It is hard to imagine a year that changed the world as much as 2020.
Leaders of the professional services industry are forecasting disruption – but how will this take form? What are the new challenges and opportunities?
As we start to navigate the year ahead, we’ve taken a look at a few areas that help explore these questions and will ultimately define the future of the UK economy.
COVID-19 & The Corporate Environment
A report published by McKinsey argues that Covid-19 will bring “the great reset” to working life. We have already seen the majority of the professional services industry move to remote working, prompting companies to plan a more radical optimisation of workspace. A new hybrid model of both home and in-person working means that office spaces can reconfigure into fewer and lower cost locations. In order to be successful, corporate centres will need to invest in better remote-working technologies and provide a framework for a healthy home-work balance.
Covid-19 will also trigger the “next normal” in producer behaviour. Companies are increasingly engaging in “stakeholder capitalism”, a business model which recognises potential gains from balancing the interests of not only business owners, but also employees, wider society and the environment. Investment in community building may turn stakeholder relationships into a valuable asset in 2021 as individuals seek a sense of trust and security post-pandemic.
With coronavirus shadowed by the climate crisis, green needs to be the colour of recovery in order to make long-term improvements to the economy. Companies are beginning to identify growth opportunities in green technology that could help increase returns. The UK has world-leading research and development infrastructure in place and therefore has the potential to establish itself as a leader in sustainable business practice.
The Fourth Industrial Revolution?
Digital innovation will continue reducing entry barriers into the financial services market over the year. Incumbent, well-established banks that have advantages in size and network are having to compete with an increasing number of FinTech disrupters. New, fast-moving firms often focus on particular innovations, such as mobile payments or insurance, and offer services at greater convenience and lower prices. It will be important for incumbents to continue adopting the pace of tech-start-ups in order to close the technology gap and remain competitive.
Technology is also changing the nature of financial regulation. Regulators are beginning to adopt data collection and analysis tools to inform policy, hoping to monitor the industry more effectively and predict potential issues before they become full-scale market problems. However, moral questions will need to be asked about the role of technology in both professional services and civil society. What should algorithms determine? How much power should be given to artificial intelligence? The FCA will need a deep understanding of machine learning and the outcomes it delivers – a potentially difficult ask for authorities who are not typically at the forefront of technological revolutions.
In a global race for the most innovative and efficient technologies, employees will also need to keep up. A capability gap has emerged between actual and required skills for human capital. Companies increasingly seek out expertise in data analysis and IT in order to remain competitive. “Reskilling” workers will be a challenge for firms as much as employees. HR departments will have to invest in innovative training – a risky experiment when there is not a clear understanding of skills that already exist in the workforce. In turn, workers will be expected to be increasingly dynamic and to have a greater grasp on technology.
Despite a “thin” trade deal on financial services, Rishi Sunak remains positive that Brexit will help reinforce London as the financial hub of the world, claiming that new regulatory autonomy in the UK could give the financial services sector a boost. The EU has however refused to grant equivalence rulings to most sectors in the financial services industry, meaning that the quality of UK’s legal requirements and regulations will not be recognised across borders. Many view this as a “no deal Brexit” for the financial services sector.
The overarching structures governing British financial services are changing and cutting EU red tape also comes at a cost. Financial links with Europe are becoming “less fluid” and as a result it is estimated that £1.2 trillion in assets and 7,500 jobs has already been transferred to the continent. In order for Brexit to be successful, the UK financial markets will need to stay ahead of European competition and prove they can operate without access to the single market to ensure this trend doesn’t continue.
Brexit could provide an opportunity to do things differently and, in light of new challenges, the FCA has been working closely with Government and Bank of England to minimise potential disruption. We should expect to see changes in the financial regulation system which complement the introduction of new EU laws and trade deals.
Optimism is growing. The shocks and drawbacks of 2020 are acting as a sorting mechanism for the UK economy and could provide a platform for positive change. The rules of the game are being shaken up and, with this, comes an array of threats and opportunities. The decisions made in 2021 will determine how the UK economy bounces back and performs over the decade ahead.
Author: Sophie Adamson