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Global Regulation: What to Watch Out For – Markets and Securities Services Outlook
18 Plays4 years ago
What are the big policy priorities of global regulators? In this podcast, we explore the focus on digitisation and ESG among financial services regulators and how the risks of both will be managed by regulated firms. Paul Ellis, Global Product Head for Regulation, Tax and Trustee, and Depository Services for HSBC, is joined by HSBC’s Henry Raschen, Head of Regulatory Outlook for Securities Services, James Pomeroy, Global Economist, and Richard Pounder, Global Head of Operational and Resilience Risk, Securities Services, as well as Shay Lydon, Partner in the Asset Management and Investment Funds Group at Matheson.
While timetables and details will be different from country to country, financial firms need to plan ahead with these global priorities in mind and meet the opportunities and challenges that these areas present. From renewed commitments across the globe on carbon net-zero targets, to asset owners and managers considering sustainability, our panellists look at what’s next in ESG. In the vast topic of digitisation, they consider policymaker approaches to crypto assets and regulated firms’ digital operation resilience.
Markets and Securities Services Outlook is a podcast miniseries exploring the critical topics that will shape our industry in the next decade, including sustainability, digitalisation and emerging markets. Find out what’s driving the global outlook for institutional investors and where the opportunities and challenges lie. For more information, visit here.
This episode was recorded on 9 June 2021.
Hosted on Acast. See acast.com/privacy for more information.
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Transcript
Introduction to HSBC Podcast
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
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Thank you for listening.
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You're
Markets and Security Services Outlook Miniseries
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listening to the Markets and Security Services Outlook, a podcast miniseries exploring the critical topics that will shape our industry in the next decade, including sustainability, digitalisation and emerging markets.
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Find out what's driving the global outlook for institutional investors and where the opportunities and challenges lie.
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Speaker
Thank you for joining us.
Panel Introduction on ESG Discussions
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Okay, well, hello.
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My name is Paul Ellis.
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I'm Global Product Head for Regulation, Tax and Trustee and Depository Services.
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I'm delighted to be joined with Henry Ration, Head of Regulatory Outlook for Security Services and HSBC.
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James Pomeroy, Global Economist, Global Research, HSBC.
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Richard Pounder, Global Head of Operational and Resilience Risk, Security Services, HSBC.
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Shea Lydon, Partner in the Asset Management Group in Matheson.
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Well, a very warm welcome to you all.
Europe's Leadership in ESG Regulation
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So let's start off then with ESG.
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And Shay, I'd like to turn to you in the first instance, if I may, because I think it's probably fair to say that policymakers in Europe are perhaps seen as the front runners in certainly in terms of the quantum of ESG regulation.
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And when we look at that, we sort of see that grouped in sort of almost like three kind of key pillars of the policy objective.
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Firstly, to
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require asset owners, asset managers to have robust controls that consider sustainability within their investment process, irregardless of whether the end outcome is a sort of an ESG product.
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But then, of course, if they are manufacturing a product that claims to be ESG, it needs to be proven to be just that.
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But of course, the final sort of, if you like, the three legs of the stool of that policy approach is that issuers need to supply the relevant sustainable information to allow asset owners or asset managers discharge those obligations.
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So I know obviously you engage a lot with particularly asset managers, both in Europe and internationally.
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We've just been through the first phase of big sort of ESG regulation in Europe around particularly around ESG disclosures.
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So kind of interested in your experience, really, and dealing with those clients in terms of the opportunities and challenges that have been so far presented and perhaps what you think sort of, again, as we're trying to think about this panel in a forward-looking basis, what's coming over the horizon and what should firms be thinking about?
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Sure,
Trends and Challenges in ESG Investments
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no problem at all.
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And thanks very much, Paul, for the invitation to participate today.
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I'll start, I guess, I'll back out of being a lawyer for a moment and start with the opportunities rather than the challenges.
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It's worth taking a step back and just realise why are we putting this amount of effort into ESG and meeting the requirements?
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I guess ESG is just very much a growth area for investment allocation in 2020.
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More than 50% of the inflows of European funds went to ESG-related strategies, depending on how broadly it's categorised.
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It's a huge inflow.
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BlackRock has indicated that it had 40% inflows to sustainable uses last year, and the figure this year is higher, at 58% year-to-date.
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And this is consistent with research that suggests that sustainable assets will triple to become over half of European funds in time.
