Increasingly, ESG is the lens through which investors, consumers and regulators interact with businesses. From conscious consumption by consumers to investors who are required to disclose the environmental impact of their investments to the desire to “build back better”, ESG touches every part of our business lives.
Financial institutions, and the products and services they offer, have a vital role in delivering key climate sustainability developmental goals and policies, and it has become increasingly evident that this is not a task for the public sector alone. The private financial sector is central to mobilizing capital to meet the current significant shortfall. It is vitally needed to finance long-term sustainable growth and build a low-carbon, climate-resilient and circular economy by channelling funds towards well-governed, responsible and ethical enterprises. Despite this, the securitization market trails significantly behind other capital market debt products in terms of ESG-themed issuances and we look at why that is the case and what might help make ESG securitizations mainstream.
FinTech is another global growth area. In the UK, the Kalifa Review concluded that FinTech has an important role to play in ESG issues. This is in part due to the need to obtain and process substantial amounts of data from a variety of sources; the review suggested that FinTechs can utilize their digital capabilities to enable relevant ESG data to be collected and processed efficiently using technology solutions. However, the most obvious example of FinTech and ESG overlap is undoubtedly in the investments space. We look beyond this to where ESG impacts and opportunities for FinTechs may develop and where we could see FinTech moving next year and beyond.
Algorithmic decision-making and other forms of predictive tools have become embedded in our daily lives. AI is used to automate compliance processes in the financial services industry, facilitate medical diagnoses, drive personalized digital marketing campaigns and monitor worker performance. Yet, while AI offers huge opportunities for organizations, it also presents new ethical and regulatory challenges that need to be both understood and addressed. A number of jurisdictions have started to develop dedicated laws aimed at specifically addressing AI and we look at this exciting and developing area, and the opportunities it presents.
Digital currencies have been around for a while now but the emergence of central bank digital currencies, or CBDCs, is an exciting new development which could fundamentally alter the banking and payments landscape. The UK, ECB and Fed are all exploring the creation of CBDCs with reports due in 2022. China is one step ahead, with an intention to use its digital yuan more widely after the Winter Olympics in February 2022. In this piece, we look at the opportunities – and threats – that CBDCs could cause. Although AI, ESG and FinTech are consuming a lot of their time at the moment, regulators remain focused on ensuring financial institution compliance with laws and regulations. Relevant agencies both in the UK and the U.S. have indicated that they intend taking a more aggressive approach to enforcement action in 2022. In the UK, the FCA has announced that it will continue on its journey to become a “forward-looking, proactive regulator” which is “tough, assertive, confident, decisive and agile”. In the U.S., there is an increased focus on corporate enforcement generally, including enforcement of the financial services industry’s recordkeeping obligations. We look at some of the proposed initiatives and what they could mean for financial institutions in 2022 and beyond.
Finally, no publication looking at 2022 would be complete without a piece on the issue of regulatory divergence between the EU and the UK. A massive subject which will present both opportunities, as well as risks for years to come, our piece looks at the lack of equivalence assessments from the EU in favor of the UK and the UK’s apparent willingness now to diverge from the EU’s financial regulatory framework.
I do hope you find this edition of Financial Institutions Horizons both informative and thought-provoking.
If you would like to explore any of the issues mentioned in the publication, please speak to one of the contacts listed, or to any member of our global industry sector.
Authored by Sharon Lewis, Michael Thomas, John Salmon, Julian Craughan, Rachel Kent, James Black, Elaine Penrose, Ann Kim, Jonathan Chertkow, Jeffrey Greenbaum, Bret Cohen, Andrew Carey, Sukhvir Basran, Dominic Hill, Rebecca Umhofer, Yvonne Clapham, Virginia Montgomery, Daniela Vella, Jane Griffiths, Ambia Harper Charles Elliott, Dan Whitehead, Andrea Salsi, George Kiladze, Steven Minke, Charlie Middleton, Jennifer Staniforth, Nikki Ogun.