LUẬN văn THẠC sĩ (KINH tế) is government regulation perceived to be a barrier to IT innovation in the finance sector

ListofTablesandIllustrations...5 Acknowledgements...6 Abstract...7 Introduction...9 BackgroundandDefinition...9 Aim andObjectives...10 Approach...11 Organisation...11 Scope andLimitation

IsGovernmentRegulationPerceivedto

beaBarriertoITInnovationintheFinanceSector?

Author:EdwardKellyStudent#: 1553371MBA(InformationSystems)DublinBusinessSchool/

LiverpoolJohnMoore’sUniversitySeptember2012

ListofTablesandIllustrations 5

Acknowledgements 6

Abstract 7

Introduction 9

BackgroundandDefinition 9

Aim andObjectives 10

Approach 11

Organisation 11

Scope andLimitationsofResearch 12

MajorContributions of theStudy 12

LiteratureReview 14

CommonFacilitators/SourcesandBarrierstoInnovation 14

TheDifficultiesinMeasuringInnovationWithintheBankingSector 15

Sarbanes-Oxley(SOx) 17

MiFID 19

TheEuropeanDataProtectionDirective 21

TheDodd-FrankAct 22

TheEU CookieDirective 26

TheBankSecrecyAct(BSA) 27

BaselI,II&III 29

ResearchMethodologyand Methods 32

ResearchPhilosophy 34

Positivism 34

Interpretivism 35

Realism 35

ResearchApproach 35

Deductive 36

Inductive 36

ResearchStrategy 37

ResearchChoice 38

Mono Method 38

MultipleMethods 38

MixedMethods 39

TimeHorizons 39

DataCollectionandAnalysis 39

PrimaryDataCollection 40

EthicalIssues 41

DataAnalysisandFindings 43

WhatchallengesdoITinthefinancesectorfaceinordertomeetwithcompliancerequirements? 44

Thecomplexityandlackofclarityof regulatorylegislation 44

Dataquality,integrityandclassification 47

Howdo meetingcompliance requirementseffectIT’soveralloperatingbudget? 49

Howdo meetingcompliance requirementseffectIT’smanpowerresourcesandabilitytos u p p o r t emergingprojects? 51

HowdoITandfinancialorganisationsasawholebenefitas aresultof regulatorycompliance? .53

HowdoITandfinancialorganisationsasawholesufferasaresultofregulatorycompliance? .56

Whatlevelofsupportisthere availabletoITin financialorganisationstounderstandandenactcomplexregulatoryrequirements? 58

Whatlevelofsupportisavailabletocompliance/operationalrisk to understand thetechnologicalaspectsofvariousregulations? 60

Whataspectsof thecurrentcompliance/regulatorystructurecouldbechangedtofacilitateITi n n o v a t i o n i n t h e financesector,withoutofcourseimpactingthe integrityoftheselaws? 61

Tightermanagementofregulationswithinorganisationsandamorecompliancefriendlyculture 61

Aconsultativesectionwithin regulatorybodies toactas apoint ofcontactforindustryt e c h n o l o g y issues 62

Amore refined,globalisedregulatorystructure 63

Conclusions 65

Recommendationsfor FutureResearch 70

Self-ReflectiononOwnLearningandPerformance 71

KeySkillAreasDeveloped DuringMBA 74

InterpersonalSkills 74

CriticalSkills 75

PersonalManagementSkills 75

ResearchandInvestigativeSkills 76

DevelopmentofLearningStyle 76

Conclusion 79

Bibliography 81

AppendixI 86

Interview1: 86

Interview2: 97

Interview3: 105

Interview4: 113

Interview5: 120

Interview6: 128

ThereisnoamountofthanksthatcanrepaythepatienceandsupportofmywifeJeanandmys o n Brianw h o gaveup 2 yearso f eveningsandweekendst o getm e t o t h e f i n i s h l i n e oft hi s master’sdegree

Ialsooweadebttothe lecturersofDublin businessschoolwhoprovidedmewith thecriticalt o o l

s t o n o t o n l y completethisdissertationbut toadvanceinmycareeraswell

Finallyparticul ar t h a n k s m u s t got o PatrickO ’ C a l l a g hanw h o s u p e r v i s e d t h i s dissertationandprovidedinvaluableadviceandguidance

