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Future Proofing Your Business From Regulatory Change

By 23 November 2014November 8th, 2022No Comments

One of the fundamental pillars of financial markets working is consumer confidence in the integrity of systems and participants. Without this confidence, there is a lack of participants, it has for capital to be raised or traded and confidence in markets and the systems can be dented – we may remember  what happened to the credit market in 2008 due to the discovery of the in-transparent nature of credit default swaps, leading to a ‘run of the banks’ in some parts of the world.

In July, I introduced on the blog the concept of the ‘Social Regulator’ and how the industry is reforming – not only in response to regulation, which is largely reactionary, but also through leading indicator of how business models should develop is relation to what is reasonably acceptable to both consumers and public opinion generally (who are increasingly being championed by the media in the face of high profile advice scandals).

The latest validation of this thinking in Australia is the defeat of widely anticipated watering down of Future of Financial Advice (FoFA) laws in the Senate, which means Financial advisers must now fully comply with Labor’s original version of FOFA. With the ammunition of recent scandals still very much in the papers and social consciousness, Labor, the Greens and four crossbenchers, argued the Coalition’s proposed changes would leave investors vulnerable to a future financial collapse.

It means that on balance, the politicians believe that the fundamental pillar of confidence, which is so necessary in properly functioning financial markets, is broken. In the case of CBA and Macquarie, despite the vast resources of these institutions, if they cannot be trusted to act in the public’s best interest in the pursuit of profits, how can anybody argue something isn’t broken here?

Some anecdotes being prescribed for the industry point to more training, regulation and red tape, and some, such as a public register of advisers, are an attempt by the industry to appear more professional and transparent.  Our views are that whilst a step forward, these seem more like a band-aid solution when what is really needed is a fundamental rethink.

For firms trying to decide on a winning business model going forward, the environment may appear stifling, with FOFA still around and FSI and who knows whatever else around the corner. This creates a dilemma in many financial advice organisations in terms of how can I achieve the right balance of compliance and business competitiveness? The trend at the moment is to hire more compliance staff (at the expense of advisers and other revenue generating headcount) and commit to ‘higher training and professionalism standards’. With margins in financial services already compressing fast, the last thing advice businesses need are more non-revenue generating costs.

Financial Simplicity believe compliance cost blowouts are first and foremost a cultural problem – not necessarily at the organisational level but rather at the industry level – and to improve compliance requires taking a step back and considering compliance in sometimes completely different ways.

If compliance frameworks exist to regulate and monitor the quality of advice provided to clients, but are largely administered manually through compliance teams, documentation and training programmes, this becomes a non-scalable and expensive solution, that will most likely have some holes in it’s approach. The compliance effort is also a product of the organisational culture and leadership, and pressure to produce results can also see compliance pushed to the bottom draw.

Rather, Financial Simplicity views compliance as a fundamental embedded part of a firms operating model (ie EVERYTHING IS COMPLIANT) rather than a framework that is imposed on top with costly checking resources.. And because everyone else is so pre-occupied by keeping their compliance frameworks up to date, those with compliance embedded into their operating model, operate at a competitive advantage, with resources directed towards client and revenue generating activities.

Financial Simplicity has, for more than a decade enabled embedded portfolio and investments compliance to be automated and systemised in our clients’ businesses, to the extent that they don’t even have dedicated compliance resources or think about compliance in terms of explicit costs or periodic audits – they just know it is all OK. It is embedded directly into their revenue generating advice activities and often taken for granted as compliance is an ‘outcome’ that is systematically applied through automated and technologically-driven processing.

If you are currently concerned about how to ‘future proof’ your business and revenue against future regulation, it may be time to talk to Financial Simplicity about how we can radically reduce your compliance costs while positioning your business for growth.

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

More posts by Stuart Holdsworth

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