The outlook for Canada’s financial services sector is relatively rosy for the year ahead. This means the sector – and policy-makers – should seize the moment, so they aren’t caught unprepared when conditions change.
Coming off a year marked by heightened geopolitical turmoil and absurd market moves, coupled with inflated Canadian housing markets and household debt levels, the outlook for the coming year is remarkably optimistic. After 10 years spent recovering from the global financial crisis, the world’s economy finally seems to be regaining its stride. This happy fact appears to be keeping some of the large, lurking downside risks at bay.
Nevertheless, the fact remains that although markets can stay out of whack for a surprisingly long time, eventually, the underlying fundamentals cannot be ignored. One way or another, there must be a reckoning for the excesses that build up in various corners of the economy and financial markets. Hopefully, the unwinding will be smooth and gradual, but there’s a good chance that it will be bumpy and painful.
In the meantime, the financial services sector should be taking advantage of the current comfortable conditions to prepare for the inevitable storms to come.
For starters, the sector must prime itself, and its clients, for the reality of rising interest rates. Given the far-reaching damage the global financial crisis has wrought and the prolonged period necessary for recovery, forgetting that interest rates have been remarkably low for an exceptionally long period of time is easy. As interest rates rise, the fallout is sure to be felt throughout both the real economy and financial markets.
Another critical component that must not be overlooked is the reservoir of trust that allows financial markets to function. To date, the sector has resisted reforms that could inspire trust – such as the introduction of explicit, upfront compensation models and the adoption of fiduciary-level conduct standards. By undertaking these improvements while times are good, the sector may be able to avoid the breakdown in trust that pushed the global financial system to the brink of collapse a decade ago.