Professions in a pandemic: risks, coping strategies and the future of professions post-COVID
Examining some of the thematic risks which the pandemic has brought to the professionals operating in the built environment and accountancy arenas.
On 23 March 2020 the UK economy and working life as we knew it was effectively shut down in the first of the nation’s lockdowns imposed to slow the rapid spread of COVID-19. In a sense, of all the commercial sectors, professional services had the greatest potential to cope with the lockdown, having already widely embraced basic technologies to enable remote working, data management and effective communication. Indeed, as many commentators, including ourselves, had been saying over the last few years, even in the pre-COVID world it had become absolutely clear that those professional firms which led innovation and embraced technology brought huge opportunities within their grasp, and gave themselves a significant competitive advantage. It had also become accepted that those professional firms which failed to adopt technology, and refused to accept change, were those at most risk of failure in the years to come. In that sense, the COVID lockdowns have not taught us anything we did not already know, but there is no doubt that they have significantly hastened progress.
So, insofar as is relevant to the professions, what of the economic climate in the COVID and immediately post-COVID world in the future? We know that the professions tend to be adversely impacted in times of recession which, generally speaking, leads to higher risks and increased claims. We saw a recession in 2020 and economists now anticipate that becoming a double-dip recession into 2021, but it is not a recession of a sort that we have seen before; it has been created by Government policy in response to COVID, not by the failure of a bank, financial system or collapse in a property market. The normal economic and fiscal rules do not apply and there appears to remain a real likelihood of a sharp bounce-back. Economically, the last 9 months have been very bleak indeed: personal finances, businesses and livelihoods have been wrecked as a result of the pandemic. The property market is now fundamentally uncertain and, although temporarily boosted by the Stamp Duty savings, there are now real concerns over how long that boost will last when the Government’s job support schemes come to an end, leading to significantly higher jobless numbers. And how long will it take to rebound? How will it rebound? Will we ever return to the pre-COVID economy?
As we embark on another lockdown it is perhaps hard to look too far into the future but, in due course, there will be a rebalancing of the economy and the markets and there will be (and already have been) winners and losers. We have said that those professional practices that embraced technology and flexible working would be the ones which would succeed, with new entrants arguably having a competitive advantage over those which were encumbered by old technology and dated working practices. The importance of being flexible, tech-enabled, and open to change is at the heart of the concept of operational resilience – “the ability of firms and the professional sector as a whole to prevent, adapt, respond to, recover and learn from operational disruptions.” Operational resilience is something that we will come back to.
So what of a recovery? As noted above, the ordinary economic rules do not apply to this recession, as it has been created by Government policy, rather than by any failure in the financial system. With that, it seems that there is cause for optimism. There is huge frustration and pent-up demand and, once the restrictions and fear-factor have lifted (which we now understand will be a gradual process), there seems every reason to be confident that we will see a significant and fast acceleration in economic activity and a fairly steep road back to recovery. And that would be entirely consistent with messaging from the Government and the Bank of England. When it comes, there is good reason to believe that the recovery will be all the stronger for the lessons that we will have learnt over the last few months. But questions will then arise as to whether firms will be able to cope with the workload and new ways of working that a rebound will bring. There are huge opportunities for those who embrace change and technology, manage risk and are open to flexible and innovative ways of working. In that sense, nothing has changed.
In the next part of this insight, we will examine some of the thematic risks which the pandemic has brought to the professional services sector, and take a closer look at specific challenges facing those professionals operating in the built environment and accountancy arenas.
Beyond the immediate financial and practical challenges facing professional firms in simply continuing to practice during the COVID lockdowns, the UK’s professional regulators have, by and large, been commendably proactive in identifying and highlighting particular risks which the pandemic has brought. In this part of the insight, we will look at two general risks that arise across the whole sector, and also certain specific risks affecting particular professions.
First, as to the more general risks arising across the professional services sector, a number of regulators have highlighted (i) the increased incidence of fraud, and (ii) the concept of operational resilience/risk. Taking fraud first, there have been widely reported concerns around a huge increase in fraud and cyber-attacks across all sectors, with specific warnings being sounded by the ICAEW, RICS and FCA, among others. This increase in attacks has escalated as organisations of all sizes increase their reliance on remote working and online services, and staff and systems are vulnerable and under increasing pressure. A particular theme has emerged of criminals using phishing scams to prey on sensitivities around furlough and redundancy, and exploiting the financial pressures faced by staff. HMRC have received reports of countless scams and frauds relating to the furlough scheme and the Government’s stimulus packages. Beyond the risk of direct criminal attacks such as these, firms also faced fraud-related risks arising, for instance, from the challenges of completing adequate client due diligence and AML checks remotely, certainly in the early days of the lockdown before firms had become fully acclimatised to working remotely.
