The report, which outlines geopolitical risk scenarios and provides guidance for business leaders to prepare strategically and operationally, highlights that "the death of truth and trust" represents a critical challenge for financial services firms.

According to KPMG, financial institutions must navigate an increasing expectation from stakeholders – ranging from government officials to clients – to demonstrate their trustworthiness and commitment to acting in the best interests of their clients and the broader financial system.

It said rebuilding trust, particularly in the wake of the 2019 royal commission, remained a daunting task for the industry.

“Stakeholders – from government officials to customers to employees – expect more and more from financial services firms, and the task of rebuilding trust following the 2019 Royal Commission is arguably still underway,” KPMG said.

Other specific risks are also emerging, it said, including the rising threat of AI-enabled fraud compelling banks and financial firms to invest heavily in protective measures for their customers.

To effectively tackle these challenges, KPMG advised that financial services firms prioritise investing in "trust capital," adding, however, that the legacy of the royal commission has left the industry facing an “uphill battle”.

Additionally, the report emphasised that Australia’s financial services sector faces interconnected challenges driven by climate change, energy, and food security.

As the climate crisis intensifies, firms have been under increasing pressure to disclose and manage the associated financial risks. This, KPMG said, is especially challenging for insurers, with more properties at risk of becoming uninsurable.

Banks and institutional investors must also consider how these risks impact them and their borrowers – companies in industries highly exposed to the physical effects of climate change and the necessary policy changes.

Ultimately, KPMG said successfully navigating this scenario could require revising how macro risks are identified and managed by Australia’s financial services firms.

KPMG also flagged the increasing fragmentation of global markets as a significant challenge for Australia’s financial services sector as nations prioritise national security and insulate themselves from foreign influence, undermining the prospects for truly global markets in capital, insurance, and currencies.

“Australian financial firms have historically been able to access global funding sources during difficult moments in the national economic cycle. As these overseas sources become less accessible, due to the fragmentation outlined above, Australian banks may be less able to help shield the economy from shocks,” said Daniel Knoll, financial services lead at KPMG Australia.