Brexit - Project Innovation?
11 July 2016
Brexit could accelerate innovation in pensions market but we need to get open data standards agreed first explains Adrian Boulding, Retirement Strategy Director at Dunstan Thomas
As the financial markets are being buffeted in the wake of the dramatic ‘Brexit’ referendum vote it is easy to feel concerned, even despondent. It is fair to say that the vote went against the wishes of many in the financial services market. Indeed, early market falls were deepened by the fact that the City had priced in a Remain win which failed to materialise. However for the pensions, investments and financial advice world, I’ve identified a potential silver lining. Let me explain.
Moving faster, innovating more outside EU
Most of our financial services regulation today emanates from EU. The latest wave to hit us includes Solvency II, MiFID II (Market in Financial Instruments Directive) and PRIPS (Packaged Retail Investment Products). Now we have an opportunity to re-write some of this regulation in a way that better suits UK consumers and the market that serves them.
We have a once in a lifetime chance to fashion the way our industry operates and, in particular, to open the door to more rapid adoption of new innovation. After all, why is it that over recent years other industries have seen innovative players such as Amazon, Apple, Netflix and Uber emerge; whilst some of our pensions and long-term savings institutions are behaving much as they have for the last 100 years?
An unpleasant side effect of the EU’s 50,000 ‘Eurocrats’ controlling our market, has been that we can only move at the pace of the slowest. And when there are 28 member states at the negotiating table, complexity, delay and inadequate compromise is inevitable.
Let’s take Digital Identification or Electronic Identification and trust Services (eIDS) as an example: Creating a Digital Single Market has been on the EU’s agenda for many years. However, applying an EU-wide digital ID scheme which works in specific markets like financial services still has a long way to go – aspects of it finally reached green paper stage earlier this year. In the future, we could potentially move much faster.
For example, in India the majority of the population are already registered on the national iris recognition scheme already. They don't even let absence of electricity grid infrastructure get in their way over there. Indian life assurance salespeople carry battery-powered iris scanners so they can sell in the remote regions that are still without any reliable form of mains power. There is a digital ID project underway in the UK, and now we are going it alone it should accelerate and rapidly deliver the enormous savings we are expecting from it, to the long-term benefit of UK consumers.
Underlying the development of a range of initiatives like digital ID, pension dashboard, faster transfers and improved fund settlement, are adoption of open data standards to enable rapid movement of relevant authorisation data, followed immediately by asset transfers if appropriate. It's like saying that our computers will all speak English to each other.
If you scan across to other markets, common to the acceleration of innovation is wider adoption of new technologies. Common to wider adoption of new technology is facilitation of integration between systems by using commonly agreed data standards. For example in the physical security world some eight years ago five visionary security systems manufacturers, including the likes of Axis Communications, Bosch and Sony, created ONVIF (Open Network Video Interface Forum). Pretty soon after they were joined by all key vendors around the world as the market sought to accelerate a nascent migration from traditional proprietary, analogue-based CCTV systems to open Internet Protocol (IP)-based video systems.
Today ONVIF boasts 39 full members and 382 associate members globally. There is no doubt that ONVIF’s work in creating open standards for transmission of data has accelerated the adoption of IP video but also enabled faster integration between cameras and other IT systems from door controllers to HR systems. The results are very positive as end-users can now do far more with their surveillance systems than they ever could before, return on investment comes much faster driving up adoption. The market is innovating rapidly and has a much more global outlook. It is also less fragmented and is growing faster than it used to.
In the UK pensions world, it’s proved tougher to agree open data standards to date. When I talk to the different groups claiming to be operating open standards they seem to disagree over whether a standard is open if you have to pay a subscription, use a proprietary messaging service, or if the commercial service provider is also the body maintaining the open standards. Perhaps one good example of what can be achieved is TISA’s open transfer initiative for ISA and pensions transfers. This framework consists of open standards from the UK Funds Market Practice Group. Dunstan Thomas is a member of TISA, but there aren’t many such exemplars out there in our market to date that we could have quoted.
However, I believe Brexit gives us an opportunity to finally create a single independent body that will be responsible for creating and maintaining all the open standards for UK financial services, an ONVIF for our market! Once open standards for data and asset movement have been agreed and implemented, we might be surprised how much faster we can deliver new innovations as greater competitiveness and more players enter the market.
Simultaneously, consumer communications on pensions policies must go digital. Moving illustrations and reviews documentation onto email and web portals, viewable via smart mobile devices will not just save money but unleash a wave of latent FinTech talent to serve our industry.
There are talented programmers and designers that could transform the dry old benefit statements designed for a pre-digital age, into new, exciting and highly interactive financial learning and planning experiences. I've talked to a lot of companies about benefit statements over the last year, and I know some are making real progress in this area. But an example of the sort of frustrations they experience was highlighted by one who had created a really slick website for pension scheme communications, only to have it parked by their compliance team. The conversation went something like this:
Compliance Manager: "Does your new slick website let you see which members have actually looked at their online statements?"
Marketing: "Yes I'm sure we could ask it for that MI (Management Information)"
Compliance Manager: "Then do so, and for anyone that hasn't looked at the electronic version you must now send them out a paper version as well"
While we are writing new regulations, we need a presumption of electronic communication from the regulators so that compliance teams don't fall into this sort of belt and braces approach. Other sectors have already adopted soft copy as the default, with hard copy only going to those that opt in (often paying more for hard copy statements to reflect costs of producing and posting all that paper).
A good example of that is the Annual Report that a listed business has to send its shareholders. Often they are so large that the paper ones could injure the proverbial cat sat underneath the letterbox, but that huge wastage of print and paper has been largely eliminated by the presumption of electronic messaging and eReports. Glossy hard copy annual reports are only sent to those that demand them.
Tightening cyber security
But for digital communications to be successful it also needs to be trusted and to be trusted it needs to be delivered in a highly secure manner. New regulation should promote, or maybe even mandate, modern methods of data sharing that can reduce the risk of unwanted third parties getting access to personal data they shouldn’t.
Instead of sending data, which is now rather old fashioned, our industry should consider the concept of ‘exposing’ data. Here, the only data that is actually sent is what is called ‘metadata’ and contains only non-controversial items like field widths and alpha-numeric formatting. Then the holder of data can expose it to the recipient, so that the recipient can see it and use it, for example in a pension dashboard.
But the recipient has no need to store the data, and whatever was seen when it was exposed is no longer visible when the connection is closed at the end of the session. Security is massively improved by not sending and storing data as if the recipient is hacked after the end of the session, there isn’t any customer data there to be stolen!
Obviously it will take a while for the new path forward to become clear. The UK needs a new Prime Minister and the process of separating ourselves from the rest of the EU can’t start in earnest until Article 50 of the Lisbon treaty has been triggered. But it will involve a large amount of re-jigging of financial services legislation, so it makes sense to have a vision of what we would like our new world to look like. And I’d like it to be technology and innovation-friendly, encouraging new and more effective forms of communication, and using the latest secure, yet open data standards. That would indeed be a vital silver lining in the Brexit cloud for this market.
Adrian Boulding is Retirement Strategy Director at Dunstan Thomas
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