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And there's a number of factors behind that.
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Europe has signed up to ensure all EU countries are carbon neutral by 2020, and that's driving its legislative agenda.
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President Biden in the US committed to halve greenhouse gases by 2030.
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So there's a lot of impetus to push people towards EST investment.
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Social factors are relevant.
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Younger investors are focused on EST and they're voting with their investment decisions.
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And something that will drive this even further is that with the upcoming mythic changes, investors will be asked upfront whether they prefer to allocate only or substantially to sustainable investments.
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And in practice, when people are faced with that decision, it's a very easy thing in the abstract to say, yes, I would.
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And that means people will be pushed more and more towards these articulation, articulating products, which are the green or the light green and dark green products in European legislation.
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So in terms of opportunities, drawing all that together, what are they?
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One is that an ESG-focused approach will attract investment.
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You'll be positive ESG products are positively received in industry.
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Bad practices, conversely, can be the subject of social media comments.
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At least for the moment, there's a perception that people would pay a premium for ESG exposure.
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It's not just about the feel-good factor of making an ESG investment.
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There's a wealth of research that indicates that ESG investment approaches will assist in enhancing returns.
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And you can see how that would play out, that as legislation generally around carbon or polluting industries impacts and bite on those entities or more sectors, they'll struggle against those sectors which by comparison are really investing in and are focused on sustainable industries by comparison.
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And then lastly,
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ESG investing isn't straightforward and that leads on to the challenges.
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There's a huge opportunity here for managers to distinguish themselves from the competitors.
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That could be in the clarity of their range or the vision they have in terms of their ESG products.
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It could be in their use of data and how they use data to construct portfolios because there's a lot of work to be done there.
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And indeed there's potential even to build their own proprietary data models and if they're successful to license them out to others.
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So there's a huge opportunity there but there's challenges and there's a number of them.
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I think the first one from a legal perspective
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in terms of what people are focused on, it's just the risk of getting it wrong.
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Like when we looked back at SFDR and Level 1, there was updates, perspectives to websites, risk management procedures, to remuneration policies.
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The legislation, it's complex and it's introduced on a phased basis.
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So people need to be thinking a couple of steps down the road in terms of what's coming.
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So we've got the European approach.
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We now have the UK approach, if that's the extent they're moving away from taking on SFDR.
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We've got the approaches in Asia and Hong Kong and elsewhere, and we've got the US approach.
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So people are looking to track all of these in different jurisdictions and ensure some sort of global consistency.
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And even things like, if you look at the rating agencies, for example, different rating agencies can rate a given target investment in different ways.
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Some might regard this according well for the social part of ESG, others might not.
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So trying to get that consistency is a real challenge.
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And then the final challenge I've seen is just the reality, at least in the short term, of increased costs.
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So
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There's a lot of data and expertise required.
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Managers may need to draw in independent third parties in reviewing and verifying the data so they can stand over whatever allocations or whatever investment decisions they've made and provide the comfort to investors.
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And there will be comfort and there will be support coming in the context of further legislation.
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So you've got the EU Corporate Sustainability Reporting Directive, which will force the entities in which funds invest to give more information, which allows you then to pass on that information and makes it an easier task.
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But that's still down the line, it's going to be two years after SFDR comes through.
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So there's a challenge in terms of doing that.
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Compliance and spending is going to be a factor for everyone.
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I think that's kind of something to join to the challenges as well.
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Right.
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So I mean, I think
Government Focus on ESG Strategy
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to that point, I mean, I guess the regulator or the policymaker conundrum there is,
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We want to achieve the outcomes.
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We want to get things.
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You've got to start in an environment where things aren't perfect.
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And I guess that's where Europe started.
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But obviously, to that point, there is some risk that remains then for firms with the uncertainty.
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James, I mean, I don't know.
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Shea's spoken a lot about there, about the policymaker approach.
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Any views on... And we've talked a bit more about the European view there.
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Any views you have that support our challenge, what Shea has mentioned there?
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No, it's to share some really good points around how this is evolving.
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You've got the governments all over the world really care about environmental issues.
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There's a couple of reasons why.
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One is that we're in an economic hole at the moment.
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We need to get out of it.
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And that's going to mean a lot of investment.
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And where is a sensible place to invest?
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It's in the things you know you're going to have to do in the next.
