Friday, March 27, 2009

The Innovator’s Prescription for financial regulators?

The Turner Review criticises “financial innovation of little social value” as a key cause of the financial crisis.

Two newly published books may offer useful insights for financial regulators seeking to support innovation that delivers instead high social and environmental value.

The first is “The Future of Finance: Megatrends beyond the Crisis,” co-authored by futurologist Adjiedj Bakas.

It predicts that the future will be different from the past in ways that go well beyond the current debate.

One of its key megatrends brings together a revival of ethics, an emphasis on health and happiness and new missions for financial services in which “all money is green”. But it goes beyond this.

It thinks that “financial services are going to develop into a creative industry” and mission-critical skills will be those seen today at companies like Google and Apple. And the boundaries of financial services will expand. Banks, insurance companies and pension funds will need to prevent problems from arising and provide solutions rather than only paying out.

Looking at how these trends may interweave provokes intriguing questions. “Who will deliver the most planet-friendly pensions tomorrow – an incumbent or a new entrant?” and “How will the debate on financial regulation affect this?”

Some of the answers may come from the second book – even though it is not about financial services but another “problem industry” – American healthcare provision. The Innovator’s Prescription is by Harvard’s Clayton Christensen. The initial chapter is available online – it is worth a read.

Christensen believes that fundamental change comes from disruptive innovation. This consists of four things - a simplifying technology, a business model innovation, a disruptive value network and finally regulation and/or standards that facilitate change.

He says that regulation needs to facilitate business model innovation in particular. His research shows that, while simplifying technology may come from incumbents, business model innovation is almost always forged by new entrants to the industry.

This suggests to me that future opportunities to deliver financial services in ways that advance sustainable development will depend critically on what emerges from today’s debate on financial regulation.

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