How the New Zealand financial services industry weathered the ‘perfect storm’

As the COVID-19 pandemic led to lockdowns and market volatility across the globe, BNP Paribas Securities Services (BNP Paribas) provides a custodian’s unique perspective on how the New Zealand and regional markets responded.

Early in 2019, COVID-19 was widely viewed as a medical crisis that was limited to the Asia-Pacific region, but the situation rapidly changed when it was declared a global pandemic by the World Health Organisation (WHO) on 11 March 2020.

At a recent New Zealand webinar, BNP Paribas shared its perspectives on the changes that ensued in New Zealand and across the globe as lockdowns were implemented across all major economies.

Doug Cameron, Head of Location for BNP Paribas Securities Services in New Zealand, said the pace and degree of change he saw was unprecedented.

“When we look at the number of coinciding events, the perfect storm comes to mind. We had market volatility and people working from home. We also had year-end activity happening in New Zealand which impacted registry providers and fund accounting teams and also independent audit testing, which provided additional challenges to audit teams and custodians.”

Ireen Muir, Head of Client Services, Public Trust, said clients began to activate their business continuity plans to the fullest extent.

“Our focus was also on the economic conditions and the impact on returns we were seeing. Fund managers, and especially those offering KiwiSaver and superannuation schemes, had to focus on supporting investors as well as their day-to-day operations.”

“We also saw investors reacting to negative media coverage by making more short-term decisions. Switch requests, phone inquiries, withdrawal requests and the number of hardship claims for KiwiSaver schemes all increased dramatically.”

The market volatility meant fund managers were concerned about meeting their liquidity requirements. As a result, there was a heightened focus on the pricing of assets, verification of pricing and transactions costs to ensure equity between investors.

“This resulted in buy-sell spreads being changed and, for some of the funds’, buy-sell spreads being implemented for the first time,” Ms Muir said.

Industry collaboration

As a result of the volume and scale of change, BNP Paribas, like many other New Zealand organisations, significantly increased communication with clients, helping to update disclosure documents and websites and meeting daily with certain clients for whom liquidity was a primary concern.

Public Trust also met with the Financial Markets Authority (FMA) and Reserve Bank on a weekly basis. “Our relationship with regulators became even more important, allowing us to share insights and help secure time extensions for regulatory reporting and additional guidance where needed from the FMA,” Ms Muir said.

Mark Wootton, BNP Paribas Head of Custody Product for Australia and New Zealand, said there were also numerous other examples of the industry working together to ensure markets continued to operate efficiently.

“In both Australia and New Zealand, we have seen exchanges and settlement platforms extending hours. New Zealand saw a 58% increase[i] in settlement activity and, impressively, we saw little to no uplift in the number of failed trades.”

Australia had slightly different challenges, given its singular settlement process through CHESS. During the first week of March, Australia reached new records in terms of transactions, which peaked the following week on 13 March.

“The level of trading we saw on this day led to a few frantic calls. Normal processing for CHESS concludes at 7pm, but on 13 March all market participants had to extend processing for an extra two to three hours to ensure CHESS was able to get through the volume of executions,” Mr Wootton said.

“Overall, we saw a 218% increase[ii] on the market average in a single day, with seven million executions carried out, but again in terms of fail rates there was nothing that was of any real concern. This is testament to all market players working together.”

Digital solutions

BNP Paribas currently has 90 billion[iii] NZD in assets under custody in New Zealand, the majority of which it is also the fund administrator for. During the lockdown period, its market volumes increased by 50% and these remain above historical averages.

“Our operating platform withstood the different challenges thrown at us over this period and we were able to ensure the continued safety of our clients’ assets, trade settlement, redemption payments to investors and unit price delivery.” Mr Cameron said. During February, the custodian was pleased to have completed a significant process and technology project, involving the transfer of all its clients to a state-of-the art unit pricing platform. “The increased processing capacity and exception based reporting enabled the teams to quickly identify and explain out of tolerance movements across the 10,000 unique securities and 60 markets our clients Funds invest in.”

Technology played a significant part in ensuring the custodian and its clients could continue with business as usual. BNP Paribas had already implemented digital checklists for many of its processes, which Mr Cameron said helped during the working from home period.

“As part of a previous operational risk review, we already had a number of controls in place to. reduce the reliance on having a reviewer and preparer in the same location.”

Luc Renard, BNP Paribas Head of Financial Intermediaries and Digital Transformation for Asia Pacific, said COVID-19 has accelerated a number of initiatives that were already underway.

BNP Paribas also focused on deploying digital solutions to enable clients to better communicate while maintaining the same level of risk management.

“For example, we had clients who relied on call-back procedures after receiving a fax. These clients had to find alternative ways of communicating while staff were working from home. To assist, we immediately deployed Symphony chatrooms for a number of clients so they could continue to communicate important information efficiently to their customers.”

“Our virtual assistant was able to record an automated response to clients in 98% of cases. This enabled us to manage a massive spike in demand in a very timely manner so our team could pick up the remaining questions.”

“What this has highlighted is there is a greater need for digital transformation across our industry,” Mr Renard said.

Increased outsourcing activity

Looking to the future, Mr Cameron believes the increase in unemployment seen across the globe is likely to impact the savings and spending habits of consumers and will result in further transformation in the financial services industry.

“We believe industry participants will review their business models, and increase their focus on core activities, with a stricter definition of what is ‘core’. We expect to see an increase in outsourcing activity over the next 12 months.”

According to Natalie Floate, BNP Paribas Head of Market and Financial Services for Asia Pacific, the business has already seen an uplift in enquiries from fund managers and asset owners on how to automate or delegate trading functions.

“Many have realised that trading ‘off premises’ is more than an IT challenge, it’s about governance and oversight. This includes time-critical decision making protocols and maintaining a trading culture – for example in trading you sometimes have an error. These are much more difficult to manage when teams are split or not working in the office,” she said.

“As a result, many of our clients are reviewing the complexity involved in trading and are seeking assistance from experts like BNP Paribas to manage the risks involved, whilst exploring what additional flexibility they can gain in terms of not just costs but also time to market, experience, and distribution. And this is important as managing what you do today is one thing, but implementing change when teams are split is another.”

Key lessons from the pandemic

From an investment perspective, Ms Floate said fund managers and investors led a ‘flight to safety’ during the pandemic, increasing cash allocations by up to 30% and reducing equity and fixed income exposures, while increasing hedging activity.

“In essence a lot of things worked the way they were supposed to, and we are now returning to more of a ‘risk on’ mindset. Clients are not just looking at investment opportunities but also at operational and risk opportunities based on the lessons learned from this situation,”

she concluded.

COVID-19 has highlighted the value of being prepared with sound business continuity plans and stress testing them to foresee the worst-case scenarios.

“No matter how much you plan for business interruption, you can guarantee there will be some elements you have not anticipated. This requires the ability to adapt and be flexible, and we have seen that in spades across our industry in recent months,” Mr Cameron said.

He added that despite the challenges thrown at it, the financial services industry in New Zealand and across the globe has proven to be extremely resilient.

“For me one of the biggest successes has been the high level of industry collaboration, which has helped to ensure markets have continued to operate efficiently,” he concluded.

[i] BNP Paribas internal MIS report

[ii] ASX Business Committee report

[iii] Strategic Insight