Theintentionofthisdissertationwasto

explorethefinancialregulatoryenvironmentandanalyzewhetherornotitcreatesasuitableecosystemforthe fosteringofITinnovation TheliteraturesuggestedthatITexperiencedagreatdealdifficultyindeliveringinnovativesolutionstobusinessrequirementswithalargeproportionoftheirbudgetaryandmanpowerresourcestiedupi n meetingr e g u l a t o r y requirementsandd e a l i n g w i t h a varietyo

f auditorsb o t h internalandexternal.Furthermoretheliteratureindicatedthatthehighlevelofcomplexityofregulationsaswellastheir ambiguityandsometimesconflictingrequirementsmeantthatforITdealingwithregulationsinacoherentandefficientmannerwasdifficult.Allofthisseemedtole

manner.Ontheotherhandtheliteraturealsosuggestedthattherewassomebenefitandcompetitiveedgeforfinancialorganizationstomeetregulationsfasterorbetterthancompetitors

budgetaryandmanpowerconstraintsalludedt o i n t h e literaturem a y n o t m e asp r o n o u n c e d o r c

r i p p l i n g ast h e y m i g h t seem.WhilethereisagreatcosttothebusinessforregulatorycompliancethiscostlieswiththebusinesslinewhichneedstoenacttheregulationnotwithIT.WhileITmightenactthesolutiont h e y billoutthe costinternally tothe relevantbusiness line.The questionis alsopos

ed inthe researchastowhetherthereisarequirementforITtoinnovateatall.Whilethereiscertainlyarequirementf o r t he m t o s u p p o r t i n n o v a t i v e s o l u t i o n s developedbythebusinessf o r cu st om

e rs t h e regulatory environmentisnot

conducivetonon-standardorboutiquesolutions whichhavet h e potentialtoincreaseoperationalrisk and inturnregulatoryscrutiny.Havingsaid

thismuchoft h e researchdoessupporttheconclusionsmadeintheliteraturewithIThavingdifficulty

understandingcomplexr e g u l a t o r y requirementsanda l a c k ofs u p p o r t f r o m b o t h internalandexternalsourcesto do so.

Whiletherei s c e r t a i n l y a requirementf o r i n n o v a t i o n i n t h e finances e c t o r asi n anyo

t h e r i n d u s t r y theenvironmentisquitehostiletochangeorheterogeneityofanykind.ThisleavesITw i t h a v e r y challengingtask

isIT.IfyoulookatPortersvaluechainitcanb e seent h a t t e c h n o l o g y developmenti s a s u p p o r t functiont h a t haslinkagest o allo f t h e p r i m a r y valueadding activi ties (Johnson etal.,2011: p.98).Whether t he i n n o v a t i o n within anorganisationisR&D/productbasedorprocessbasedITwillplayavitalrolein drivingit.

IntermsofsupportingR&DinnovationITcansupplymanytoolstoaidinthedesignandtestingo f newproducts.ForexampleComputerAidedDesign(CAD)hasgivencompaniestheabilitytocreatevirtualprototypesfor

testing,speedinguptheR&Dphaseformanyproductsandallowingm o r e precisetechnicaldesignsdo

wn to thenanometrescale

IntermsofsupportingbusinessprocessesinnovationITcanhelporganisationstocreaterobustprocessesbyamalgamatingallofthedatainacompanyinacoherentmannerandhelptomakeprocessescommonacrosslargeglobalorganisationsbysupplyingcommonplatformswithglobalcommunication(Callon,1996: p 119)

n t h e businessworlds h o w i n g h o w i n n o v a t i v e ITs o l u t i o n s havegones o farast o bringcompaniestobankruptcy(Davenport,1998)soitstandstoreasonthatsuchahighlyriskaversesectorasb a n

k i n g w o u l d b e ca ut io us whenitc o m e s t o i n n o v a t i o n FurthermoreJ o h n s o n etal

(2011:p 3 6 ) suggestt h a t a n y o r g a n i s a t i o n w i t h a greatdealo f rulesandregulationsw i l

o a d d valuethroughi n n o v a t i o n t o t h e s e firms.A f t e r a n a l y s i n g t h e keyargumentsf o

r andagainstIT’sa b i l i t y t o i n n o v a t e ands t i l l s u p p o r t a financeo r g a n i s a t i o n s compliancestructureintheliteraturereviewthekeyobjectiveoftheprimaryresearchwithinthedissertationwillbetounderstandifthesetheoriesstandupintherealworld.Itisimportanttounderstandifthestakeholdersinthis argument– ITandcompliance/

operationalriskmanagersfeeltheoperationalconstraintscausedbygovernmentregulationalludedtointhetheory,andift h e y thinkthatthesuggestedsolutionstotheseconstraintsareactionableandcouldinfactexisti n t h e wild

Asm o s t m a j o r financiali n s t i t u t i o n s acto n t h e g l o b a l stagetheycanbesubjectt o regulationsi

m p o s e d inavarietyofstatesregardlessofwheretheirparentcompanyoperates.Becauseofthist h e regulationsexaminedin thisdocumentwillnotbenarrowedto thoseofanyspecificcountry

