COVID-19 – A Game of Two Halves?
By Nick Andrews
As it comes towards the end of the year, with the Covid pandemic still not having an end in sight, I was asked to write a few words regarding the effect of Covid on the City Financial Sector; that is a tough one to answer in a few lines as it is multi-faceted and complex and therefore can only be observational from my point of view. With my eyes to can only be in respect of those areas that I can see – bear in mind too, that I’m predominantly working from home so even the observational comments are restricted!
A few words though about the people that drive our diverse FS City and, it does feel as if the people are divided into groups, being those with work and those without and then further divided into age categories. I shall explain. Those who are lucky enough to have retained their jobs are actually feeling better off financially – the cost of the commute, the cost of lunches/coffee, clothes, and shoes have all been cut leaving considerably more in the bank account at the end of the month; those without work are undoubtedly in a far worse position with the previous buoyancy in certain sectors of the City being slowed and stifled. The age part comes about as the interactions that we all had in the office environment have disappeared –the junior staff (generally younger) used to be able to feed off the experience via the close proximity to the more mature members of the team; it was easy to listen and contribute to/learn from discussions on certain issues or simply ask questions. Now, it is much harder for them to pick up a phone and ask anything – it takes a true self-starter to do that and it’s not easy. So I fear that a section of that generation is simply not learning and gathering experience and therefore will be less valuable in the future. That is not good for the City as a whole especially as the experienced people are contemplating not returning to offices or, as we are seeing, early retirement.
Offices, now there is another subject. What will the fabric of the City look like in a say the next 15/20 years? A couple of major employers (granted, in Canary Wharf) have publicly announced that home working is the way to go and others are seriously contemplating whether large office blocks with thousands of staff are really the future. It is a question raised at Board meetings as to what the plans are – that tends to then stray into, “what will we do with the building” when a firm knows that only a few dozen key people out of x thousand now need to be in the premises to keep the machines working. Possibly then, some of the blocks will be converted to flats. That of course raises further questions of property values for both commercial and residential property in and around London.
But if turn to real business flows, and I again suggest that this is a tale of two halves (noting that my comments refer to the financial sector that I exist in, and not any other sectors). Some areas suffered greatly, to begin with, with those trading securities, seeing some horrendous capital impact due to initial value write-offs followed by improved trading commissions as some volatility returned. Other areas are seeing absolutely no effect from Covid and are booming – specific areas of fintech and especially the digital asset/crypto sector. London is seen as the place to be for both of those activities and we have seen two new digital exchanges get full regulatory authorization (one in the equity sector the other in the derivative sector). These two together, I would suggest, are the beginning of the game-changers for the securities/investment sectors and will potentially cause a massive disruption in the way the whole City has worked for the past 200 years. Covid did not give rise to them, but the parallel concept of fewer people/greater tech will certainly give them an advantage as they have the ability to remove people and operations from the “traditional” workflows and replace them with technology that can be located anywhere. Their impact on the major existing participants could be phenomenal in a short period of time and make London the center of the digital world (mind you, plenty of others want the same position, and technology can be moved easily…).
It can be seen that the drive for this change in the trading of assets and the potential that gives to increase accessibility and distribution of capital is coming not from the large incumbents, but the small start-ups that are driving change. The large firms have woken up to this and we have seen them making strategic statements and, in some cases, strategic investments. Picking around the edges we have a large US firm as custodian of Bitcoin, another announcing the first digital repo trade being executed today (15th December), and the big custodians having to rethink their model if digital becomes the way forward – and if it does the asset managers will be questioning the costs of administration/custody of their AUM.
In the more traditional business, technology has played a great part in the thinking of Boards, despite that thinking has been forced upon them. Homeworking, which was an alien concept to a good number of firms, is now controllable and monitored in different ways. Yes, it is creating different ways of working, but it is being seen to work well and potentially decreasing costs (office space) whilst changing but not necessarily increasing operational risks.
It may be worth a few words on the cryptocurrency sector as well – we have all heard of Bitcoin but it is going mainstream. It started as students playing/trading/buying it (yes, the two most expensive pizzas in the world in today’s prices, were purchased in 2010 ago for 10,000 bitcoin, current value now making the cost of those pizzas £86million) and in recent months, the big institutions are announcing their intentions in this sector. Were you aware that the first new UK Clearing bank in over 250 years was established in 2018 and is crypto-friendlyrypto friendly and the rest of the world watches it closely? What is this to do with Covid’s impact? – really to say that this whole sector is glowing white-hot in the UK, centred in London, and significant brainpower is coming here, as is an investment into these new businesses and that all supports the other financial services sectors that make up the City. Note that two of the world’s largest cryptocurrency firms are now FCA regulated and therefore potentially drawing others to center in London.
Covid has also focussed the technologists’ minds; there are so many inefficiencies that were taken for granted; machines and the technology that drive them are able to be built and deployed rapidly. We are in the plug and play period for this albeit IT departments in certain firms still haven’t got it. To be able to manage and monitor the rapid homeworking regime that we have adopted since March 2020, firms have demanded and received better quality tech that was previously available or deliverable. I do see this leap has been aided by Covid as social media/video conferencing tools have driven efficiencies in the tech providers.
On the more negative side, it is never good that people lose jobs. But, the financial services sector is cyclical and we all have to keep learning and reinventing ourselves. Brexit is the word that has been used in so many always has strikes fear in anyone being asked or being asked to opine on it. The transitional period ends very soon and as this is written, with an unknown outlook for the City into the EU. This very area has been the topic of so much angst in Boardrooms that Covid has likely not been the main topic of such meetings. Whatever the outcome, Covid coinciding with Brexit has been a double whammy where the effect on the City will not be known for some period of time. I haven’t opined upon the specific areas of the City that have been unduly impacted by Covid, shipping perhaps, but perhaps that be better served in a later piece when Covid and Brexit have passed.
I have drawn very high-level lines between certain specific parts of the City and observed there are two halves in various sectors – I haven’t given you a feeling of what it’s actually like to go back to the office. Again, I can draw that self-same “two halves” parallel – the surreal nature of being able to walk around in London with no traffic (ok, this was a few weeks ago), no fumes, no noise, no people – yet all those small businesses in the City set up to support the offices such as restaurants, shops, bars, etc who may not be there if and when we finally return in numbers. In my view therefore, I think Covid has coincided with Brexit, both of which have provided an opportunity to rethink not only how work is done but also where it is done. With the advancement and greater accessibility of technology overlaying those two issues, are we watching a radical overhaul of the City that can be bigger and better than it was? Who knows, but the opportunity is there!