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10, 15, 20 years because of climate change challenges, climate change commitments that different governments and cities themselves are making too.
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So what we should see in the coming years is much, much more investment and push from governments.
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Now, that's partly an economic decision, but it's also a social decision.
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It's a political decision because, as Shay alluded to, about young people wanting to invest in ESG and those sorts of subject areas, you also vote on the back of them.
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And there's no surprise to me that Joe Biden won an election where one of his flagship policies was around green energy and around environmental sustainability.
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And that is a policy angle that appeals to a lot of people.
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And I think what we're going to see in the coming years is many more governments and policymakers across the world keep pushing that angle because it's a good way of winning votes, growing the economy and doing things well.
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So this
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isn't a fad, it's not a trend, it's something that's got a long, long way to run, particularly when you look at the demographics of the global population, where that cohort of people who really care about this stuff is making up a bigger and bigger share of the electorate every single year.
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And so these issues are only going to get more important.
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Right.
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So, yeah, so I think so.
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I
Global Regulatory Emphasis on ESG
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think you sort of reinforce the point there that we're wearing our regulatory hats.
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We've got a lot more regulation to come.
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I mean, Henry, in terms of you obviously look at the outlook around the world as well, right?
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In terms of what I mentioned in my sort of introductory remarks, we see an emphasis on asset owners, asset managers having procedures to make sure they're considering sustainability in terms of the risk process that they when they're making investment decisions.
00:09:24
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I mentioned, obviously, the need not to sort of to ensure if you're manufacturing ESG to have control so that the product's not greenwashed, but then also that the issuers, right?
00:09:35
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And Shay mentioned this as well.
00:09:36
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So whether that be a corporation or the issuer of a bond, that they're supplying to the industry the relevant information to actually be able to do the assessment as to whether the investments are ESG or otherwise.
00:09:48
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Do you see a difference in terms of emphasis with policymakers on those three pillars of regulatory priority?
00:09:54
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I think there's a certain consensus amongst regulators around the world in terms of the importance of disclosures by issuers on this topic that's very much grown up in the last 12 to 24 months.
00:10:06
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We see a lot of work being done on that.
00:10:08
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And the EU is certainly out in front, I think, from what we've been hearing in terms of the investors' responsibilities in that direction as well, in terms of where they place their money.
00:10:17
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Looking outside the European Union, I might just say briefly, the United Kingdom,
00:10:22
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Clearly not directly within the scope of the European regulations nowadays outside Brexit.
00:10:30
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We've now got requirements upon premium listed companies for accounting periods beginning 1st January 2021 in terms of some of their disclosures on ESG matters and the FCA is going to be consulting shortly.
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on the subject of the Task Force of Climate-Related Financial Disclosures, as they will apply to asset managers, life insurers, and some pension schemes in the UK.
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That's going to be their way forward.
00:10:56
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I would say internationally also, probably very importantly, we have the US and China talking now on what they're going to do.
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And so we had actually a discussion between John Kerry and Xi Zhenhua
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the envoys from both countries in mid-April, coming out with a communique at the end on the importance of it all and driving forward the UN Framework Convention, the Paris Agreement, and looking forward very much to the COP26 or UN Climate Change Conference in Glasgow in November.
00:11:26
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to various matters that can be addressed there.
00:11:29
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Clearly, there are also other specific regulations now coming in in the United States now that we have the Biden administration.
00:11:36
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A lot of work being carried out, actually in MENAV, in the Middle East, North African Turkey, and in Asia as well.
00:11:42
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Particularly, I'd single out the People's Bank of China who's work on the green taxonomy, where they're working alongside the EU for common ground.
00:11:50
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We've also got various other Asian countries involved in that.
00:11:53
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So a lot going on primarily in the issue of space.
00:11:56
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Okay, well, thanks for that.
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And thanks for sharing
Impact of Central Bank Digital Currencies
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those views, Henry.
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So let's switch to digital now, if we may.
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Obviously, this is a vast topic.
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And obviously, our perimeter within that vast topic is around the sort of policymaker approach to it.
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So but in the spirit of not trying to boil the ocean, we've selected two policy areas that we think firms should pay particular attention to.
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Firstly, the policymaker approach to crypto assets.
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And we're going to chat in particular about central bank digital currencies.
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we're also going to talk about regulated firms' digital operation resilience.
