This article was written by Neeta Mundra, Banking and Financial Services Executive at Salesforce and entrepreneur with experience in scaling start-ups, technology disruption, large-scale transformation programmes and transparency in financial services. Neeta is also on the board of Young Women’s Trust (UK), on the committee of Women in Banking and Finance (Heading the Women on Boards program), Transparency Task Force and a mentor with the Cherie Blair Foundation.
As we mark the 10th anniversary of Lehman Brothers collapse, the aftereffects of that debacle are felt even today. About $1.4 trillion in annual economic output will never be recovered, and that is in US alone. Today as we stand, we all realise trust and confidence in financial institutions is important to keep the economy stable. It is crucial to understand the financial services value chain and the role played by each link in the chain - the financial services organisations, counter-parties, asset management companies, pension funds, insurance companies, regulators, etc. and the impact of their actions and decisions on the end consumer.
The lessons and effects of the 2008 crisis are all well known. The entire financial system was so loose that it could not detect the building risks leading to banks building on debt with little equity which they could not cover up during crisis thus resulting in banks being bailed out at taxpayers ('consumers') expenses.
Post the crisis, fast forward last 10 years, many financial institutions were either merged or nationalised, resulting in big becoming bigger. The risks are still concentrated in a handful of large institutions - market makers. The risk and challenge that looms now is that the big banks are too big to be saved by government and central banks if there were a financial crisis again. Some of the points to ponder on are: Is there a high level of confidence in financial services industry today? How often are consumers risked with lower returns on investment? How often is the blame put on economic conditions, market volatility and so on, instead of lack of duty of care? Is the global financial system as exposed and vulnerable as it was in 2007? I do agree regulators are making attempts to address these issues with new regulations to avoid the crisis, but should regulators also look at how the reg-debt is increasing in the financial services industry over the years?
While profitability is of importance for financial institutions to survive, it is equally important to ensure better models and technologies to improve: operational costs, risk awareness, data governance, ability to compute price and returns on investment, better interaction with regulators and consumers - thus protecting consumers’ interests. However, this not entirely happening, and hence new regulations are being imposed on financial services to ensure that public interest objectives are met and to address the information imbalance across the value chain between providers and consumers. To meet generally strict timelines, financial organisations land up complying to regulations to just avoid penalties which at times could lead to more patchy fixes to their platforms, often as a tick-in-the-box activity to meet compliance deadlines. However, ever increasing regulations addressed badly or only partly through an ever increasing series of piecemeal solutions without a unified model will only lead to mounting reg-debt or regtech-debt (as it is steadily building up in financial services today) resulting in inefficiencies like poor governance, inefficient policies, controls, poor data quality, lack of traceability.
There are indeed challenges in keeping up with new regulations and changes to existing regulations, but with challenge comes opportunity. This is the opportunity for financial organisations to look at how compliance can be managed more innovatively and effectively. Innovative technology based solutions should be employed to enable financial institutions to keep up with latest developments in regulations. Technology can also be applied to provide information in different forms for various management levels, financial reporting, regulatory and consumer selling purposes. Smooth and consistent information and data flow across the value chain is important for the success of any industry. Aspects of the financial services industry are difficult to understand however transparency of information is of key importance for the survival and success- in turn enabling better control and visibility on future risks.