We touched on the concept of operational resilience earlier in this insight– “the ability of firms to prevent, adapt, respond to, recover and learn from operational disruptions.” Operational risk is effectively the flip side: the risk that a firm will be unable to cope with certain events, as a result of inadequacies in its resources or capabilities. The COVID pandemic has thrown a light on the immense risks resulting from firms which had failed to embrace flexible working and technology, and were forced to adapt very quickly when the first lockdown was announced – the consequences of them not being able to do so was that they would fail their clients and, probably, ultimately themselves fail. In the case of those firms which have proved not to be operationally resilient, it is too early to say what line the regulators will take having regard, for instance, to common regulatory requirements around effective business management, and competent and timely service. We would expect the regulators to be lenient in most cases, but we anticipate that there will be some cases where a firm’s pre-COVID practices, procedures and infrastructure were so wanting that they may be found to have caused or significantly contributed to client and conduct risks which otherwise would have been avoided. The regulators are certainly expected to show an interest in those firms that do fail and firms in difficulty would be well-advised to take advice on mitigating not only their civil liability to clients, but also their exposure to regulatory sanction.
Turning now to some examples of emerging, COVID-related risks touching specific professional sectors.
Taking property professionals and the RICS first, as a preliminary point, it is worth noting that anyone involved with the valuation and sale of real property, including estate agents, will certainly need to be thinking about “material uncertainty” warnings (as advised by the RICS) given the huge uncertainty over the market. With that in mind, it is interesting that we have already seen reports of firms using increasingly sophisticated “Big Data” on property valuations and, although Automated Valuation Models (“AVMs”) have been relatively widely used in generic valuations for some time, it is clear that tech is now capable of providing more sophisticated solutions to new valuation challenges, including those where a physical inspection by a valuer is not possible. Staying with property professionals, but now turning to property managers, this seems to be an area particularly affected by the lockdown with significantly increased risks and challenges to operational resilience. Property managers, who are no doubt still tackling a backlog from the first lockdown, will have been concerned about dilapidations occurring during lockdown and building defects which might not have been rectified sufficiently promptly before causing damage or injury. In addition, property managers will have primary responsibility for making a property COVID-secure, moving people through buildings safely, maintaining new standards of hygiene, installing screens, increasing ventilation and implementing social distancing measures. Still further, given the financial hardship that many business tenants have faced, property managers will have been under pressure to maintain service charge receipts and rental income, with options for eviction and enforcement limited by the emergency COVID legislation, and so they and their landlord clients will be grappling with the requirement to incur significant costs in adapting buildings and adopting new measures, whilst in many cases receiving significantly reduced income. All the while, the sector is continuing to grapple with fire safety in the aftermath of the Grenfell tragedy, and with the new Building Safety Bill looming on the horizon.
In the construction sector, maintaining the supply chain through the pandemic will have been a key challenge (and risk) and there have been real concerns over delays to project programmes where there has been a shortage of materials, limited access to labour, and new challenges presented by social distancing requirements on complex construction sites. Further, it seems to us that there will be even greater challenges in the medium term as those involved in projects and supply chain face significant financial distress and, in many cases, insolvency, and those commissioning new buildings rethink their strategies, questioning the future need for city-centre commercial space.
Moving beyond the built environment, the accountancy sector is another which faces particularly acute challenges now and, we anticipate, in the aftermath of the pandemic. Even in the pre-COVID world, HMRC was continuing to tighten its grip on tax avoidance, imposing increasingly stringent and penetrating rules around avoidance schemes, and seeking to apportion liability to advisers for overly-ambitious schemes. We have already seen multi-party claims against a large number of accountants and tax advisers, arising from their design and promotion of tax avoidance schemes which ultimately proved unacceptable to HMRC. With the very significant demands that have been placed on the public revenue by the pandemic and clear messaging from Government that the burden on tax payers is set to increase, there is now no doubt at all that the tax advisory sector will continue to be challenging, and high risk for any practitioners other than true specialists.
