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Too much change? UK financial services sector strangled by the burden of new regulation

In the aftermath of one of the most turbulent times in the history of Financial Services (FS), organisations are facing more large-scale change than ever before. Sweeping regulatory reforms, complex transformations and pressing demand for speed, efficiency and new models for customer service are piling on the pressure.

In the first survey of its kind, Moorhouse commissioned  research to find out how FS organisations are
dealing with the vast amount of change they are faced with.

More than 130 Board members and their direct reports from a cross-section of Financial Services (FS) organisations were interviewed. Those surveyed were responsible for a total investment of £3.2bn on change transformation portfolios, with an average spend of £31m per annum for each portfolio.  

The Moorhouse 'Too Much Change?' survey exposed some stark revelations and very pertinent messages for FS organisations that will need to continue to adapt to survive.  

The survey revealed that:

  • Senior leaders are not fully committed to the required changes, staff do not have the capability or capacity to deliver it and front line staff cannot cope with the volume of change;
  • More than half of organisations have regular duplication of activity across departments;
  • Only 11% always measure return on investment of their projects, leading to billions of untracked spend;
  • 2 in every 5 projects are Regulatory Change initiatives, yet 40% of organisations are not coping with the volume of regulatory change. This volume is preventing 88% of organisations from proactively addressing other business priorities;
  • it is negatively impacting their competitive advantage and affecting business-as-usual performance;
  • 60% of organisations consider the guidance and support from the regulators as inadequate, and ultimately:
  • Organisations need to significantly change in order to be successful.

The impact of regulatory change

Our survey found that 88% feel regulatory change is preventing their organisation from addressing other urgent business priorities; over half stating significantly. A further 83% feel regulatory change is affecting their ability to deliver day-to-day operations and services and almost half say the regulatory agenda is negatively affecting their competitive advantage. A staggering three quarters of those surveyed felt their organisation would have to change its business model in order to thrive over the next 3-5 years, with almost two-thirds reporting this change would need to be substantial or fundamental.

The research, finds that FS organisations are undertaking an average of 21 major transformation projects at any one time, with an average of 41% of these driven by regulation. Only 4% of FS organisations are coping very well with the amount of regulatory change they are faced with, whereas 40% are not coping well.

FS organisations are left unable to focus on growing their business and responding to the changing market; specifically, respondents singled out cost reduction, business improvement, growth and innovation being sacrificed as resources are focused on meeting the needs of regulatory demands.

Delivering the changes may not be possible

The survey found that Senior FS executives and directors are doubtful that their organisations can manage the changes required with only 12%t believing their organisation has the capability and capacity to deliver the required changes 'to a great extent', and nearly half believing the business does not have the capability at all, or only to a slight extent. 48% of respondents feel that frontline staff are not coping with the changes well.

Only 7% said regulatory change was having a positive effect on their organisation, and it's likely that this minority represent the new market entrants who are in a better position to take advantage of the changed marketplace. Over half expect the pace of regulatory change to increase over the next 3-5 years.

Taking a strategic view

The problem is compounded by the overlapping and piecemeal nature of much of the regulation, especially for organisations operating globally, which are facing legislation from multiple governments. Almost all of the senior level FS respondents in the survey felt that the overall regulatory agenda has not been fully thought-through or is consistent. As a result, just over half of organisations admit to inefficient and wasteful duplication of activity across departments in rolling out new programmes and change.

Less than a quarter of respondents felt that their organisation is capitalising on the strategic opportunity of incorporating other business changes and improvements into their regulatory change programmes.

£1.4bn of unmeasured investment

Over a third of organisations in the survey are not measuring the ongoing performance of change projects and initiatives within their business. Given the huge sums invested in these programmes, the expected benefits must be tracked. With an average programme investment in the research of £31m, this equates to some £1.4bn on unmeasured spend.

Almost a quarter feel the guidance provided by regulating bodies is 'completely inadequate', and just 4 per cent feel it is fully comprehensive. Well over two thirds feel the increase in regulation is forcing them to consider their operations globally.

Coping with the 'perfect storm'

The research identifies four trends to help those leading transformation in FS organisations cope with the 'perfect storm' of regulation and change:

  1. Define and maintain a single strategically aligned portfolio of projects: rather than programmes that tackle the regulatory changes needed and one that helps the business face other market challenges, organisations should adopt a single portfolio of projects that tackle its total business strategy. 
  2. Track, measure and manage portfolio delivery: Given the significant sums invested, tracking the progress of programmes and ensuring the benefits they are expected to deliver are delivered is vital.
  3. Improve the organisation's capability to deliver change: Only just over half (52 per cent) of those reporting into the board felt their leaders have sufficient experience and understanding to successfully manage the change agenda to a fair or great extent. Leaders should champion change and visibly demonstrate the values and behaviours they wish to foster in others. Individuals need to understand how the change they are delivering is aligned to strategy and overarching priorities.
  4. Take proactive steps to shape the future of the industry: Rather than blame regulators for the volume and reach of new legislation, or rely on external guidance to help implement it, organisations have to take the initiative and proactively respond to the needs of both legislation and their customers.

Breaking point

The financial services sector is at breaking point. While there is no doubting the need to tighten the rules governing the industry, the tidal wave of legislation facing organisations is more than they can cope with. They are effectively paralysed; struggling to meet regulatory requirements to avoid fines or penalties, unable to further develop their business and failing to deliver the best service or function. As a result, the UK financial services industry is losing its competitive edge and opening itself up to competition from overseas organisations that are less burdened by regulation, and new market entrants who can more efficiently undertake smaller parts of the traditional functions of larger FS organisations.

Organisations have to accept that further legislation and more regulation will happen. While many organisations feel the guidance and support is not as helpful as it could be, they must pick up the baton and work with regulating bodies to tackle this. They must become so adept at responding to new legislative requirements that they in effect become self-regulating. The key to managing this is seeing mandatory change as an opportunity for broader business improvements and to find new ways of doing things better. Boards must build a culture and way of working in the business that is ready for change and better at managing it. To prosper in what is already a challenging market, they will need to raise their game and respond faster, better, and without sacrificing other improvements to their business – a tough challenge by any yardstick.

For more information and to request a free copy of the 'Too much change?' survey, click here.

© 2012 Moorhouse.

Is the UK's financial services industry in danger of buckling under the pressure to deliver change?

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