The future of finance: Insights into tomorrow’s financial system

Deloitte UK Financial Services | July 31, 2019

Future of financial system - The future of finance:  Insights into tomorrow’s financial systemFinancial services continue to go through major disruptive changes that are redefining their role and structure. Recognising this, the Bank of England (BoE) launched an initiative on the “Future of finance”. Ahead of the publication of the conclusions of the BoE’s initiative, Deloitte UK considered the current focus in financial services and what the future will look like.

TechnologyHow can technology enable cheaper, better and faster provision of financial services and improve the efficiency of markets?

The major changes in technology are being driven by: customer expectations; competition and margin pressures; the availability of greater computing power (including through Cloud computing); the ability to draw customer and market insight from structured and unstructured data using artificial intelligence ; and the willingness of customers to engage with digital interfaces.

This has refocussed attention in two key areas – the industry-wide opportunities to reduce friction and challenges arising from the way new technologies are deployed within firms.

The future of finance is expected to be on-demand and flexible with firms offering tailored products on a point‑in‑time basis and enabling customers to switch between providers and products seamlessly. This will accelerate the expansion of platform-based financial services, where all customer interaction is consolidated in one interface or platform. Firms and the governments will also increasingly explore the role of utility-based functions (for areas such as Know Your Customer and onboarding requirements) to reduce customer friction and costs.

See:  The future of finance report

One of the inherent challenges with increased automation is the significant increase in speed and potential lack of transparency around decision making and related controls. How firms govern these innovative technological solutions, and identify and manage risks, from the design stage through to execution and post-deployment, is a challenge for them, and will be an area of focus for regulators.

In addition to reviewing the regulatory perimeter, regulators are expected to experiment with innovation themselves specifically in areas such as regulatory reporting, market surveillance and enforcement. In the longer term, the ability to interrogate and draw insight from firm and market level data at a granular level will have a significant influence on supervision, enforcement and policy development.

Low-carbon economyHow can finance support the transition to a low-carbon world?

The major changes under way in the low-carbon economy are being driven by: rise of new technologies, increasing pressure from customers, and increasing regulatory response to the financial risks posed by climate change.

The transition to a low-carbon world in the future will need to be accelerated by the access of financial services to “green” data. Therefore, for financial markets to work efficiently, new third parties will emerge to provide estimates of firms’ carbon footprint based on a stream of different data sources (e.g., satellite data, market sentiment and disclosures could be overlaid). In addition, financial services will (need to) think about what role they can play in reducing their customers’ carbon impact. As such, financial services firms may increasingly include a penalty factor or an incentive factor as part of the terms on which they provide finance to both business and personal borrowers. This will ultimately help reduce the inequality of carbon consumption across end users.

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The key challenges will be for financial services firms to ensure a shared understanding of the low-carbon strategy across product development, risk management and sustainability teams. In addition, firms will need to boost their climate change scenario analysis capabilities (e.g., by exploring foresight over forecast) so as to price the climate change externality. As some “brown” firms will continue to exist, another key challenge will be for financial services to assess the utility of “brown” firms – in addition to their cost and carbon-efficiency.

Regulators will need to accelerate this transition by helping financial markets measure “green” data by framing and standardising it in order to allocate resources efficiently.

Emerging markets: How can we facilitate the increasing integration of emerging markets into the global financial system?

Major changes are under way in emerging markets, driven by the rising share of global growth that they account for (forecasted to grow to almost 65% of global GDP by 2022).

The BoE expects that deeper global financial partnerships with emerging economies” will be the most important drivers of global growth in the decades ahead.”

As capital flows between developed and emerging markets increase, financial activity will naturally follow. Emerging markets will become better integrated into the global financial system through a combination of increased issuer participation, broader investor base and improved market access and efficiency. This integration is likely to lead to greater market liquidity and lower capital costs, and will present investors with new opportunities for investments and risk-sharing.

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Regulators will need to ensure that this ever-greater integration is matched by increasing integration of rules and standards, and supervisory oversight. There is of course precedent for cross-border cooperation, but for a variety of reasons it is less well established with many of these economies. A plan announced by the UK government in May to expand a programme that sends BoE officials to help emerging economies reform their financial sectors is an example of how this cooperation will be built. The agreement between the UK Financial Conduct Authority and Chinese Securities Regulatory Commission on the "Shanghai-London Stock Connect", which will support mutual access to each country’s capital markets gives an indication of how integration may developed.

The BoE (as the central bank) will also play a role in developing infrastructure to support cross-border capital flows in the currencies of emerging markets. Analysis also points to emerging market debt and equity funds being more responsive to prices falls than advanced economy funds, with implications for financial stability. Authorities in the UK are considering system-wide stress scenarios and macro prudential tools.

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