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So I want to take the crypto assets discussion first, going to you, James, on this one.
00:12:35
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So as we all know, coronavirus has accelerated the world's move away from cash in terms of our online spending using our credit cards.
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And now central banks are considering developing digital versions of the notes and coins that we have in our wallets.
00:12:51
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and perhaps Sweden and mainland China, perhaps the front runners there in terms of central bank digital currencies, perhaps even this year.
00:12:59
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But you're probably a much better expert than I am on this.
00:13:01
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So where are we headed and what does this mean for asset managers and asset owners in your view?
00:13:07
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Yeah, you're quite right, Paul.
00:13:09
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In terms of this shift away from cash, it's been pretty dramatic all over the world.
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And I think what you get to with cash usage is you hit tipping points.
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And essentially, as soon as businesses stop accepting cash, then people stop carrying cash around.
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They use it less, businesses stop accepting cash.
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And you get into this spiral.
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And that spiral really kicked off
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in March, April last year around the pandemic in most of the world.
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And that's what we've seen happen in Sweden over the past decade, taking the economy pretty much cashless for most intents and purposes by the time they're about sort of 2016, 2017.
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And that's why the digital payments are going to be really, really interesting space going forward.
00:13:47
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Central banks are looking at this.
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They're looking at the rise of cryptocurrencies over the course of the past few years, and particularly the rallies we saw
00:13:54
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at the beginning of this year, and they're thinking about what they need to do.
00:13:57
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Now, we've argued that cryptocurrencies in their current form are unlikely to be a universally used means of payment.
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They're too volatile.
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They're not good enough at processing enough transactions.
00:14:07
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And central banks almost have a duty to provide a means of payment that's stable, that's secure, that's able to be used digitally, and is able to be accessed by everyone.
00:14:17
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There's a lot of decisions they've got to make, though.
00:14:19
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Now, we're very, very early in this journey.
00:14:21
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You've got the mainland China, the PBOC, doing really, really good work on this, stepping up on their pilots.
00:14:27
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You've got Sweden's Riksbank doing a pilot too.
00:14:30
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We've had a central bank digital currency launched in the Bahamas, the sand dollar, if anyone's interested.
00:14:36
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And those pilots all have something in common, which is they're indirect.
00:14:40
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So they go through the banks.
00:14:42
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And so you don't direct with the central bank.
00:14:45
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None of them appear to be interest bearing at the moment, which has a big implication in terms of negative interest rates.
00:14:50
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It could mean that negative interest rates are impossible in a central bank digital currency world.
00:14:54
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If you have a zero yielding
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unlimited central bank asset, well, good buy negative interest rates.
00:15:01
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And it creates some interesting questions about what could you do with a much, much greater digital payments usage?
00:15:06
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Does this create some amazing data that policymakers can use?
00:15:09
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Does it create an environment that allows us to grow more quickly because we get all these productivity gains that come out of it?
00:15:16
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A lot of things can change in the economy and the way we think about monetary policy, but we're still some way off.
00:15:22
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In China, yes, we could see these things and be released into the general public in the course of 2021.
00:15:28
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Sweden, maybe next year, but the Bank of England, the ECB, the Fed, they're a long, long way behind.
00:15:34
Speaker
And it's probably three, four, five years until we see central bank digital currencies being widely used.
00:15:39
Speaker
But it is something we've got to get ready for.
00:15:41
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because it's going to happen at some point in the next five, 10 years.
00:15:44
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Central Bank of Chitter currencies are going to be widely used.
00:15:47
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And I think it's in all of our interest to learn more about them and to prepare for that arrival.
00:15:51
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Well, there's no ambiguity in your prediction there, James.
00:15:55
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Richard, do you want to come in there?
00:15:57
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Yeah, Paul.
00:15:58
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Yeah, thanks, James.
00:15:58
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I think there's an interesting relationship as well there with the practical side of what having CBDCs has in there as well.
00:16:05
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So where we start to see them come into some of the funds and how then as custodians in particular, we start to understand how we really provide custody service over...
00:16:14
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some of those digital assets.
00:16:15
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And I think that is an interesting thing.
00:16:17
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To James's point around timeframes, there's definitely a long way to go before we have a strong, robust industry-wide acceptance around how we do custody over those sorts of assets.
00:16:28
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But it does bring an extra dimension in the way that we can provide custody services, I think, which is an interesting thing.
