Jon Bew and Wayne Gibbard, co-heads of the Financial Services Sector at Shoosmiths, comment on upcoming trends and developments to expect in 2024 for the sector.
Everyone is feeling it, the rumbling of a technological storm. The immergence of generative AI, RegTech and increased fraud and cyber risk, have swept clouds of uncertainty across the Financial Services Sector…. but is it all doom and gloom? Have the copious amounts of changes imposed upon the Sector in 2023 paved the way for firms to safely negotiate the 2024 storm?
A major focus for the sector in 2023 was the implementation of the Consumer Duty. Now and throughout 2024 the Financial Conduct Authority (FCA) have a keen eye on how firms have implemented the Duty. Firms must continue to focus on making the Consumer Duty an integral part of their day to day. Firms must also consider whether they have any closed products, which require review before the July 2024 deadline.
The FCA have also indicated that they intend to use the Consumer Duty as a framework to supervise AI risks. This includes their increased ability to monitor the Big Tech firms when they cross over into the Financial Services Sector.
Firms must also be conscious of the FCA’s agenda to become more data driven and careful consideration should be given to the implementation of Product Sales Data Reporting (CP23/21) for consumer credit providers.
A focus on operational resilience will continue throughout 2024, emphasised by the Consumer Duty requirement to protect customers from foreseeable harm. Firms should be prepared for some adjustment in this regard when the drafting of the EU’s Digital Operational Resilience Act (DORA) is finalised mid-2024, applying from the 17th January 2025.
ESG remains at the heart of the regulatory agenda, with further policy statements on diversity and inclusion and ESG ratings. Firms will be required to continue to demonstrate their commitment to progress towards ESG measures.
2024 may see an increased workload for the FCA in relation to cryptoassets. The implementation of the financial promotion restriction to cryptoassets was introduced in 2023. Now, cryptoasset promotion must be communicated or approved by a FCA authorised person or a registered cryptoasset business. The FCA have been clear regarding the consequences of non-compliance and may find themselves very busy investigating breaches in 2024.
2024 will see an upgrade of interbank payment systems, with changes to improve on Faster Payments which was introduced in 2017. The Financial Services and Markets Act 2023, Payment Services Regulations 2017 (PSR) reforms are predicted to begin in early 2024. In addition, an FCA consultation is expected in line with these improvements and covering plans to replace strong customer authentication (SCA) with an outcomes-based regime.
Open banking shall see some changes in 2024, with the government saying that it will put forward legislation to establish a new long-term regulatory framework. This framework requires more firms to participate in a commercial model for open banking which will include enhanced consumer protection measures, purchase protection and dispute resolution. The FCA and PSR have also indicated they will consult on dispute resolution in relation to open banking in 2024.
Following record inflation and significant shifts in the prices of everyday goods, 2023 witnessed consumers re-evaluating their online payment methods. Buy-now pay-later (BNPL) is set to continue being the most rapidly expanding online payment method in the UK and abroad in 2024, with a growth rate predicted to be twice that of bank transfers and more than three times that of digital wallets. While BNPL schemes provide speed and convenience at checkout, users may not be aware that they are incurring debt or the consequences of missed payments. Following a lot of discussion in 2023, the government now plan to update consumer credit laws in 2024 is respect to BNPL. BNPL providers will be regulated, however they will be subject to a “lighter touch” regime.
More deal activity is expected in 2024 as the private equity market has been largely stagnant for the past 18 months. This is thought to be due to inflationary pressures receding, buyer and seller expectations converging and an increased amount of exits as funds won’t be able to stretch past 2024. There are some themes that will shape investment in the Financial Services Sector, such as the increased investments in fintech, especially in areas like digital solutions and AI-driven solutions for risk management. It is hardly surprising that private equity executives are showing interest in businesses in which AI is being deployed in an effort to cut costs and improve efficiencies, setting apart investee companies from their competitors. There has also been an uptick in public-to-private transactions in 2023 and this trend is set to continue into 2024.
Looking to 2024 with a cautious optimism, as 2023 proved challenging due to persistent inflation and a 15-year high in interest rates/increased borrowing costs. For real estate financings, both of those negatively impacted values of real estate assets with a consequent decade low in commercial real estate transactions. For leveraged finance and alternative finance (asset based lending and trade finance) confidence has been lower with a consequent negative impact on the number of underlying transactions and desire to re-finance. Whilst 2024 will likely start the same way, there is more to be optimistic about. Inflation fell significantly towards the end of 2023 and is expected to continue falling or at least stabilising. There is also a real prospect of interest rate reductions in the latter half of 2024, to further stimulate activity.
With an election on the horizon, that tends to mean that people are keen to get financings and/or transactions away ahead of any change that that may bring. Certain sectors that benefit from strong structural tailwinds such as Living will likely rebound the most strongly. In real estate we will continue to see opportunistic investors selectively targeting secondary and tertiary real estate as it undergoes repricing which in turn could pave the way for refurbishment to an improved sustainability standard or repurposing assets that have good fundamentals. In leveraged and corporate finance, we see a number of funds/investors with money to spend and pent up supply/demand due to lower levels of activity over the last 18 months or so. Asset based lending is expected to grow materially as it continues its rise out of the alternative market and into mainstream and as borrower confidence and desire to grow (whether by acquisition or organically) rises – the flexibility of the asset based lending product assisting materially in both of those scenarios.
Restructuring & Insolvency
The impact of increased interest rates and other economic headwinds are set to continue to impact corporates and consumers during 2024. Recent statistics show an uptick in administrations in the mid-market with Construction, Manufacturing and Retail sectors with the highest number of failures. The changed interest rate landscape will mean those businesses with debt maturing in 2024 may find refinancing a challenge. Early engagement by boards with stakeholders and professionals will always mean a wider range of options and restructuring tools will be available. Given 2023 saw a number of key rulings on the use of the relatively new Restructuring Plan procedure, we can expect to see a further increase of their use as the market consolidates its learning from those rulings. Conversely, in any challenging economic environment, there will also be opportunities for strategic investments and turnarounds.
Like 2023, the Financial Services Sector will need to focus significant time and effort ensuring compliance with the multitude of changes imposed in 2023 and those proposed for 2024. The changes appear to provide the structure needed to ensure firms, if compliant, will safely negotiate this uncertain path. 2025 will tell.