COVID-19 impacted every aspect of finance, investments, risk and compliance. It flipped rules, accelerated existing trends and established new standards. As small businesses shutter doors and fears of inflation lurk, it continues to cause unprecedented movements in the financial markets. Experts agree that we’re heading towards a highly-unpredictable future for investors and businesses. Yet this greatest of crises has brought about significant opportunities.
Join one of Esme Learning’s executive education courses to know about the multiple inflection points in the financial landscape and prepare yourself for the disruption ahead.
The rise of NFTs, cryptocurrencies in the purchase of property and the extraordinary growth of fintech, edtech, regtech and health tech are all disrupting the investment landscape. These changes are also leading to various regulatory changes. But one particular event in 2021 characterizes how changeable the current financial landscape can be.
On January 28, 2021, members of WallStreetBets, a social media group on Reddit, engineered a short squeeze involving brick-and-mortar video game retailer GameStop. The stock, which had been trading at just $3 per share a year previously, shot up to a staggering $483.
A group of outsiders took on Wall Street’s financial giants and won. Endearing David-beats-Goliath stories occasionally come to pass in the financial world, but the GameStop incident revealed how the players are changing along with the rules:
The entirety of the plan was carried out on social media – now making it a vital platform in the finance sector.
In just a few weeks, 28% of Americans bought stock in GameStop.
The whole plan was executed by small traders, making them an incredibly significant player in today’s financial markets.
On January 29, fintech company S3 Partners revealed that short-selling hedge funds had suffered a year-to-date market-to-market loss in GameStop of $19.75 billion.
Trading app Robinhood shut down the purchase of GameStop shares before it began plummeting, leading many to accuse the app that purports to democratize finance of protecting “billionaire hedge-fund managers.”
In his testimony before the U.S. Congress, CEO of Robinhood Vlad Tenev said that the GameStop stock had experienced a “1 in 3.5 million event which is basically unmodelable.”
Steve Huffman, CEO of Reddit, said the site wanted to keep WallStreetBets online because it brought many new users to Reddit.
These contradictory statements intensified the need for more financial regulations and made clear that fintech cannot operate outside it.
Four other “meme” stocks were traded along with GameStop, representing a probable shift in market behavior where stock prices don’t necessarily reflect stock value.
The COVID-19 pandemic continues to influence the financial markets, in many cases accelerating pre-existing trends. Increased adoption of digital technologies, expanding role of government in the economy, persistent fear of inflation, easy money and emerging markets have become key moving pieces on the financial chessboard.
Nine investment trends reshaping the financial markets:
As the economy continues to rise, it’ll also face several undertows. Economic stimuli is reviving economies but can lead to inflation and raise bond yields. As businesses begin to open back up and consumers start spending more money, the surge in savings could also go down.
There’s a persistent fear of inflation due to factors such as:
Depopulation as the global working-age population falls
Deglobalization and reduced competition
Declining productivity due to government bailouts
Rising government debts could revive inflation.
In 2020, home prices increased in most developed countries and this boom could last over a longer period as 90% of the world’s central banks dropped short-term rates, consequently pushing mortgage rates to record lows.
According to Morgan Stanley, “the potential return of consumer price inflation could compel central banks to tighten again, which we expect to come first in the form of reduced bond buying (not higher rates).”
Following stimulus rollouts, government debts to the rest of the world peaked at over 50% of GDP, a level capable of triggering a financial crisis.
As cryptocurrency adoption increases, it’s giving the dollar a run for its worth. They are becoming a store of value as a digital alternative to gold and a medium of exchange as a digital option to the dollar.
Supply constraints during the pandemic and increased demands along with a weak dollar could bring about a revival in commodity prices.
Emerging markets could make a comeback because, as Morgan Stanley points out, “Despite the fact that both exports and manufacturing are shrinking as a share of the global economy, a select few emerging countries concentrated in Eastern Europe and Southeast Asia are still growing on the back of export manufacturing. Today, the top emerging markets account for 36% of global GDP and just 12% of the global stock market, while the U.S. accounts for 25% of GDP and 56% of markets. Imbalances that are this extreme tend to diminish over time.”
According to the IMF, of the world’s 30 most-digitized economies (by digital revenue as a share of GDP), 16 are in emerging markets, led by China, South Korea, Indonesia and Colombia.
In these markets, digital revenue is growing by 11% per year faster than in developed markets and could support an emerging-market comeback.
The market capitalization of smaller, popular rivals of e-commerce giants is witnessing fast growth. Local platform-based businesses are also taking on large e-commerce and social media platforms.
