Between the lines: 'Innovation' still vital to future of financial services

Published on Wednesday 2 September 2009 21:05

A YEAR after global banking's worst week in living memory, can any of us use the word "innovation" in relation to financial services without a wry smirk or an embarrassed shrug?

It is not easy, believe me. I have accepted on behalf of the industry the fact that some types of innovation led to chaos in the markets and serious damage to institutions. The impact is being felt by the taxpayer, the wider economy and by people working in those companies. But we cannot allow our views of that quite narrow and rarified activity to stifle support for "good" innovation.

Right now, the debate is raging over the best ways to learn from the crisis, and the best forms of interaction between governments, regulators and companies. The added challenge is in attempting to tie domestic decisions into international operations, so that legislative changes in one country still work at EU or global level in what is perhaps the most international of all industries.

Some of these regulatory and industry changes are happening quite quickly, while others will take years to work through. But all of these changes require innovation. Not the kind that produced financial instruments so impenetrable that the basic requirements of price discovery and risk management were compromised, but the kind that will help the industry recover and rebuilt its reputation for prudence and reliability.

In Scotland, we have understandably taken a hit, like every other global financial centre. But we are seeing clear signs that people are looking to the future and coming to terms with the immediate past.

One innovation I see is the link between our financial services companies and the increasingly impressive academic network in Scotland that is focusing on financial services. The University of Edinburgh's business and economics school introduced an MSc in finance and investment in 2004, a course which is now well established and massively over-subscribed. Professor Nick Oliver, who is head of the school, cites the value of being on the doorstep of a major financial community as a key reason for this success.

Heriot-Watt University has created a centre of excellence in financial risk and actuarial modelling and this year launches its own MSc in quantitative risk management. Napier and Strathclyde universities also focus on financial services.

Growing links between our world-renowned academic institutions and our financial services industry can only be beneficial, bringing academic insight to the industry, and high quality entrants to our companies. If we get it right, a deeper relationship between our universities and our industry could give Scotland an international competitive advantage.

Another example of good, or at least improving, innovation is in communications. Prior to the financial crisis, much of the industry's view of communication had been understandably very focused on shareholder contact, fixed reporting schedules and dialogue with specialist media. A number of senior industry executives have recently conceded that this meant that when things went wrong, they did not have the systems or thinking in place to handle the onslaught of external interest and the hugely increased demand for information that came their way.

That is changing, and many in financial services are now demonstrating innovation in the way they invite external interest, and in the way they seek to communicate with clarity, and with a wider range of audiences.

Product development is another obvious area for innovation – it always has been and always will be an industry priority. Just scanning the newspapers in the office, I see reports of new products for the mortgage market in the UK and the creation of funds to attract investors in uncertain times.

Scottish Financial Enterprise's commitment to innovation in our industry is demonstrated most clearly by our annual Innovators Awards, in association with Ernst & Young. Indeed, the 2009 awards are open for entries right now, and I'd encourage any financial services company in Scotland to find out more on our website at www.sfe.org.uk

Of course, innovation is also taking place in the sphere of regulation, and rightly so. Lord Turner's questioning of the wider value to society of some parts of our industry is not new in historical terms but it is a novelty in our time.

And the draft European Union directive on alternative fund managers is innovative in one sense, in that it seeks to use one legislative vehicle with ill-defined objectives to tackle a range of too loosely connected issues, many of them already covered in the existing corpus of EU legislation. It is a good example of 'bad' innovation.

So, innovation is vital to our industry's future, at all sorts of levels. The great trick is to make as much of it as possible 'good' and as little as possible 'bad'.

&#149 Owen Kelly is chief executive of Scottish Financial Enterprise