The Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
Last week the Financial Conduct Authority (FCA) released its 2014 Risk Outlook. High on the agenda was technology risk.
As we have talked about before on this blog, discussions of technology risk in a regulated context often bring to light the uneasy tension between technology and the law. The law almost always proves to be unable to keep up and effectively deal with the opportunities that innovative technologies present.
But as businesses look to move transactions and processes away from traditional person-to-person or paper means to online, there is a clear need to re-establish trust in the engagement process. Whenever we speak to our clients about online engagement, we find that they almost invariably will apply greater levels of rigour and attention to a process or a means of engagement once a decision has been made to move it online. Unfairly, it always seems to me that online is regarded as being inherently more risky than a broadly equivalent offline process.
So for businesses in the financial services sector looking to innovate in response to technology change – that is, quickly, the FCA's Risk Outlook is to some extent a step in the right direction. In its Risk Outlook the FCA points out the growing importance of digital technologies in satisfying consumer demand.
"Interactions can be quicker, less costly, simpler and more efficient, improving the functioning of markets", the report says. "Consumers are able to source products with more ease and gain access to new channels for advice and information", it adds.
It even acknowledges that many consumers are being driven to use online financial services forums, searching for guidance to help them better understand financial products. Technology is likely to lead to some products, for example, self-invested personal pensions (SIPPs), appealing to a "wider range of consumers", the report also suggests.
But the messages the regulator's report gives are mixed. While it acknowledges the importance of innovation, those looking to innovate quickly may get the feeling that the light is amber rather than green.
The FCA highlights two general risks associated with execution-only platforms: "There may be products and services that are unsuitable for execution only purchase"; and, there is also a need to "prevent consumers from making impulsive or ill-informed decisions, due to more direct, more frequent and faster interaction with financial services, particularly through execution only sales".
It also stresses that consumers need to gain a clear "understanding of the limitations and risks associated with online platforms". It warns against increased use of data insights and of "information asymmetries between providers and consumers" becoming more pronounced as a result.
It touches on the need for updated rules in drawing the distinction between financial advice and guided self-help. Its handbook will need to be updated it said to "support good business conduct" and to ensure "that the controls in place and use of technology supports our objectives". In general "operational controls and oversight arrangements will need to improve in line with technological changes".
While these are all realistic risks of which organisations should be aware, those operating within the financial services sector are not helped by statements that are only general in nature. Direct-to-consumer (D2C) platforms contemplating expansion for instance, can move no further along on the basis of a vague and general idea that 'some' financial products may not be suitable for direct distribution.
The regulator's cursory look at the importance of social media is also a cause for concern. Businesses currently thinking through the regulatory implications of 'social trading', 'following others' and 'listening to the crowd' must either move forward with little visibility over the risks involved, shelve plans to do so or engage directly with the FCA in respect of the specific propositions they have in mind. Likely the third option is best, but had the regulator given more guidance on the interplay between social media and financial services, a firm's ability to get innovative ideas to market could have been better supported.