The COVID-19 pandemic continues to be the driving force behind regulatory agendas. For instance, during the pandemic, asset managers were allowed the use of capital buffers, ease of reporting and disclosure requirements and changes to market position limits. Now, some places in Europe have set short-selling bans and have imposed new conditions in dividend distribution and remuneration and increased reporting on the liquidity positions of open-ended funds.
Undoubtedly, the regulatory agenda is working against one of the most challenging economic and operational backdrops of recent history.
There’s a growing debate surrounding some trading practices and fund types, such as computer-led trading strategies, short selling, money market funds and exchange-traded funds that contribute to systemic risk.
Regulators are united on the importance of recovery and growth while ensuring it happens in a controlled way to protect investors and maintain financial stability.
An increased pace of digitization, distributed work practices, demands for ESG and greater global interconnectedness are changing the ground realities of risk management.
Regulators want businesses to take greater measures to protect their customers by:
Operational resilience by business continuity planning (BCP), IT, cybersecurity, AML, protection of client assets and data
Liquidity management of open-ended funds
Enabling technology that makes investing simpler and cheaper for customers
Protecting the investment ecosystem from crime or poor investment choices
Increased efforts for digital transformations, which will also be scrutinized
Increasing focus on a business’s duty of care and stewardship and reducing short-termism
Meaningful disclosures to investors over costs and performance
More sustainable finance/ESG investments
Re-evaluate and establish necessary processes for operational resilience, including BCP, IT, cybersecurity, AML, protection of client assets and data
Assess risks deemed as systemic and increase stress testing scenarios – regulators are scrutinizing liquidity management of open-ended funds as well as the use of leverage
Establish processes for more individual accountability, culture/ethics, governance and distribution
Set up or adjust to new disclosures on commissions, payment for investment research and performance fees
Make ESG the heart of the investment decision-making process
For corporate risk managers and compliance officers, the COVID-19 pandemic brought on additional challenges. Increases in cyberattacks, supply chain disruptions, employee health and safety and new corporate governance and compliance showed how risks emerge and are intertwined.
Some of the risk and compliance trends that emerged from this period are:
Investors are increasingly interested in sustainable finance, leading financial institutions to prepare programs related to diversity, gender, fair wage terms to employees, donations to the community, environmental responsibility and corporate governance. Environmental, Social and Governance (ESG) reports are becoming an integral part of company annual reports
Regulators will want to see organizations conform with the global standards that are now being set in relation to ESG issues and attribute sufficient importance to these topics.
GDPR is now being considered as the beginning of an increased era of scrutiny entailing consumer privacy protection. Data protection regulations will become more stringent and rigid and will be more meticulously enforced across the globe.
Although these regulations vary from country to country, data privacy laws will eventually be standardized worldwide.
Risk managers have to contend with a new format of work and the dangers thereof, such as increased cyberattacks in a work-from-home environment. Returning to the office is also bringing up questions about vaccination passports and mask policies.
The Black Lives Matter movement spotlighted systemic racism and social disparity. Organizations will have to conduct themselves with more transparency and responsibility and provide equal opportunity and increased diversity when hiring employees.
Risks are related to one another, and organizations need to integrate risk analysis and holistic thinking about risks.
According to the STEEP model (social, technological, economic, environmental, and political), uncertainty will persist in the coming years. IRM processes can enhance decision-making and streamline governance efforts.
The 2020 pandemic showed the susceptibility of organizations to supply chain disruptions. Alongside this, the increased interconnectedness also makes businesses more vulnerable to cyberattacks.
Compliance officers will have to enforce rules that will protect their businesses from these increased disruptions.
Whistleblower protection is already in effect in the U.S. and the EU instituted the Whistleblower Protection Directive in 2021. Similar trends are noticeable in Japan, Australia and many countries across Asia.
Under these laws, companies that fail to safeguard whistleblower identity face economic and even criminal sanctions. Risk and compliance managers must ensure mechanisms that allow employees to submit reports safely while protecting their identities.
Ralf Huber, Co-Founder of RegTech company Apiax, says, “Whilst RegTech automatically solves and implements routine inquiries, compliance officers are empowered to focus on their core business objectives: manage risks on a strategic level and seize opportunities.”
While there are applications of RegTech in other industries such as health tech, it’s inseparably linked to the finance industry.
The phenomenon of RegTech within the financial services industry was driven by:
The financial crisis of 2008 led to the massive overhaul and expansion of the regulatory environment. It led to a deluge of regulations coming from the government and regulators, increasing the complexity of the regulatory environment. RegTech helps companies easily navigate these challenges.
