‘At a time when technology is rewriting international financial services, we need to ask how policy is best placed to manage this process and ensure it reduces inequality and creates inclusive growth’
Greg Medcraft, Director of the OECD Directorate for Financial and Enterprise Affairs addressing the OECD Global Parliamentary Network, hosted by the UK All Parliamentary Party Group (APPG) on Inclusive Growth at Parliament, London, 5 April 2018
Inclusive growth requires long-term investment in people, places and industries. Across the world by 2020, $111 trillion will be under management by financial institutions. This places the Financial Services (FS) industry in an amazing position to impact positive social and economic outcomes. It also means it can no longer be just about diversifying risk, FS organisations must also play a role in managing systematic risk.
As is increasingly acknowledged, the rising risks of inequality are one of the critical motivating factors driving FS companies to play a greater part in supporting inclusive growth. Speaking on behalf of the OECD, Greg Medcraft explored three key shifts – trust, digitalisation and globalisation – that are hugely affecting FS businesses and how they might work together with policymakers.
The 2018 Edelman Trust Barometer Financial Services Sector study revealed that only 54% of consumers trust FS organisations to do the right thing. The current levels of dissatisfaction are unsustainable because trust is a fundamental pillar of the FS business model and more must be done to rebuild it. In particular, this will involve rethinking the approach to lawmaking and the importance of effective communication around FS. Business has a critical role to play, but governments can also support this.
Historically we have seen that business culture cannot be regulated by law alone, the power and pressure of customers and investors is a vital check. This is why when it comes to FS governments and businesses must work together.
So what role can policymakers play?
- Consumer protection – policy has to respond more quickly to changes such as new technology, to protect consumers from potential harm whilst supporting growth and innovation. This is at the core of the work of the G20/OECD Taskforce on Financial Consumer Protection.
- Financial literacy – Last year a G20/OECD INFE report revealed the poor levels of adult financial literacy globally, less than half of us understand simple topics such as compound interest. Government can support FS here by providing guidance on digital best practice and influencing curricula but business has a role to play in the education of both customers and wider society. Much could be achieved by using simple and clear language in product sheets, as well as encouraging this topic in schools and offering accessible explanatory information online.
The development of digital services and new technology offers huge opportunities for the expansion of financial inclusion. For example, nearly universal mobile use is already having huge impacts on how FS are delivered to the most marginalised communities. For example, the adoption of mPesa in Kenya means 80% of the country’s economy now flows through mobile money and this is allowing businesses to develop new FS products in the region.
Alongside this, burgeoning technologies such as AI, blockchain and cybersecurity offer new opportunities for inclusivity but may also exacerbate the growing concern around data privacy. The use of big data and AI means companies will be able to grow their customer base globally and also better meet their needs. However, this must be alongside financial education and helping consumers understand their rights and ensuring organisations meet their data privacy responsibilities. AI also offers exciting developments in this area with new products such as Robot Financial Advisers making high quality, regulated advice on services such as pensions more widely available. Blockchain technology offers new international business models and a huge opportunity for the development of inclusive growth. It also presents exciting challenges to the FS industry such as disintermediated peer-to-peer models allowing for informal lending within social groups; such competition will underline the need for financial organisations to build trust and add value to their services.
Government also has a part to play in the management of digitalisation, in both law and best practice, as well as ensuring regulatory bodies function effectively. For example, the development of blockchain could enable governance to adapt, with its possibilities for complete traceability and security. In particular, there will be a need to rethink antitrust laws to ensure that markets work effectively. This has been particularly evident in dominant market powers driving down competition such as web giants Google and Tencent. Going forward, as we are already beginning to see, this kind of regulation will only function effectively if it is international.
At the same time as technology is re-writing international FS principles across the world, it is necessary to consider how policy is best placed to manage this and ensure it benefits individuals, creates inclusive growth and reduces inequality.
As FS organisations look to move into new markets and services – supported by rapidly developing technology – these global opportunities have the potential to deliver growth that is more inclusive than ever before but the international nature of this development also presents challenges.
For policymakers, lawyers and regulators it is clear that globalisation of services necessitates better exchange of information and improved measures to prevent issues such as fraud, tax avoidance and money laundering. However, this is all predicated on international agreements and information sharing, which needs agreement at a government level, as well as best practice endorsed by business. Fundamentally there is a need for legal certainty for business and consumers.
What is next?
Medcraft concluded by sharing the recent work of the OECD in this area, in particular, the role it played in restoring some trust to the financial industry after the financial crisis by developing and updating key global standards, including:
- the G20/OECD Principles on Corporate Governance; and
- the G20 High Level Principles of Consumer Protection.
He reiterated that bad practice has simply become too big a risk, and the impact of consumer opinion is amplified by the 24hr news culture and social media. As an OECD Business and Financial Outlook study found last year, a business’s social score – its capacity to generate trust and loyalty with its workforce, customers and society – had an overwhelmingly positive effect on return on equity and return on assets.
Going forward, he said, business culture is not something that can be regulated by law. But Government does have a role to play, in particular in the areas of international regulation with the opportunity to foster good corporate governance – which leads to good culture and conduct. However, he made clear that FS companies have a significant part to play here as businesses, as investors, and as beneficiaries of the positive financial outcomes of inclusive growth.
Find out more about working with A Blueprint for Better Business here or download our paper on ‘How can purpose-led businesses contribute to inclusive growth and how can policymakers help them?’