Reform vs. Innovation: Opening the Right Doors
April 13, 2010
As the financial service regulation debate marches on, a seemingly missed opportunity is the restructuring and refocusing of the regulators and the multiple agencies they run.
Due to Obama Administration and Congressional priority and focus, the principle of “too big to fail” –driven by the interconnectedness of financial firms -- could lead to an economy where a company could be “too small to succeed.”
The loser could be business innovation. For many practical reasons, the focus of the current regulatory agencies is on the large Wall Street firms and their impact on the economy. But the unintended consequence comes at the expense of financial innovation and enabling new ideas, products and services into the marketplace.
As a result of the scrutiny and threats levied against Wall Street firms over the past year, a significant amount of talent has left traditional Wall Street firms. This talent pool has found homes in small, more nimble start-ups and is devising innovative ideas to promote within the financial services market. Their ideas represent a significant force that will drive adoption of more efficient technology and operational practices, these innovations can help change the industry as a whole.
The benefits will be greater transparency amongst participants about what they are doing and whether they have the capital to conduct business as pledged. There will also be better utilization of information, greater efficiency within the industry helping to lower costs, and ways of building and using networks of people never before imagined.
But innovations inevitably require engagement with regulatory agencies. The “too big to fail” discussion could stifle business innovation. New ideas will be kept on the shelf until the regulating agencies have time to devote to them.
Understanding that the regulatory agencies have limited resources, here are some suggestions that will allow self-funding for the initiative to pay greater attention to the changing face of the financial services industry.
- Pay more attention to the data needed to evaluate how companies are governed. This is foundational to the agencies’ ability to understand what is going on at the firms they oversee.
- Leverage the existing data to identify systemic risk within the large Wall Street firms. This will help preclude failure among big firms. This means employing better surveillance of the data already collected.
- Create a small business review team. There are many new market entrants with innovative ideas trying to gain access to the regulatory agencies radar. Create a way to kickstart these ideas.
Clearly the job of the regulating agencies is a complex one and even tougher under the political pressure resulting from the most recent economic crisis and populist agenda.
Collectively though, regulators should be not just protecting the “system” from the bad operators. They should also be opening the doors to the good and innovative.
Jeffrey Wallis is managing partner of SunGard Consulting Services in its Financial Services Practice.
