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Regulation: the key to FS Innovation?

Picture the scene - the telephone rings as you close the front door, and you rush to answer it, only to be greeted by a recorded message uttering the immortal words in flat, dreary tones: “Have you been missold PPI in the last 12 months?”. It’s a situation we’re all familiar with and since the Financial Services Authority (FSA) decided to fine a number of high-profile companies for mis-selling Payment Protection Insurance (PPI) several years ago, it seems like an issue that’s never been far from the public consciousness.

Whether it’s through recorded telephone messages or convoluted television adverts, PPI seems to have become a part of the fabric of our everyday lives. By May 2008, 20 million PPI policies existed in the UK alone - a figure that was estimated to increased by as much as seven million per year, in the years that immediately followed. However, surveys also showed that some 40 per cent of PPI policyholders claimed that they were unaware that they even had a policy in in place. This is primarily because customers had been incorrectly profiled, targeted and sold the policy by banks.

But has this also had wider implications beyond customers, and for the industry at large? Today, of course, major banks have set billions aside to compensate customers who have been mis-sold PPI. Despite this, the biggest impact this and other similar scandals have had, could be that it has opened the door for FS companies to innovation.

Historically, financial services companies have erred on the side of extreme conservatism and caution when it comes to embracing new, innovative IT services. In an industry where security and trust are the watchwords, newer technologies such as cloud computing and mobile have been largely eschewed, primarily because of concerns over security and cost. Fast forward ten years or so, and these same companies are falling over themselves to embrace innovation. So what’s changed?

There’s no doubt that the biggest shift has come in the way financial services companies are regulated. The PPI scandals, and others like it, have forced the hands of the authorities who, eager to avoid similar problems have proposed new data protection reforms which all companies must adhere to with the aim of restricting customer profiling. Interestingly, a study conducted earlier this year by the Information Commissioner’s Office found that of 506 UK businesses surveyed, not one was able to accurately describe the proposed reforms.

This means that many in the industry took a belt and braces approach to the problem, by ensuring that teams of third party experts were brought in with a view to regulatory adherence. Whether it’s to produce the detailed reports required by regulators, or to provide simple process management, financial services companies have finally learnt that IT innovation can provide much needed value. As a result, we’ve seen a significant increase in the number of IT outsourcing enagegements in the industry, as well as the number of banks and insurance companies looking to embrace IT innovation. 

Of course, there are a number of other factors also at play here. Increased demand for mobile solutions, demanded by generation Y, as well as an increased willingness from those within the financial services sector to turn to outsourcing specialists in order to try to extract greater efficiencies from legacy IT systems have also played a part. However, it’s also no exaggeration to say that the very reason that these organisations have become so open to exploring these options is that they found themselves caught between a rock and a hard place due to regulatory pressures.

If PPI scandals took a terrible toll in defrauding millions, then it should also be remembered that they are also, indirectly, the reason that many banks have been able to bring new, value-added services to customers. Fast internet banking, mobile bank transfers and payments and similar services have all been introduced as an indirect consequence. It’s been a long road, wih many lessons learnt along the way, but one question remains. Has it really made all of those nuisance PPI recorded calls and bothersome television adverts worthwhile? I’ll let you decide!


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