Thecontento f t h i s dissertationw i l l b e presentedi n asclearcuta f a s h i o n asp o s s i b l e T h e literaturereviewanddataanalysiswillbeclearlydemarcatedwithonefollowingclearlyonfromt h e other

Thereareseveralvariableswhichwilllimit theusefulnessof the dissertationsresearch

Firstlylimitedavailabilityofresearchsubjectspreventstheuseofquantitativeresearch,becauseo f thistoalargedegreetheresultsoftheresearchissubjectivetotheinterviewees.Theauthorhasendeavouredtogetabalancedcross-

sectionofstakeholderstobalancetheargumentbutalargergroupofsubjectswouldhavebeen

preferable inordertoweedoutindividualbias

Secondly,asw i l l becomeclearlateri n t h i s documentt h e subjecto f governmentregulationi s q u i t e

a p o l a r i s i n g i s s u e i n t h e finances e c t o r T h i s meanst h a t gettinga n accurateandh o n e s t answeroutofinterviewparticipantsmaybedifficult.Furthermorebecausetheresearchisaboutt h e subject’sperceptionsanswerswillbedifficulttoverify.Whiletheauthorhasgonesomewayt o mitigatingthisbyguaranteeingintervieweeanonymityitisstillsomethingreadersshouldbeawareofwhenreviewing thedissertation

Finallythereislimitedtimeandresourcesavailabletotheauthor.Thishasforcedsomecompromisestobemade intermsofhowresearchiscarriedout

Despitetheselimitationstheauthorhopestocreateausefulpieceofresearchopeningthedoorf o rotherstofurtheranalyseacomplexandoftenpolitically chargedsubjectwhichhasagreatdealo f impacto n t h e financese ct or andi s o f greatconcernto allb a n k s fromt h e boardleveldownwards

MajorContributionsoftheStudy

ThelinchpinofthisdissertationisthefindingsofNESTAaformerUKgovernmentbodywhichprovideayardstickagainstwhichinnovationinfinancialorganisationscanbemeasured.Aswillb e expandeduponlaterinthisdocumentthetraditionalmethodsformeasuringinnovationwould

showbankingasquitealowinnovationsector.Without theframeworkprovidedbyNESTAitw o

u l d notbepossibletoquantifygovernmentregulationsimpactonITinnovationinbankingastherewould benoclearmeasureof thesectorsinnovation output

RecentworkbyJoeTiddandJohnBessantonthebroadsubjectoforganisationalinnovationaswellasmajorcontributorstothefieldsuchasJosephSchumpeterwhilenotregularlyreferencedi n t h i s documentc o n t r i b u t e d greatlytot h e a u t h o r s u n d e r s t a n d i n g o f in no va ti on , i t s impacto n organisationsanditskeyinfluencein thecontinuedprosperityof anyfirm

CommonFacilitators/SourcesandBarrierstoInnovation

BeforefocusingonITinthefinancesectortherearefacilitatorsandbarrierstoinnovationwhicharecommonacrossavarietyofsectors.Itwillbeusefultoidentifytheseandlaterdiscusshowgovernmentregulationaffectsthemforbetter orworse

Commonbarrierstoinnovationinclude:financialaversiontorisktaking,lackoforganisationale x

p e r t i s e , r i s k aversion,businessinfrastructure/

administration(bureaucracy)andp o o r communications(Nečadová& Scholleová,2011).M a n y o f t

h e s e barriershavebecomem o r e pronouncedduringthecurrenteconomicdownturnparticularlyinthefinancesector.Companiesaremoreinclinedto ‘sit’oncapitalratherthaninvestitinprojectswhichmaynotguaranteeareturn.Alsocompaniesthatmayhavebeenrisktakersinthepastbuthavebeen‘burned’byaneconomicdownturnt e n d t o worktoavoidbeing damageda g a i n Having seent

he failuresandbankruptciesofcompetitorstheyfocuson avoidingthe samefate(Yorton,2006)

TiddandBessant(2009,p.131)suggestthattheinfluencesthatstifleinnovationcomefromtheorganisationse n v i r o n m e n t a l factorsandp e r p e t u a t e a culturel a c k i n g i n i n n o v a t i o n T h e y

l i s t s o m e o f t h e s e factorsas:dominanceofr e s t r i c t i v e verticalrelationships,

poorlateralcommunications,t o p

-d o w n -dictatesan-dformalrestricte-dvehiclesf o r change.A l l o f t h e s e arecommonaspectsofalargebanksorganisationalenvironment.Organisationalhierarchyisusuallylargeandcomplexw i t h m a j o r decisionsalwaysmanagedfromt h e t o p oft he house.Differentbusinesslinesareusuallysiloedandunwillingorinsomecases(becauseofregulatoryrequirementss u c h asC h i n e s e W a l l rules)unablet oshareinformation.A n d f i n a l l y changei s alwaysmanagedin a veryformalandrestrictivemanner

