Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
Management consultants McKinsey & Co recently played futurologists and published the report Management intuition for the next 50 years, an attempt to provide long-term guidance for strategic thinkers on how they can succeed as technology disruption, shifting geographical markets and ageing populations shape the global economy.
Any prediction half a century ahead is going to attract its fair share of criticism and scepticism. To avoid the worst of both, McKinsey seems to have taken the sensible approach of focusing on broad brushstroke developments rather than specific detail.
One of these in particular stands out to us. McKinsey connects future success with productivity gains and says that "...progress will be uneven because many known productivity solutions depend on effective regulatory regimes and market mechanisms that are far from standard in emerging markets".
In other words, McKinsey says that in the future there will be winners and losers, as global centres of progress and success shift. Where these centres end up, however, will depend in part on which countries, cities and markets are supported by regulatory regimes flexible and agile enough to enable change which is caused by innovation and new technology.
While McKinsey questions the ability of some emerging markets to develop flexible and agile laws, we also question the ability of more developed markets such as the EU, US and Japan, to do the same, if attempts made over the last 50 years are anything to go by.
Software copyright law as an example
Consider for example the regulatory path taken by lawmakers in relation to protecting software. Over the last 50 years lawmakers first in the US and Japan, and later in the EU and elsewhere, have had to choose between relying on existing laws to protect software or inventing new ones.
As early as 1961 copyright had been suggested as a suitable source of protection for software. The problem with copyright law, however, is that it is a legal framework designed to protect musical works and creative literary works such as books and plays. Its rules on who should own a creative work, how long ownership should last for, and how a work can be shared, have all been designed with literary and musical works in mind.
While many other existing laws could also have been used to protect software such as patent laws, trade secret laws, laws against misappropriation and unfair competition rules, another alternative could have been to create a new 'purpose-built' law, designed specifically to meet software's unique attributes. Interestingly, this is exactly what the World Intellectual Property Organisation (WIPO) suggested in the early 1970s, three years after it had been asked by the UN to conduct a study on what should be the appropriate form of legal protection for software.
The conclusion of WIPO's investigation was that while software does involve writing things down – computer code that can be translated into ones and zeros – this written content is very different from a creative literary work.
WIPO published model laws that suggested that software be protected by a unique regulatory framework and that the protection last for a maximum of 25 years, rather than 70 years, which is the minimum standard generally applied across the EU to literary works that vest in corporate entities.
WIPO's reasoning was clear – the protection given to literary works rewards creativity, but on the whole, does not significantly restrict future innovation. On the other hand, while limiting access to software source code may also protect creativity it will hamper future innovation. Software products typically have a short commercial shelf life but encompass lines of code that could be highly useful for a long period to come. The ability to gain access to those lines of code to create new and innovative products needs to be balanced against rewarding the developers for the initial software product in which they were used.
Finding this balance is difficult, but strait-jacketing software with the laws of copyright, designed to protect authors of novels, musicians and painters, has not proved to be a well thought out course with the subject remaining a matter of debate 50 years on.
The next 50 years
My purpose here is not to engage in the debate as to how software should be protected but to highlight that if law makers continue simply to apply old laws to new technologies, there will be significant risks and competitive disadvantages to the cities, countries and markets that are forced to live with them.
There are today's problems – an arrangement to use a public cloud service has elements that are similar to a traditional IT outsourcing, but it also has unique aspects of its own. Laws designed to deal with a traditional outsourcing are not always equipped to address cloud problems.
The obvious example is the requirement under the Markets in Financial Services Directive (MiFID) which gives auditors the right to insist on access to the physical premises on which data are processed for certain outsourcing arrangements. While there may be some benefits to maintaining this requirement in a non-cloud outsourcing, the practicality of applying it to a public cloud arrangement is completely disproportionate to the objective sought to be achieved, which is maintaining effective regulatory oversight over the provision of a third party service. A better approach would be to design regulatory controls that take into account the unique aspects of cloud technologies and the ways in they enable for data to be transferred.
But the cloud auditing issue is by no means an isolated example. Social media networks are communications platforms, but that does not mean that they should be governed by laws designed for telecoms or postal services. Digital currency can be used in place of money, but that doesn't mean that it should be regulated under an identical framework. Search engines process personal data, but requiring them to respond to every request to alter their search results to avoid listing data that relates to an identifiable person undermines the effectiveness of search engines as business, personal and societal tools.
In all of these matters, regulators at an EU level seem to prioritise consumer protection as their main objective. But this should not mean that this objective must be pursued in a rigid way and at the expense of equally important interests. A balance must be struck between protecting individual consumers and establishing rules that benefit all consumers and the overall competitiveness of regional markets. Drafting laws that rigidly insist on the rights of the individual consumer at the expense of enabling innovative ideas to develop has negative overall consequences for the markets and societies in which they apply.
Then there are also tomorrow's problems – driverless cars, DNA storage devices and new applications for artificial intelligence. McKinsey suggests that there are many reasons to believe that current hubs for progress and innovation will be challenged by Tianjin in China, Porto Alegre in Brazil, Kumasi in Ghana and Hsinchu in Taiwan. If these cities choose to develop flexible, agile and specific laws there is good reason to believe that McKinsey's prediction that progress will be uneven will have a greater impact on countries and cities where regulation remains an obstacles to change rather than an enabler of it, no matter what there history has been.