00:16:34
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But that timeframe is the important piece there as well.
00:16:37
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There's still a long road to go.
00:16:38
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True.
00:16:40
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I mean, I think myself and Henry's experience internally dealing with our
00:16:44
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our folks in our digital product development team, they ask us about how do you interpret this in the context of the regulation?
00:16:50
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I mean, not we need to poop the party.
00:16:52
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I think that has always been a little bit challenging because it's been unclear.
00:16:57
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And it probably leads me neatly into the question I had for Shay, because I think now we're starting to see, again, I just was going to take Europe as a proxy, but I don't think it's an invalid proxy for the rest of the world in terms of we now have
00:17:10
Speaker
we can see coming onto the rise in this markets and crypto assets regulation in Europe, where I think there is clearly the intention to create greater definition of how we sort of consider these assets, crypto assets, cryptocurrencies, et cetera, stable coins.
00:17:25
Speaker
So, and I'm sure as a lawyer,
00:17:28
Speaker
I mean, it's sort of flatter you on this one, Shay, you like legal certainty, right?
00:17:30
Speaker
So in terms of that regulation, what do you think or see within that as sort of the big developments that our clients should sort of be looking out for in terms of that emerging regulation?
00:17:41
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Sure, although I should probably give a clarification for it.
00:17:43
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I probably like the right legal certainty.
00:17:47
Speaker
If people dive in too quickly, we get the wrong answer.
00:17:50
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It could be dangerous too.
00:17:52
Speaker
I think you're right in terms of the challenge for people to try to figure out what is a crypto asset.
00:17:58
Speaker
Is it some form of a commodity?
00:18:00
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Is it a financial instrument?
00:18:02
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How do you regard it as the first stepping stone to actually deciding what a product might look like?
00:18:09
Speaker
And Micah is part of the European response to that.
00:18:13
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So it stands for the market and crypto assets regulation.
00:18:15
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And in many respects, it's a bit like the other MI, MIFIT, markets and financial instruments regulation.
00:18:20
Speaker
It's a similar sort of structure.
00:18:22
Speaker
It sets about creating a structure that allows for the regulation of crypto assets and the providers of crypto asset services.
00:18:30
Speaker
It allows them, it provides a harmonized regime across Europe.
00:18:33
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It allows those crypto asset services providers to be regulated in their home jurisdiction.
00:18:38
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and as a result of that regulation they then get the ability to passport their services across Europe and to provide into other jurisdictions.
00:18:44
Speaker
So you can see the infrastructure, the MIFID constructs coming through there again.
00:18:51
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It does have to go through as part of a proposal, as part of a wider EU digital finance package and there's an operational resiliency digital proposal in there as well.
00:18:58
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We'll have to go to the EU legislative process.
00:19:00
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The timeline is at this stage looking like 2023.
00:19:03
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But even in 2023, there'll be a lead-in period, there'll be a transitional period we expect before people go through.
00:19:09
Speaker
In terms of what the concepts are, you get the pan-European process passport.
00:19:13
Speaker
The quid pro quo is that you need to have an EU presence if you're a provider, you need to obtain an EU license, you need to comply with certain minimum prudential requirements, so there'll be minimum and ongoing capital requirements, for example, and you need to comply with minimum requirements in terms of risk management, policy and procedures around conflicts, around complaints.
00:19:32
Speaker
But at the moment, it's sometimes seen as being kind of the Wild West in terms of crypto.
00:19:35
Speaker
You can see how the regulators are taking and expanding their existing rules and the legislators' existing rules and given member states and effectively stretching them to cover this new asset class and to provide a kind of a coherent regime.
00:19:47
Speaker
The challenge will be in kind of how extensive that regime is and the sort of hoops people need to jump through in order to comply.
00:19:53
Speaker
But the coverage is coming.
00:19:54
Speaker
So there's always going to be that concern that the regulation, based on what we all know today in terms of the securities markets, could perhaps trim the innovations.
00:20:02
Speaker
That's going to be the concern and why it's important for firms to play a part here.
00:20:06
Speaker
I don't know, Henry, do you want to add anything on that discussion quickly?
00:20:09
Speaker
I think that's pretty comprehensive.
00:20:12
Speaker
I think in board of the day, that is covering service providers and issuers.
