Financial services firms are facing a pressing need to modernise their operating models to remain competitive and deliver on their strategy in a post-COVID environment. They are simultaneously being required by regulators to enhance their operational resilience.

Deloitte’s EMEA Centre for Regulatory Strategy has published a new report, Resilience by Design: Financial services operating models and operational resilience. Below we discuss some of the key themes contained in this report.

There will be a growing need for operating model re-design in a post-COVID world  

The recent regulatory push into financial services operational resilience is the closest regulators have yet come to scrutinising how a firm designs its internal operations. It is also a regulatory initiative that has rapidly gained momentum around the world as regulators become more alert to the risk that operational disruptions could pose just as significant a threat to the stability and soundness of the sector as financial ones.

Given all of this, firms are having to learn to live with continuous and rising regulatory scrutiny of the resilience of their operations. Financial services operating models will have to adapt to this reality.

Firms’ operating models will also need to respond to new trends in the business environment as countries emerge from the COVID-19 pandemic. They cannot simply go back to the status quo ante operating models of early 2020.

An updated operating model design will have to reflect changing customer and employee preferences, location strategies, new technologies and economic imperatives that have emerged in the last year.

Firms should integrate an operational resilience mindset into operating model design 

We believe that financial services firms must consider the business pressures of a post-COVID operating environment and the regulatory push for operational resilience hand-in-hand. Each will have significant implications for how a firm should design its target operating model.

The report we have published sets out our approach to the financial services operating model and the challenges and opportunities that we see operational resilience posing for it. We propose three principles for how senior leadership can instil an operational resilience mindset into firm-wide operating model design:

  1. Taking a consistent group-wide approach to integrating an operational resilience mindset into operating model design;
  2. Prioritising action on operating model design using impact tolerances; and, 
  3. Using gradually more sophisticated testing methods to refine operating model design choices. 

Firms should do this to improve their understanding of how the regulatory agenda will affect operating model design over the course of its implementation, and to identify ways to build ‘resilience by design’ into their operations as they evolve. Ideally, firms should use their work on operational resilience as a catalyst for revamping their operating model.

Action can be prioritised according to likely regulatory attention 

At the heart of the regulatory agenda is for firms to have a better understanding of how their operations would be affected by a ‘severe but plausible’ disruption and to take action to enhance the resilience of their most important or critical services in the face of such a threat.

Not all of a firm’s operations will receive the same scrutiny from regulators. The UK approach to operational resilience is built on the principle that regulators will focus on those operations that are necessary to deliver business services that are important to external stakeholders such as clients, counterparties or the financial market as a whole. The emerging global approach, as best represented by the Basel Committee on Banking Supervision’s (BCBS) March 2021 Principles, is equally clear that regulators and firms should prioritise the resilience of critical operations.

Even though the resilience of all operations is important, this regulatory prioritisation exercise will allow firms to understand better where putting resilience considerations first in their operating model design will have the maximum benefit.

Firms need to build ‘resilience by design’ into their operating models 

The operating models of financial services firms were in a state of almost constant flux in the years leading up to COVID-19 due to a plethora of technological and regulatory developments. Since the pandemic, firms have had to modify their operations in order to cope with on-and-off restrictions on social and economic life and have put many change programmes on hold. As these restrictions recede, the demand to upgrade and refine operating models will return quickly. But with that will come the risk that these upgrades will not be suited to a world with significantly more regulatory involvement in financial services operational resilience.

We believe now is the right time for firms to take a longer view and consider what the operational resilience agenda means for their target operating model in four to five years’ time. This will necessarily reveal some trade-offs between their desired operating model (based on a purely commercial rationale) and one that will stand up to regulatory scrutiny. Identifying these tensions early will contribute to a more stable and sustainable operating model over time. Firms that can demonstrate to regulators that they have incorporated ‘resilience by design’ into any changes to the operations that support their important services will reduce the likelihood of regulatory intervention (such as formal reviews leading to ex-post remediation) and the potential reputational damage that could come with it.

Achieving and maintaining the confidence of regulators, shareholders, customers and other stakeholders through proven resilience in the face of financial stress is already a well recognised competitive advantage for firms in the aftermath of the Great Financial Crisis. It is entirely reasonable to expect that, with the growth of new operational threats to the stability and functioning of the financial sector, a similar competitive advantage will arise more and more for firms that can demonstrate effective operational resilience.

You can read more of our views on this strategically significant subject in our new report: Resilience by Design: Financial services operating models and operational resilience.