Advancements in techs like cloud computing, AI, machine learning and Big Data helped entrepreneurs in the regulatory sector create innovative solutions that make risk management easier for businesses.
Fintech and the total upheaval of the financial industry are engendering numerous innovations and creating new regulatory policies. RegTech is helping organizations remain compliant with these new rules.
Fintechs are trying to keep up with standards such as GDPR, PSD2, open banking and API infrastructures. These technologies are in turn leading to the growth of RegTech within the financial services industry.
Increased digitization of businesses and shifts in consumer behavior mean that regulatory solutions need to keep pace.
RegTech is not only increasing productivity but also cutting costs and improving traceability and auditability.
Fintechs have to follow regulations and restrictions to protect their consumers against cyber threats, which are constantly growing as cyber crimes grow. RegTech is helping companies by monitoring security measures and remaining compliant.
An increase in distributed teams due to work from home and cloud-based interactions are bringing on new compliance risks and potential breaches that RegTech helps organizations manage.
Financial institutions are using RegTech to more than meet regulatory requirements. They’re leveraging it to achieve targets and remain competitive.
The General Data Protection Regulation (GDPR) is a European regulation but applies to all organizations doing business or interacting with EU citizens. It’s focused on how personal data is processed. The UK GDPR sets out seven key principles:
Lawfulness, fairness and transparency
Integrity and confidentiality (security)
The California Consumer Privacy Act (CCPA) is very close to the GDPR and gives consumers in California additional rights and protections regarding how businesses use their personal information.
The CCPA establishes the following privacy rights for people in California:
A right to know what personal data is collected, used, shared, or sold by businesses.
A right to delete personal data.
A right to prohibit the sale of personal data. Children under the age of 16 must give explicit consent to have their data eligible for sale, and a parent or guardian must give explicit consent for a child under the age of 13.
A guarantee that consumers who exercise their rights under the CCPA will not be penalized with higher prices or lower levels of service than those who do not.
The Payment Card Industry Data Security Standard, or PCI DSS, is a regulatory standard developed by credit card companies to help protect cardholder data.
Build and maintain a secure network
Protect cardholder data
Maintain a vulnerability management program
Implement strong access control measures
Regularly monitor and test networks
Maintain an information security policy
The National Institute of Standards and Technology (NIST) has developed the NIST Cybersecurity Policy Framework and is a powerful tool to organize and improve a startup’s cybersecurity program.
The 5 components of the NIST Cybersecurity Framework are:
The Health Insurance Portability and Accountability Act, or HIPAA is one of the most popular regulatory compliance frameworks in the U.S. and is specific to the way health data is secured.
Key HIPAA principles include:
Receive, use and disclose protected health information (PHI) for purposes of treatment, payment and healthcare operations.
Adopt reasonable measures to protect PHI from unauthorized access, use or disclosure.
Limit the amount of information you receive, use and disclose to what is reasonably necessary for you to do your job.
Evaluate your agreements with vendors – especially those with access to our PHI or who create PHI on our behalf – and determine whether HIPAA business associate language is required for those contracts.
Choosing the right compliance framework is critical for a startup because the correct one can put them closer to bigger deals and move upmarket. In contrast, the wrong call can jeopardize compliance and affect company growth.
The risks are high, and startups need to understand the use cases and benefits of each compliance to make an informed decision.
Compliance frameworks can relate to various topics from IT security to customer data protection and they act as guidelines that companies can follow.
Deciding which frameworks will best benefit a startup is important, as it determines the amount of time, money and resources required.
Global supertrends, pandemics, climate change and technological advancements will continue to bring about the complete disruption of the financial industry with risk and compliance in tow. While businesses have reasons to be scared, they also have plenty of opportunities to help solve problems through the use of innovation and technology.
Esme Learning Solutions is bringing you a series of executive courses that prepare you to take these challenges head-on and arm you with the toolkits and frameworks to respond to change and drive innovation.
Our Cambridge Startup Funding: Pre-Seed to Exit Programme guides you through the fundraising journey, teaches you the Markides Framework to develop your own fundraising roadmap and acquaints you with new sources of funding.
Our Oxford Fintech Programme teaches you about fintech innovation, regulatory changes in the financial sector, digital transformation and venture capital filter and techniques.
Our Cambridge RegTech: AI for Financial Regulation, Risk & Compliance programme teaches you how to adjust to the changes in the regulatory environment with the help of technology and points out the opportunities for innovative solutions in this field.