With businesses and individuals facing significant financial stress, and expected high numbers of personal and corporate insolvencies, insolvency practitioners are likely to be kept extremely busy over the coming years and will, themselves, need to show operational resilience in order to cope with the demands of practice in the post-COVID world. In addition, thinking about the financial and solvency stresses which the pandemic has brought, the ICAEW has sounded warnings to auditors as to the risks of conducting remote audits, unable to conduct in-person interviews or inspect hard copy files, thus increasing the risk of errors and omissions in the audit process. These concerns chime closely with recent warnings from the FRC about the risks of auditors being too willing to accept their clients’ word rather than embarking on a close interrogation of the available evidence. Further, as the ICAEW has warned, auditors will need to pay particular care in the consideration of whether businesses will remain a “going concern” once furlough and other stimulus payments have been exhausted and they return to business as usual - there is a strong feeling that whilst many businesses may currently appear solvent, they may quickly fail once short-term loans need to be refinanced, and staff costs revert to pre-lockdown levels. In the meantime, those within the accountancy sector responsible for pay-roll and staff administration will have faced new challenges in implementing the furlough scheme and various other business support measures which were introduced hastily through the lockdown. Of course, in the background, furlough and the Government support schemes were also heavily targeted by fraudsters, and the cyber risk is therefore acute in this sector. Overall in the accountancy sector, professional indemnity underwriters have said that they are increasingly cautious of firms which appear to dabble in a range of activities: instead, insurers seek the reassurance of firms with credible specialisms and adequate resources to ensure good practice and up to date knowledge.
In summary, whilst we have touched in this article on a number of specific sectors within the wider professional services arena, the pandemic has undoubtedly brought new and in many cases significant risks across the board, and those are risks to which firms have had to adapt very quickly. But the key, as ever, is to identify the risks and to manage them - whilst the risks are clear, it is also clear that the professions have, in the main, shown incredible resilience, flexibility and innovation in adapting to a commercial environment which changed dramatically, almost overnight.
In the last part of this insight, we will look at some of the ways in which businesses across the professional services sector have adopted new technologies which have not only enabled them to continue trading, but will undoubtedly permit them to flourish in the post-COVID world.
As a general observation and perhaps a real cause for optimism, it is utterly extraordinary how we, as professionals, have managed to adapt to the challenges of the lockdown, in particular our ability to keep communicating and operating in many cases almost seamlessly when very few organisations had personnel in the office and the world around us had effectively been shut down. Indeed, to many it would have been impossible to imagine, merely nine months ago, that we would now be “meeting” clients, developing business, running client meetings, participating in remote hearings before courts and arbitrators, conducting remote mediations, and delivering podcasts/webinars: and not only that we were doing these things to cope, but that we would do so successfully and flourish as a result. The professional services sector has come on in leaps and bounds in terms of its ability to do business remotely - indeed, we have been so successful in this that we are now questioning the value in expensive city centre real estate, and asking what the future is for traditional commercial hubs.
There is no doubt, however, that our new ways of working remain far from perfect and that in some important respects we are yet to find a good “remote” alternative to being there in person. Particular challenges arise around maintaining staff morale, managing, supervising and training staff, and supporting junior team members. This is the same problem that had already been flagged in the context of the use of Artificial Intelligence in the professions: how to train and develop junior staff if a machine is doing their job, and the question now is how to train and develop staff effectively when the senior professionals responsible for them are miles away, communicating via Zoom? Perhaps there is an irony here in that technology and Artificial Intelligence may need to be deployed to provide an environment for junior professionals to gain hands-on experience.
We need no longer look to the future to understand how technology and innovation will enable us to thrive. Across almost every professional sector we have seen technology deployed to get firms through the pandemic thus far, and propel them sustainably into the post-COVID world. Looking at specific examples, in the construction sector we have seen the development of new scheduling tools to monitor progress on construction projects, keeping them on track and ensuring project-wide, minute by minute communication on progress and programming. The technology not only provides project teams and employers with real time information on progress and delays, it identifies the causes of those delays and draws on big data to benchmark different projects within a portfolio or sector, and track trends over time to predict future programme risks. Similarly, we have seen reports of wearable technology being used on site to facilitate safe working and social distancing, whilst enabling work to continue as productively as possible without undue delay or disruption, despite the lockdown. In projects where, previously, physical presence on a site was necessary to understand its topography, we have seen the increased use of laser scanning technology by surveyors and project managers, as well as by property managers concerned with dilapidations. Further, whilst Automated Valuation Models (“AVMs”) have been in use for some years in generic valuations, the improvements in technology and data analytics has and will undoubtedly continue to allow valuers to produce increasingly sophisticated and accurate valuations in many cases without the need for a physical appraisal of the site in question, and whilst also reducing the risk of fraud. Finally, certainly in the near future, smart buildings will enable property owners and managers to manage a building’s systems and infrastructure remotely, with increasing safety and efficiency. Stepping back, of course, we continue to see advances in the use of technology and automation across the professional services spectrum, often deployed in tandem with increasingly flexible ways of working.
Whilst there is no doubt that the pandemic has been incredibly bleak, indeed ruinous for some, and will continue to be so for a little while to come, there is huge cause for optimism and excitement for the future. So, to conclude, we adopt a quote from the ICAEW which describes the COVID pandemic as “A crisis with a legacy” … “A global pandemic has meant businesses need to rise to the challenges that have developed and find a way forward through the storm. It has also given us the opportunity to press reset and build businesses for a new, more sustainable economy.”