00:20:17
Speaker
A lot of points we've seen before from things like MIFID,
00:20:20
Speaker
In terms of processes, qualifications, conflicts of interest, licences and capital requirements, as Shane mentioned, also one slightly newer one, I suppose, is the subject of, in some cases, liability for lost assets and replacement of assets.
00:20:34
Speaker
And points like that will certainly need to be watched when this is implemented.
00:20:37
Speaker
Okay.
00:20:37
Speaker
What would be the advantages for a retail investor in a developed country using a central bank digital currency?
00:20:43
Speaker
It's one of the biggest questions I'm asked is why bother?
00:20:46
Speaker
And it's one of those things where the developed market, where we all have access to digital payments or most of the population have access to digital payments.
00:20:57
Speaker
Why would you rip up the plumbing and start again?
00:20:59
Speaker
You know, if in your house, if you've got hot water,
00:21:01
Speaker
You don't suddenly refit all the pipes.
00:21:03
Speaker
And that, I think, is a perfectly valid question.
00:21:07
Speaker
The answer is really in twofold.
00:21:09
Speaker
One is making a better system.
00:21:10
Speaker
The technology has improved in a way that allows us now to build a finance network that is much more streamlined, much more efficient, much quicker and cheaper.
00:21:21
Speaker
And actually, there's a cost saving that comes out of this streamlining of digital payments, if you can design it in the right way, that could be estimated at about half a percent of GDP, even in developed markets.
00:21:31
Speaker
And that's huge.
00:21:32
Speaker
And I think actually that that's a substantial reason why we should start going down that route and why central banks are thinking about it.
00:21:40
Speaker
But if you're a person on the street, if you're an investor, if you're a consumer, if you're a retailer,
00:21:45
Speaker
really actually the difference in your day-to-day interaction with payments between a central bank, digital currency, and what you have today is pretty negligible.
00:21:54
Speaker
You wouldn't notice any difference.
00:21:56
Speaker
You still use your bank card or your mobile phone and nothing really changes.
00:22:00
Speaker
The thing changes though for people who are paying fees.
00:22:03
Speaker
Essentially, if you think about all of those payment fees that exist within financial system, so be it small retailers paying card fees, be it
00:22:12
Speaker
new processing fees, transaction fees, all of those things, over time, technology is going to take those fees to zero.
00:22:18
Speaker
And I think that will provide a substantial uplift to economic activity because what you're going to see is all of the frictions drop out of the global economy.
00:22:27
Speaker
And I think that's really good news.
00:22:28
Speaker
But they're small enough individually, you think, is it worth doing all of this for this very, very small benefit?
00:22:33
Speaker
But actually in sum, those benefits could be quite transformational.
00:22:37
Speaker
And I know the question is about the developed world, but that's why in the emerging world, this could be really, really powerful.
00:22:42
Speaker
Because if you think about digital payments in many emerging market countries, they're not used commonly because of these really, really high transaction costs.
00:22:49
Speaker
If you crush those transaction costs, suddenly digital payments become much more usable.
00:22:54
Speaker
That brings people into the banking system.
00:22:56
Speaker
Then you start really thinking about the other benefits that come from that access to credit, savings, all of those things.
00:23:02
Speaker
This could be genuinely transformational for growth there.
00:23:05
Speaker
So I think that the benefits may feel quite small, but I think they multiply quite quickly.
00:23:10
Speaker
Okay, thanks, James.
00:23:10
Speaker
So I want to switch now.
00:23:12
Speaker
I mentioned obviously there's, we've been talking about some of the benefits of digital, but obviously there's also the pitfalls for regulator firms are getting it wrong and really want to drill into the digital operation resilience because, again, the volume of financial regulation on this, I think is significant and growing.
Digital Operational Resilience in Financial Services
00:23:28
Speaker
29th March FCA's rules and operational resilience
00:23:31
Speaker
EC's, Shay mentioned the Digital Operation Resilience Act, which is probably 2023 as well.
00:23:38
Speaker
But in between time, we've got guidelines on outsourcing to cloud service providers published on the 10th of May.
00:23:43
Speaker
Hong Kong has had similar requirements on its licensed firms around using cloud.
00:23:49
Speaker
I think we've seen, Henry's mentioned other, we've seen a similar in sort of around Middle East, et cetera.
