Plotting a course for the future

Written by: Duff & Phelps Posted: 08/09/2020

BL69_EdShorrock_Duff&PhelpsAs the Channel Islands enter the fifth month of lockdown in a less restrictive environment, there are cautious notes of optimism about the resilience of both islands in how they have coped with the pandemic, says Ed Shorrock, Director, Compliance and Regulatory Consulting, at Duff & Phelps (Channel Islands) 

During the lockdown period, much of the focus of regulated firms and the regulator to date has been on ensuring that the operational aspects of their activities can continue without material disruption. 

From businesses’ perspective, this has largely centred around making sure working-from-home arrangements have been able to continue in a secure and logistically efficient manner, including continuing with business-as-usual compliance arrangements.

Regulators have responded with various initiatives, such as deploying virtual examinations, providing guidance on electronic customer due diligence (CDD) measures and moving towards online submissions of returns and notifications. 

In short, projects that, in all likelihood, had featured in longer term planning have now been brought to the forefront of c-suite thinking due to necessity.

The islands, however, do not operate in a separate bubble economically, even if they have largely been successful implementing social distancing measures.

Resilience starts at home

In our view, there are likely to be three key drivers of how the regulated sector responds. First, firms are likely to be reassessing how their commercial strategies have been impacted by events. 

The past few years have witnessed a seemingly unstoppable appetite for mergers on a global scale. This has been driven by capital provided by external investors who are seeking efficiencies of scale and increased bandwidth in terms of services available to clients. 

The integration of businesses on this scale has always proved challenging, even in pre-Covid times. 

We anticipate the level of transactions, already reduced in light of the current restrictions, will be subdued as firms consolidate their position and seek internal efficiencies through a more focused application of technology. 

Although investors have always sought to increase their top-line revenues, our sense is that a new period of cost-cutting through the use of regtech, remote working and a reduction in physical premises costs is near at hand. 

We do not discount acquisition and merger activity in totality, but we believe that the focus of senior management will change to cost control.

Second, this is likely to be coupled with a retrenchment by regulators to ensure that their ‘home’ territories are robust and can withstand any future shockwaves. 

This points towards an increased amount of attention being paid to day-to-day front-line and compliance activities, business continuity planning and financial liquidity. 

As the pandemic has shown, for ill or for good, the apparently irrepressible drive towards globalisation has been thrown into sharp relief, politically and economically. 

Much like governments whose first duty is to protect citizens from harm, so too regulators will want to make sure their own community is capable of survival and, hopefully, growth.

However, and as the third driver, we cannot ignore how clients’ business models and underlying demands will be affected. 

As support measures provided by governments gradually unwind and the scars on economies are revealed in the form of debt levels that exceed those witnessed after the financial crisis, clients will be asking fundamental questions about their arrangements and whether they are sustainable economically. 

For example, much has been written about the impact on the demand for prime real estate in city centres and also on the residential property market. 

This change will cause investors to reassess their exposure to whole sectors and, implicitly, the corporate structuring that underpins them. 

In the medium to longer term, this will feed into the corporate service providers and the network of professionals who support their activities.

Agile and opportunistic

Unfortunately, planning for what may or may not happen has proved to be extremely challenging as we are only at the beginning of life in these new political and economic conditions. 

As such, firms, regulators and clients are likely to want to remain flexible in order to be able to respond to the changing landscape rather than committing to a strategy that proves unsustainable.

While growth and expansion may have been a given in the past, we believe that the future will be characterised by commercial opportunism in some quarters with a more home-grown, self-sustaining approach to regulation. 

Inevitably, there will be structural shifts in some sectors. However, until the planning horizon becomes more stable, our view is that the emphasis will be on preserving existing business models as far as possible but with efficiency as a renewed point of focus.

The pandemic has exposed the frailties of international commerce, for all its advantages, and until that ecosystem can be restored on a robust footing, we are likely to be seeing a more localised approach on many fronts. 

This advertising feature was first published in the August/September 2020 edition of Businesslife magazine

About the author

Ed Shorrock is a Director in the Jersey office of Duff & Phelps, delivering regulatory services. He qualified as a Chartered Accountant with a Big Four firm and specialised in forensic, regulatory and insolvency services.

More recently, he spent eight years at one of the islands’ leading law firms, specialising in dispute resolution, providing regulatory and other litigation-related professional services.

He is a regular speaker at conferences on regulatory topics relating to offshore financial centres and is co-editor of a leading textbook, Jersey Insolvency & Asset Tracking 5th Edition, published by Dessain & Wilkins.

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