IFC: What impact has the widespread adoption of technology within financial services industry had on the financial services industry and in particular for traditional ‘offshore’ centres?
Chris Evans: The impact of lower communications and data storage costs has meant that whilst it is often more economical and flexible for the financial services industry to store data ‘out of jurisdiction’ it is not necessarily so secure and may not be fully compliant with local regulations.
The financial services industry generally operates in a competitive environment with a rapid cycle of new products and services and an ever-increasing level of customer expectation. As a result the industry has invested heavily in technology, as it is often the driver for product differentiation in the market. In the ‘offshore’ centres the reliance on technology is even more marked as these centres are typically small island states with very limited human resources. However technology changes have shifted the balance of power from data being inherently secure to it being inherently available. This has had a profound impact on how confidential information is managed and stored.
Some of the OFCs such as Luxembourg, Cayman and Switzerland have strong data retention legislation to ensure that information stays in jurisdiction. This together with some notable examples of customer data being disclosed to unauthorised parties has meant that many OFCs and their financial services sectors have been forced to take information security management more seriously. We are seeing the effect of that as new regulations to deal with this issue are emerging.
IFC: As technology has advanced IFCs have seen their unique selling points (privacy/secrecy in particular) increasingly come under scrutiny – what advantages does technology hold for IFCs, particularly the smaller financial centres?
CE: Technology is a means or a tool and it can be used just as effectively by those wanting transparency as those wanting privacy. In a sense it’s an electronic arms race between the safe makers and the safe breakers. I believe the driving force for the increased level of scrutiny is the change in attitude regarding banking secrecy rather than any specific developments in technology.
Many so-called ‘offshore financial centres’ are adopting a tax neutral approach with increased levels of transparency under international pressure. Smaller jurisdictions are seriously disadvantaged in the global economy as they have very limited natural resources and relatively expensive air and sea links, especially if they are islands as many are. The result is that they have concentrated on financial services (which are less susceptible to costly transport links) as a way of competing. Modern technology and communications can reduce this disadvantage and a few traditional OFCs (such as the Isle of Man and Jersey) have strategies to encourage other economic activities around the digital economy to reduce their reliance on financial services.
IFC: Was the downfall of the tradition of Swiss secrecy and the whole notion of secrecy/privacy ‘offshore’ inevitable with IT advances?
CE: This is a similar issue to the earlier question on other OFCs. The pressure on Switzerland has been building over a period of time as the tolerance of the US and EU countries has been waning. There is little doubt that some of the scandals that have involved whistleblowers within the banks have been helped significantly by developments in technology. Thousands of pages of documents or customer records can be accommodated on a single thumb drive costing a very little. Putting aside the obvious security issues for a second, removing data from a business on such a scale was inconceivable just a few years ago.
IFC: How important is it for all those involved in the financial services industry, back and front of house, to be technically savvy?
CE: The most important things to be ‘savvy’ about are the implications of technology, especially where developments or innovation have the capacity for disrupting the traditional ways of doing business. Smaller businesses have the ability to be agile but often don’t have the access to technical skills and expertise available to bigger organisations. However ‘utility (or cloud) computing’, where technology is delivered as a service, is swinging the balance in favour of smaller businesses again as banks will take a much more conservative approach.
IFC: How is the use of cloud technology likely to affect cross border wealth management business?
CE: Financial services companies tend not to be at the leading edge of adoption of new technologies and cloud computing is no exception to this. Having said that, there is evidence that the financial services community is now adopting cloud but it is interesting to note that the big providers such as Amazon, EC2 and Google do not appear to have been the main beneficiaries. The suggestion is that these types of companies don’t have the appropriate level of focus on the security, regulatory and compliance requirements of the industry. Instead it seems that financial services firms are more attracted to trusted industry specific providers of information security services.
The issue of where data is domiciled is likely to grow rather than diminish in importance in the future and so cloud services providers are going to be under increasing pressure from customers involved in financial services to ensure that their data is held in an appropriate jurisdiction to help with the obvious governance concerns. Businesses that fail to understand the implications of this will be taking big risks.
IFC: Does technology make regulation of the financial services industry easier or more difficult?
CE: Both probably. There’s no doubt that legislation and regulations are written to address behaviours and risks that are current at the time but they can often appear hopelessly outdated as things move on and changes in technology allow activities that couldn’t possibly have been previously anticipated. In that sense the regulators will always be playing catch up. In terms of enforcement and compliance however, technology has given regulators and businesses more sophisticated tools in areas such as data leak prevention and document discovery.
IFC: With the ever increasing financial burdens of regulation in the financial services industry do you think there will be a growth in the sharing of technology between companies to reduce such costs?
CE: Technology sharing is inevitable and is the fundamental basis of cloud computing, which offers subscribers efficiencies and scalability through the economies of scale of shared resources. Risky capital expenditure becomes more easily managed, operating costs are more transparent, disaster mitigation and security are ‘baked in’ to the services and they often improve compliance with governance and regulatory requirements.
Whilst financial services will always adopt a more conservative approach, partly because that is the nature of the business and partly because it is highly regulated, widespread adoption of the cloud is inevitable.
Chris Evans is the CEO of Foreshore, a Channel Islands based Internet services company that provides secure hosting, email and data storage solutions to financial services companies worldwide.