Becoming Covid-19-proof: operational resiliency and agility

Covid-19 tested the resiliency and agility of custodians and their asset management clients. Notwithstanding the initial confusion and market volatility, the industry has successfully managed this latest global crisis, and acclimatised to the new operating environment. Although a semblance of relative normality has returned to a few markets with some staff returning to work on a staggered or rotational basis, organisations are not blind to the risk that a second wave or infection spike could result in the re-imposition of lockdown measures. In response, financial institutions are making material changes to their organisational structures and processes to ensure they are Covid-19-proof. We spoke with three operations experts to see what resiliency and agility means for their business.

Eggs in one basket: a review of outsourcing dependencies

A number of industry experts argue that outsourcing dependencies will need to change if they are to manage risk effectively amid Covid-19. “It is critical that financial  institutions– when outsourcing – do not have all of their eggs in one basket, as it can a create massive risk if a serious, destabilising event takes place in a specific market. BNP Paribas Securities Services operates out of a number of different markets meaning if there is a crisis in any one of those countries, we can seamlessly transfer operations to another jurisdiction. Furthermore, the bank maintains a list of Securities Services employees with operations and service delivery experience who can be called upon in the event of mass absenteeism. I anticipate there will be greater regulatory scrutiny of companies’ outsourcing arrangements, which could encourage more firms to become less reliant on only one market,” acknowledges  Alain Pochet, Head of Client Delivery at BNP Paribas Securities Services.

Similarly, a number of buy-side firms are beginning to ramp up oversight of their outsourced service providers as a result of the pandemic. “Over the past two years, Eastspring Investments has outsourced some of its middle and back office operations as part of a transformational programme to modernise our business and position the company for sustainable growth. Covid-19 has reinforced how important it is to have effective oversight of outsourced service providers and also emphasised the importance of strong partnership and collaboration.  Our resilient operations and detailed business continuity planning enabled us to quickly adapt to new ways of working” says Shu May Neo, Head of Middle and Back Office Services at Eastspring Investments.

This renewed scrutiny from clients will force custodians to demonstrate that their operations are resilient and that they can port key functions from one market to another as seamlessly as possible.

BCP under the magnifying glass

As working from home became common practice, organisations have started to interrogate how their BCPs functioned during Covid-19 with the aim of rooting out any weaknesses and shortcomings. Buy-side firms are already deep in the process of strengthening their BCP responses. “Updates to BCPs were typically incorporated annually, but this is going to occur more regularly now. BCPs also need to factor in more risk scenarios. This could involve companies providing instructions for personnel should half of  the business or several core people be incapacitated by Covid-19, for instance. Any BCP deficiencies will need to be identified and ironed out. It is imperative we start looking at the bigger BCP picture,” comments Sirpa Yrjonmaki Head of Back Office at Sampo.

In addition to mollifying the concerns of institutional clients, wholesale reviews of BCPs will help custodian banks and asset managers navigate future conversations with market regulators, a number of whom are already starting reviews to examine operational resiliency across the financial services industry. “European regulators – including the UK’s Financial Conduct Authority (FCA) in particular – have spent a lot of time examining the BCP processes at financial institutions, and I believe they have been impressed by the responses of a few organisations,” highlights Pochet. BNP Paribas, for instance, is already engaging with industry associations, regulators and peers to develop a common understanding of expectations and best practices around BCP and operational resiliency.

Security and sociability – the key to remote working

As global workforces transitioned to remote working, digital communication platforms experienced a massive ascendency. Both Sampo’s Yrjonmaki and Eastspring Investments’ Neo concur that video conferencing tools such as Teams and Zoom are being used extensively but concede these platforms are still far from perfect. “Video conferencing has been widely used at our organisation, but one of the limitations of this technology is that the social element of work has been much reduced, namely the personal interactions with colleagues. It is incredibly important to see people face-to-face. This transition to online connectivity and communication does take time to adjust to psychologically,” says Sirpa. Neo highlights that remote working and video conferencing can lead to a blurring of home/work boundaries.

Cyber-attacks have also been an unfortunate by-product of remote working, with one expert saying there had been a 6000% increase in Covid-19 related spam. [1] There are several reasons behind this. Firstly, home broadband does not offer the same level of cyber-protection as what one would get in an office environment. Secondly, people are distracted by Covid-19 making them more susceptible to phishing and hacks. Organisations are responding to this threat. “The number of attempted frauds and cyber-attacks during lockdown has increased exponentially. This is a risk that we have carefully addressed by making major enhancements to our cyber-security protocols,” says Pochet. Neo agrees. “Cyber-security is a significant consideration and we are constantly reminding our employees to be very vigilant,” continues Neo. “Our technology teams have implemented a number of solutions to mitigate against these risks.”

Security and innovation – the bedrock for client communications

In order to safeguard clients, communication must be done in a way that is secure, resilient and efficient, according to BNP Paribas’ Pochet.  “It is vital that communications and linkages with clients, market infrastructures or regulators – irrespective of whether it is through SWIFT, the cloud or APIs [application programming interfaces] – is done so in a way that is secure and efficient. In addition to demonstrating technology interoperability, organisations running multiple communication platforms are in a stronger position from a BCP and risk management perspective. If one of those platforms breaks down for whatever reason, providers can move to a different channel. We are not an industry that can afford to stop operating for any length of time,” comments Pochet.

Covid-19 has also catalysed a number of existing trends in securities markets, most notably around innovation. “The pandemic has accelerated technology innovation at BNP Paribas. For instance, NOA – the virtual agent for the Planetshares shareholders services website – was integrated into the Securities Services’ call centres at the beginning of the Covid-19 crisis. NOA is seamlessly and accurately handling circa 20,000 client interactions each month 24/7. As a result, we are looking to incorporate NOA into other BNP Paribas product suites including global custody,” explains Pochet.

The COO in 2021

Although businesses are striving to get critical staff back into the office, the risk of future lockdowns amid Covid-19 resurgences are very high. The pandemic is still far from over, and it is essential that banks and asset managers continue to improve their operating models during this steep learning curve. Again, this crisis – concludes Pochet – is likely to reinforce the importance of the COO in helping buy-side firms to navigate many of the challenges that lie ahead with this pandemic. As we know from our own research report, The Future COO, the majority of COOs see transformation as a key priority for their role. This drive is needed now more than ever as COOs navigate the storm to set sail towards calmer seas.

[1] Financial Times