The future of banking in the UK: What are the key trends for 2021?

Covid-19 support

With the Coronavirus loan schemes extended to 31 March 2021 and continuing financial strain on borrowers, lenders will be looking to review their loan portfolios and continuing to provide support and assistance to their clients who may need it.

Lenders may need to update their policies and processes to ensure that they have robust outcomes testing framework in place. If there are any changes to the original facility arrangements, lenders should ensure that any new terms, consents and/or waivers are documented in writing. Lenders need to ensure that borrowers continue to supply the relevant compliance certificates in order to test and monitor the financial covenants.

Brexit

Following the UK’s withdrawal from the EU on 31 December 2020, there will be an on-going debate of the UK financial services industry’s access to the EU single market and its equivalence status. As explored in our earlier article by James Worrall, partner in our Corporate and Financial Services team, the UK-EU Trade and Cooperation Agreement failed to deal with the relationship with the UK financial services industry and the EU.

James Worrall comments, “It is clear that a long term agreement which provides for regulatory and supervisory co-operation and a stable equivalence recognition is required for the UK financial services industry. Achievement of a deal on this basis will however likely require the UK to commit to stay in the regulatory orbit of the EU financial services regime; how politically appetising this is for the government remains to be seen”.

Libor Transition

After the year we have had, LIBOR seems to be a distant concern. However, as the availability of LIBOR shall cease to exist after 2021, lenders will need to ensure that they continue to focus their preparation for the transition of LIBOR.

Milan Kapadia partner in our Dispute Resolution and Financial Services team comments, “Lenders will need to continue to review their loan portfolios which are LIBOR backed, determine the alternative interest rate and finalise their communication strategy. This is no small task and may require input from intermediaries and third party service providers. Therefore, lenders should ensure that they have started their preparations. The impact is not only on existing borrowing, but also new finance that may be sanctioned in 2021”.

Fintech and technologies

As a result of the Covid-19 pandemic, digital transformation in the financial services sector accelerated. Whether we like it or not, the view that fintech and technology are disruptors is changing. This digital transformation shall continue to grow. Fintech and the use of technology to create, deliver and disrupt financial services is a thriving industry in the UK.

Bharti Moore, senior associate in our Corporate and Financial Services team comments, “Investment into fintech continues to rise in the UK. This growth and investment is also supported by the City of London Corporation and the FCA with the introduction of the regulatory sandbox and digital sandbox initiatives. These initiatives aim to support earlier stage innovation where products and solutions are still in development. These new initiatives will further help UK fintechs boost their international profile, and may mitigate any negative Brexit-driven impact on inward investment”.

Open banking to open finance

Open banking was one of the buzzwords we heard a lot in 2019 and 2020 in the financial services sector.  Open banking as a concept is the ability for customers to share financial data, not just with their own bank or building society but also with approved third party providers of products and services. The UK is already part of the way on this sharing journey. There remains a huge opportunity for banks to gain customers and offer a greater range of services to existing clients.

In 2021, we will see a shift from open banking to open finance. Towards the end of 2019, the FCA issued a “Call for Input” in respect of its vision to extend open banking to financial services more generally. The FCA received over 150 responses and the feedback statement in expected in the early part of 2021.

Bharti adds, “Open finance will have a much broader impact on the financial services industry than open banking. It will have the potential to transform the way consumers and businesses use financial services, affecting mortgage providers, consumer credit firms, investment and pension funds, as well as general insurers and intermediaries. This new openness will bring opportunities and challenges to the sector”.

Use of data and ethical AI

As innovation and collaboration will continue to play an essential part in the financial services sector, it will be key for lenders collaborating with any business to ensure contracts deal with the novel use of data and AI. Lenders will need to make sure that any AI it uses is lawful (particularly in terms of privacy and data protection), ethical, and robust. Data use needs to be secure, fair, and auditable. Brexit also adds an additional layer of complexity to those with an EU customer base.

Dan Meadon-Bower, partner and lead for Commercial, Technology & Innovation comments, “As lenders become more reliant on AI for decision making, accountability will be the watchword.  Do you understand how your (or your supplier’s) AI tool has come to its decision?  Do you know how accurate it is?  How do you get comfortable that a decision is free from gender or racial bias, or prove to the FCA that you are treating customers fairly?  Lenders cannot afford to treat AI as a black box that they don’t need to understand - it is time to open the lid”.

Redefined future of work

The Covid-19 pandemic has forced a change in the way we work. However, the change in the workplace is far from complete. We have explore this phenomenon in our recent report into the future of the workforce.

What does this mean for the financial services sector? The sector will be rethinking the way work is done (in particular with the changes in digital transformation and AI), where it is done, and the skills that will be required to do work going forward.

The shift to remote working and virtual customer service has dramatically changed how services are delivered. Without the usual in-person customer engagement, lenders have been forced to find creative, innovative and collaborative solutions in a short space of time to ensure the customer demand is met.

Richard Woodman, Employment partner and head of the Financial Services team comments, “The sector has pulled together to remain resilient, adaptable and flexible during these uncertain times. However, this new way of working poses an opportunity for businesses in the financial services sector to review their workforce and the skills required to continue to deliver services in the future. Upskilling employees will be key in order to meet new client demands, ensure that the teams have the correct skills to embrace the digital transformation and manage or mitigate any risk posed by technology”.

Environmental, social and governance

Although environmental, social, and governance (ESG) is not a new concept, as we look into 2021 ESG will be a higher priority on agendas.

Prior to the Covid-19 pandemic, the financial services sector was making positive strides in areas of gender equality, diversity and inclusion, climate change and contribution to society – all the good work should not be set aside and go to waste.

In March 2021, a new European Union regime on sustainability-related disclosures in the financial sector will come into force. The Sustainable Finance Disclosure Regulation 2019/2088 (“SFDR”) contains rules regarding sustainability-related disclosures which will need to be made by financial market participants (“FMPs”) and financial advisers within the scope of the Regulation.

Due to Brexit, the FCA indicated that it would not be onshoring the SFDR. However, the FCA is expected to consult in 2021 on a UK-specific regime.

Cyber security

As technology will continue to play an essential part in the financial services sector, it is essential to strike a critical balance between security and privacy, cost and convenience.