00:23:54
Speaker
So it's pretty, there's a big long list essentially, I suppose I've overemphasized that point, but Richard,
00:24:00
Speaker
It's kind of the key question for me is what are the practical things firms need to do to prepare?
00:24:04
Speaker
And probably even more so, how big a step change is this in reality?
00:24:09
Speaker
Because I think we all like to think in regulated financial services, we're well over on top of our resilience.
00:24:14
Speaker
We've all been through the pandemic and we've stood up, for the most part, everything stood up pretty good, right?
00:24:20
Speaker
So is there a big change and do we need to be thinking more about this?
00:24:24
Speaker
Yeah, thanks Paul.
00:24:26
Speaker
So I think, as you say, there is a risk that we underplay some of these regulations as they come through.
00:24:31
Speaker
I think there are three sort of main focus areas where I think there is going to need to be a bit of a step change across the industry.
00:24:38
Speaker
First of all, I think there's going to need to be a bit of a broader understanding between market participants when it comes to third party engagements.
00:24:44
Speaker
And I would expect some level of coalescence around the questions we ask each other in particular so that we can demonstrate that we fully understand the environments of those third parties and that full
00:24:54
Speaker
end-to-end supply chain that the social called the nth party risk as it is in there, particularly where there are elements of any outsourcing arrangements that are then put into digital activities by those third parties to engage with.
00:25:07
Speaker
So I think that's one of the things we need to move forward as part of the industry.
00:25:12
Speaker
I think the other one is an obvious one to talk about, but the information technology and cybersecurity risk management is going to be a big focus in this space because obviously as we put more and more into digital activity, it becomes then increasingly foundational about resilient services.
00:25:28
Speaker
So I think even things as obvious as legacy system upgrades and new IT implementation,
00:25:34
Speaker
that has to really consider in a very, very full way, the full resilience from project initiation.
00:25:41
Speaker
It's no longer I think going to be acceptable of this sort of, well, we'll just implement this system or this activity or this application.
00:25:50
Speaker
We need to really think about that full end to end resilience as it goes through.
00:25:54
Speaker
And then, which leads me on to the last one really of around substitutability, the Digital Operational Resilience Act specifically talks about some of the substitutability.
00:26:02
Speaker
And I think there is a risk in the industry at the moment that we move everything onto a digital platform and lose sight that, you know, where and when things go wrong, because things like the UK policy statements for operational resilience, that specifically talks about stress testing and scenario testing of our processes and assumption that things will go wrong.
00:26:23
Speaker
that we have to plan for what those fallback options are.
00:26:26
Speaker
And it has to be again on the micro level as well as the macro level.
00:26:29
Speaker
I think we're quite good as an industry of dealing on the macro level, the fires, floods, famines, pandemics as we've been through.
00:26:37
Speaker
But I think there is more to do in the space of the micro level.
00:26:40
Speaker
What within our specific processes of the weak points, what platform could go wrong?
00:26:45
Speaker
What are we going to do to bypass if we need to fall back from platform X so that we can then provide those services into our
00:26:52
Speaker
into our clients.
00:26:53
Speaker
So I think those are probably three of the biggest ones and understanding that we don't lose some of our operations staff.
00:27:00
Speaker
We will always have operations staff to manage manual activity, but they form part of a full backup option for our digital operations.
00:27:10
Speaker
James, maybe coming to you, I mean, obviously,
00:27:13
Speaker
You know, you have to pick up the papers day in, day out, and there's such an emphasis now on cyber attacks.
00:27:19
Speaker
And what's your view?
00:27:20
Speaker
Do you think policymakers are, clearly policymakers, I think, to the point we just discussed, are already sort of very focused on this.
00:27:26
Speaker
But do you think it's going to grow in importance and emphasis?
00:27:32
Speaker
Most definitely.
00:27:33
Speaker
I think there's a couple of things that are important here.
00:27:35
Speaker
One is how quickly the general digitization of the economy has been accelerated again by the pandemic.
00:27:41
Speaker
It's just another one of those trends.
00:27:43
Speaker
Now, think about how much shopping is online today versus a year ago and think where it's going to be in 10 years' time.
00:27:48
Speaker
Well, we're sort of nudging to the idea that we went from about 15%.
00:27:51
Speaker
A year ago, we're up about 25% today, depends on where you are in the world, goes up to about 50%.
00:27:59
Speaker
And by 2030, certainly you're dealing with a lot more transactions going digitally.