Overcomingthesebarriersandfacilitatinginnovationwouldrequireahugeculturalshiftwithina n

y established financialorganisation

Thisleadso n t o t h e q u e s t i o n o f whethercompaniesaslargeandu n w i e l d y astoday’sm a j o r financialinstitutionscanenactthatkindofchange.HannanandFreeman(1984)intheirstructuralinertiatheorysuggestthatthereareavarietyoffactors(bothinternalandexternal)thataffectafirm’sabilitytoenactchange.Theprimarycontributorstostructuralinertiaareafirmss i z e andage.A s a f i r m developsovert i m e andincreasesi n s i z e i t becomesfurtherinstitutionalised,formalisedandinflexible.Becauseofthismorematurecompaniestendtohaved i f f i c u l t y e n a c t i n g changep a r t i c u l a r l y whe

nt h i s changeneedst o h a p p e n q u i c k l y i n t i m e s o f environmentalturbulencesuchasthat oftherecent bankingcrises

TheDifficultiesinMeasuringInnovationWithintheBankingSector

InordertoclearlyidentifywhatwouldbeabarriertoITinnovationinthebankingsectoritwillbeimportantto identifywhatkind ofinnovation iscarriedoutbyITinthatsector

MostmajorstudiesgearedtowardsmeasuringinnovationsuchastheFrascatiManual(OECDa,2 0 0 2) andtheOsloManual(OECDb,2005)oftentakeR&Dinputsandoutputstoasametricforinnovation.T h e FrascatimanualdefinesR&Dasworktowardscreatingandusingknowledgeto‘devisenewapplications’(OECDa,2002:p.30).This suggeststwothings,firstt h a t R&Disintentionalworktowardstheresolution ofacleargoalandsecond thatsomething measurablew i l l b e c r e

a t e d fromi t whethert h a t i s knowledgeo r a newproduct,processo r service

Usingthismetric whenlooking atinnovationin the bankingsectorwould however beproblematic.T h e NationalEndowmentf o r Science,T e c h n o l o g y andt h e Arts(NESTA)

(formerlyanindependentnon-departmentalgovernmentbodyintheUKbutnowfunctioningasregisteredcharitywithendowmentsfromtheUKnationallotteryfollowingthedissolutionofav a r i e t y ofquasiautonomousnon-governmentorganisations(QUANGOs)anda d v i s o r y b o d i e s d u e toUKgovernmentalbudgetaryrestraintsinApril2012)reportedtheR&DspendintheUKbankingsectorfor

2005/2006tobe£705mGBPwhichisanR&Dintensityofjust0.9%.TheyinfactsuggestthattheonlyreasonthisfigurewaspickedupatallwasbecauseofnewEuropeanr e p o r t i n g standardsthatrequiredamorecleardisclosureofR&Dspendinannualaccountsrathert h a n a n y validityintheFrascatiManualsmetrics(NESTA,2007)

Despitetheseapparentlowindicatorsforinnovationthebankingsectorisknowntobeprofitable(Lloydsbankinggrouppostedapre-

taxprofitof£2,212mGBPin2010(LloydsBankingGroup,2010))andifasstatedearlierinnovation

theremustb e innovationcarriedoutinthebankingsectorwhichtheestablishedmetricsarenotcapturing.N E S T A (2007)suggeststhatmuchofthe‘hidden’innovationthatoccursinthebankingsectorisbasedaroundinnovation inbackofficeprocessessuchascashtransfersandloanmanagement,t h

i s processi n n o v a t i o n i s howeveru s u a l l y s u p p o r t e d bytechnology.O f t e n t h i s t e c h n o l o

g y i s developedbyexternalv e n d o r s s o w h i l e i t mightb e s u p p o r t i n g ani n n o v a t i v e processandt h e bankw o u l d c e r t a i n l y h a v e s p e n t a greatdealo f m o n e y purchasingandimplementingit,t h e s p e n d wouldnotbeconsideredanR&DorinnovationinputbytheFrascatiManualsstandards.T h i s shortfallingintheFrascatiManualsframeworkisalsonotedbyMiles(2007)whosuggestst

h a t a greatdeal of innovationoccursoutside itsdefinitionofR&D