Rebuilding trust through digital automation

Trust in the financial services industry has been low since the global financial crisis of 2008, but innovative new technologies aimed at regulation and compliance could help restore consumer confidence, writes Adviser Intelligence's Jacqui Henderson.

Damage control does not come cheap, just ask Samsung Electronics president Dongjin Koh.

Mr Koh told press in October this year that the total recall of the inflammable Galaxy Note 7 range - based on reports of just under 50 exploding units of the 2.5 million shipped products - would cost the Korean conglomerate a "heartbreaking amount" - more than $5 billion, the firm later admitted.

But, according to National University of Singapore business school Professor Chang Sea Jin, the multi-billion dollar Note 7 recall cost was worth it.

"The potential damage to reputation is far greater than short-term financial losses," Professor Jin told Bloomberg.

Samsung's relatively quick action to hose down its product fire may save the brand from further tarnish while capping bottom-line costs, however, some reputational repair bills are far less easily contained.

The global financial services industry, for example, has been handed an ever-escalating annual impost following the massive 'brand' damage it suffered during the GFC.

That trust repair expense has mostly been wrapped up in the compliance departments of financial firms around the world, which have expanded along with an increasing stack of regulations.

Australia's 'staggering' 492 per cent regulation boom

In a speech to an Australian fintech gathering this November, Australian Treasurer Scott Morrison put the estimated annual compliance price for the global financial industry at more than US$70 billion.

The price of regulatory compliance and governance software is also set to soar, Mr Morrison said, to US$120 billion by 2020.

"It is estimated that from the 2008 financial crisis through 2015, the annual volume of regulatory publications, changes and announcements increased a staggering 492 per cent," Mr Morrison said.

While the regulation boom may have been an understandable reaction, neither the industry nor consumers would be particularly pleased with the outcomes to date.

Our obsessive-compulsive regulatory disorder has added complexity and expense to most financial services interactions while doing little to restore fundamental public trust in the industry.

So how should we rein in regulatory inflation without popping what remains of the consumer confidence in financial services?

Technology, of course, offers some promising solutions, though to date most of the so-called fintech revolution has been aimed at streamlining or disrupting regular business activities rather than building a coherent, seamless compliance process.

Tellingly, Mr Morrison called for a greater focus on regulation technology - or regtech in the inevitable abbreviated form - to meet this burning need.

"In this digital and online environment regtech can provide enhanced regulatory compliance by building it into an organisation's key business practices and operations," he said in the speech.

Mr Morrison said by adopting an embedded "compliance by design" approach, financial services businesses could use regtech to both lower compliance costs and reduce risks.

"When successfully implemented, 'compliance by design' can increase the confidence of regulators, consumers and the community in the activities and behaviour of Australia's financial institutions," he said.

A regtech revolution for financial planning software

For financial planning software - one of the most-maligned sectors of the broader Australian finance industry - regtech could prove particularly revolutionary.

Yet for that to happen, the advice industry must lift its technology game.

Today's consumers want to access their financial information on their smart phones: everything from tracking their goals, cashflow (spending and savings), portfolio management, banking, mortgage, insurance and advice strategies.

Most of our regulatory compliance systems, however, are built on legacy technology that does not mesh well with the advice process or client-level access points.

We need device-agnostic technology that automatically monitors the suitability, quality and compliance levels of financial advice - a smart statement of advice (SOA) platform built on regtech principles that can check for inconsistencies across multiple parameters without the need for human intervention.

Regtech-backed advice technology has the capability of lowering error rates, potentially eliminating disputes while also improving client protection and their underlying advice experience.

In order to fully achieve these revolutionary goals both industry and regulators must agree on what compliant advice looks like in a regtech world.

If consumers can see their SOA had been 'rated' or 'stamped' as compliant with industry standards, based on thoroughly-tested regtech processes, then perhaps confidence in the advice industry itself might be restored.

Reputation-enhancement, in the long-run, offers a far cheaper solution than damage control.

Jacqui Henderson is the chief executive officer at Adviser Intelligence