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The coronavirus has taken a heavy toll on the nation’s health and pockets, with a global economic contraction of 9.8% being reported in 2020. Incredibly, this was actually better than the initial forecast of 10.2%, as the green shoots of recovery first emerged towards the end of the year.
However, many of the financial and fiscal challenges that plagued businesses in 2020 remain in place, with the lucrative financial services sector no exception to this rule.
But what are the key challenges facing financial service providers in 2021, and how can they look to overcome them?
Bank Lending Reaches Tipping Point
It’s thought that the total stock of bank lending to businesses closed 2020 at £493 billion, with this representing an 11% year-on-year increase due to a Covid-19-inspired spike in borrowing.
This creates a dual-pronged issue within the financial services space, both in terms of the banking sector’s exposure to risk and individual company’s increased reliance on borrowing. From a banking perspective, total business loan losses are forecast to rise from 0.4% in 2020 to 0.5% this year, which is a significant sum when you consider the increased rate of borrowing.
Banks are therefore likely to review their lending criteria in line with the rapidly evolving economic climate, in order to safeguard their capital and minimise losses over time.
From the perspective of businesses, firms may need to be more creative in terms of how they fund their operations, while also leveraging any financial assistance or grants provided by government agencies (where applicable).
Declining Consumer Credit
According to most estimates, consumer credit levels declined in 2020, falling by around 5.6% overall. This was the single biggest depreciation since 2011, when the world remained in the grip of the last financial crisis.
What’s more, only modest growth of 0.5% is projected in this space through 2021, suggesting that consumer confidence and spending levels are likely to plunge even as the global economy begins to recover from the coronavirus.
This is a significant challenge for the financial services sector to overcome, both from the perspective of private lenders and businesses that rely on optimised customer spending levels.
However, private businesses can look to incentivise spending by developing a deeper understanding of their customers and recognising the challenges that they face, while working alongside the public sector to promote confidence in the economy and the medium-term recovery.
The Rise of Legal and Professional Negligence Claims
The outlook for the professional indemnity insurance market remains incredibly uncertain, with businesses facing more litigation challenges and negligence claims as national recessions loom.
From medical negligence claims to those pertaining to financial advice that may have been provided during the recent lockdown, the financial services sector and its operators could face the prospect of making significant payouts through 2021 and beyond.
Fortunately, this is a relatively easy challenge to overcome, as companies can take out more rigorous and tailored professional indemnity policies that provide adequate protection across the board.
This is particularly crucial for financial services firms that offer actionable advice to their clients, from financial advisors to mortgage brokers.