Cost Of Regulation Top Concern For Financial Services

Author

Dina Medland, Contributor

June 29, 2015

Reducing the cost of regulatory compliance “should be the new U.K. Conservative government’s priority for financial services.”

This view is attributed to firms in most financial services sub-sectors–including banking, building societies and life insurance, as recorded by a survey just published by the Confederation of Business Industry (CBI), the U.K. business lobbying group–and PwC.

Rain Newton-Smith, CBI Director of Economics, said: “Demand for financial services continues to strengthen, with profits holding up and employment showing signs of an improving trend. But the cost of regulation and tax uncertainty are a top concern for firms across the sector.”

But there is little in the survey to elaborate on another fact it also records: expected growth in IT investment among the same business community is “the weakest in a year and a half.”

At a time when U.K. regulators are trying to come to grips with changing an industry to ensure culture change, and prevent the worst behavior of the last financial crisis from recurring, this call to “reduce the cost of compliance” seems extraordinary. That sense of disbelief is extended when one notes that banks, in particular, keep getting away with the fact that they have neglected investment in their IT infrastructure, which ultimately means that their customers are vulnerable.

A mentality of departmental silos (IT does not talk to strategy and does not talk to CFOs), bureaucratic decision-making, paranoia about the competition preventing collaboration and inherited legacy systems for which no one will now claim responsibility does not sound even a little bit like good corporate governance.

The above link via Reuters to RBS is a 2013 story, you might say.  Here is one from less than 10 days ago. This is a U.K. taxpayer funded bank. The U.K. government has said it is committed to a brave new world of investment in the country’s infrastructure, including IT.

Why is it that the banks have not (to my knowledge) suffered the ignominy of being taken publicly to task for such a basic neglect of corporate duty in the boardroom? While litigation costs for misconduct might just concentrate the mind on future behavior, there appears to have been no attempt to tabulate external costs of IT neglect.

As part of its Conversations on Leadership, the global executive search firm and boardroom consultancy Egon Zehnder just published Making The Future Now: How Financial Services Firms Can Adapt To a Customer-Centric World.

It begins: “The financial services industry has been able to survive on incremental change because the industry has existed in a walled garden, often protected by regulatory considerations and the scale of its key players.”

“Until now, there have been technology-driven developments in financial services such as online banking and more streamlined ways of conducting business, but these ultimately have been incremental, cosmetic improvements” says the Egon Zehnder paper. It does focus more on digital improvement rather than basic IT infrastructure, but it provides that rare thing: true thought leadership.

“Financial services firms are notorious for the silo-ed nature of their data systems, as well as for their large-scale back-office technology operations. In today’s environment, this combination represents an unacceptable impediment and organizations need to evolve to a model where business lines and the technology that supports them work together in an agile manner” says Egon Zehnder.

The need for business agility is essential to better corporate governance, and that is not restricted to financial services.

A study just released in the United States says there are “significant gaps in cybersecurity knowledge, shared visibility and mutual trust between those who serve on an organization’s board of directors and IT professionals.”

“These gaps between those responsible for corporate and cyber governance and those responsible for the day-to-day defense against threats could have damaging impacts on organizations’ cybersecurity posture, leaving them more vulnerable to attack and breaches: says Defining The Gap: The Cybersecurity Governance Survey, conducted by the Ponemon Institute and commissioned by Fidelis Cybersecurity.

It suggests cybersecurity is a critical issue for boards, “but many members lack the necessary knowledge to properly address the challenges.” They are even “unaware when breaches occur”, the survey concludes.

“Further widening the gap, IT security professionals lack confidence in the board’s understanding of the cyber risks their organizations face, leading to a breakdown of trust and communication between the two groups” it says.

Ah – trust and communication – as Shakespeare’s Hamlet might have said “ay, there’s the rub.”

On  the continuing debate in the U.K. on ‘low productivity’  in financial services and insurance, today’s CBI/PwC survey release says: “Banks and life insurers said an increase in “non-productive” activities, such as regulatory compliance, was the most important explanation of this trend, whereas securities traders blamed ‘labour hoarding.’”

Noteworthy statistics from the release: profits in the sector grew at their strongest rate (+61%) since March 2011(+62%), marketing spend in financial services expected to ramp up +58% (highest since March 2011 at +67%) .

But just look at IT – investment there is expected to increase +38%, “but at the slowest pace since December 2013, when it was also +38%.

Does this amount to progress when it comes to corporate governance and the financial services sector?

If not, one wonders if big business should be lobbying for less regulation, just yet.

Also on Forbes:

The 10 Best Financial Services Institutions To Work For Right Now

This article was written by Dina Medland from Forbes and was legally licensed through the NewsCred publisher network.


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