00:28:02
Speaker
And that's just an example of this talking about retail.
00:28:05
Speaker
Think about all the other transactions going digitally, all of those things.
00:28:08
Speaker
It's become the much, much bigger part of the economy, much, much bigger part of policymakers sort of focus.
00:28:13
Speaker
And clearly the risks grow as well because you're dealing with a completely different type of crime, completely different type of risks that are out there.
00:28:21
Speaker
And policy is going to have to tighten up on that front too, just because it becomes so, so much bigger.
00:28:27
Speaker
There's a general underestimation in society about how digital the broader economy is going to get over the next 10 years.
00:28:34
Speaker
And it becomes, I guess, very obvious when things go wrong.
00:28:37
Speaker
It's kind of immediate, right?
00:28:38
Speaker
So, Richard, do you want to come back in on that?
00:28:40
Speaker
I was just going to say, we've learned a lot, I think, over a couple of big incidents across the, not just our industry, but things like Maersk and TSB are two that really jumped to mind.
00:28:49
Speaker
And there is a real balance here between the cost that we spend on resilience versus the cost of actually doing business and all the rest of it.
00:28:56
Speaker
You know, we talk a lot about things like network segmentation, for example, across our IT infrastructures, particularly in large organizations like HSBC and how we
00:29:04
Speaker
we manage those two things and to James's point the more we go digital online the more the reliance there is on digital products the more we have to really factor in those resilient um processes and where we segment the the network versus where we have the resilience across things like flat network structures so you know on the technical sense there are some very practical things to talk that we need to focus on to make sure that we have
00:29:27
Speaker
good resilient services, but equally are in a place where we're not spending all of our capital only on those resiliency aspects.
00:29:37
Speaker
It's got to be a risk-based decision on those.
00:29:40
Speaker
Yeah, I can see a lot of challenge here in terms of a lot of judgment calls required around, you know, how far do you go, right?
00:29:50
Speaker
When does sort of an outsource service become something that's sort of critical or otherwise, right?
00:29:54
Speaker
And obviously different regulators
00:29:56
Speaker
driving policy or regulations in a different way.
00:29:59
Speaker
But I think going back to part of my point at the start, I think if there's sort of the policy assumption is regulators will obviously are really expecting firms to sort of be really at the top of their game here.
00:30:09
Speaker
But I think that's sort of the guiding principle to sort of form, you know, to really refresh operating models around resilience, I guess.
00:30:16
Speaker
That's exactly it.
00:30:16
Speaker
And I think there's a definite relationship.
00:30:20
Speaker
Whilst different regulators have subtly different views of what resilience really means to them, there is absolutely, to go back to that word, sort of coalescence of, or a Venn diagram of about 80% of the same stuff that we're going to have to look at.
00:30:33
Speaker
And those fundamentally are those building blocks of resilience, which is, do we understand, you know, substitutability, the backup recovery, fallback options?
00:30:40
Speaker
Do we design, build and test and release our systems properly with
00:30:44
Speaker
you know, security measures in place and all that and good cybersecurity protocols, you know, do we understand our third parties and do we have good controls in place to mitigate and manage any human error that sits within our operations team?
00:30:57
Speaker
So, yeah, I think it's those base building blocks are absolutely going to be the foundations of what virtually all the regulators are looking at now.
00:31:05
Speaker
Okay, well, thank you for that, Richard.
00:31:07
Speaker
I would obviously sincerely like to thank Henry, James, Richard and Shea for giving us the benefit of their expertise and valuable time today.
00:31:15
Speaker
I think we could have easily gone on guys for another hour on these topics.
00:31:19
Speaker
So I think I really appreciate you sharing your thoughts.
Podcast Conclusion
00:31:23
Speaker
I'd also like to thank everybody for joining.
00:31:25
Speaker
This has been the Markets and Securities Services Outlook, a podcast miniseries produced especially for HSBC Global Viewpoint.
00:31:34
Speaker
To learn more about HSBC's markets and securities services offerings, visit gbm.hsbc.com forward slash solutions forward slash securities dash services.
00:31:52
Speaker
Thank you for listening today.
00:31:53
Speaker
This has been HSBC Global Viewpoint Banking and Markets.
00:31:57
Speaker
For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings,
00:32:05
Speaker
please visit gbm.hsbc.com.