CIOs are using regulation to create IT innovation in the financial services sector, according to a new report released today (10th May 2011) by Independent IT consultancy, Xantus.

With 57 per cent of CIOs in the financial services sector dedicating more than a third of their annual IT Change budget to regulation-specific IT according to the report, "Compliance versus innovation: Should CIOs have to choose?", almost all (87 per cent) see the looming clouds of regulation as having a silver lining: driving innovation.

In fact, 82 per cent took the regulation opportunity one step further, claiming it assisted them with a business case for a new IT and wider business innovation.

Dave Upton Associate Director at Xantus, said:
"To make real progress, IT departments must become more proactively involved in the process of achieving regulatory compliance. By gaining a more complete and holistic understanding of regulatory requirements, organisations and their IT departments will be able to exploit the measures to their fullest advantage. This relies on an ability to interpret regulatory demands pragmatically as well as literally, and to be able to differentiate between hard, fast 'rules', and more flexible 'guidance'. Many are already doing this with considerable success."

By placing such an emphasis on using regulation for innovation, the report found that organisations are now also expecting a greater return on investment from compliance. In particular, in organisations with a turnover between £1-5bn, three quarters of CIOs expected a positive or strongly positive return. The insurance sector was the most bullish, with 90 per cent expecting a positive return.

However, the good news is that expectations across the financial services sector appear to be realistic - with 67 per cent of CIOs claiming to already see a strongly positive or positive return on investment in regulatory compliance IT projects.

Interpreting risk
According to the Xantus report, the way compliance is viewed by an organisation is vitally important. Those that passively accept everything the regulator is telling them are most at risk of indiscriminately allocating their IT budgets to watertight provisions, thus failing to identify scope to unlock other opportunities at the same time.

Peter Stafford, Director of Technology Services at Nationwide, believes the financial institutions themselves could and should take responsibility for strategic interpretation of what’s required by the regulators. He says: "If we step back, a lot of the regulation is sensible – things either we were doing or should have been doing. It has blown some of the cobwebs away and stops the industry getting complacent. I’d say about 80 per cent is desirable and good practice."

For Jonathan Kennedy Head of IT Service Delivery at Northern Rock, a practical balance is best achieved by building a constructive, three-way relationship and discussion which involves the risk/compliance people, IT and the marketing team. He says: "Full alignment between all parties," should be the aim. He continues: "It is possible to include business benefits in regulatory projects – and vice versa. You must look at the portfolio of work that already exists, which means planning is essential. It’s important to see regulation as part of the overall picture."

Other important findings in the report include:

• 47 per cent of CIOs said better communication of the IT benefits at board level would help their department stimulate innovation, compared to 33 per cent who wanted more money.
• 45 per cent of CIOs state that they have a complete appreciation of compliance requirements.
• 41 per cent believed that other budgetary constraints were the major barriers to IT innovation. Other limiting factors include previous IT innovation failures, lack of board understanding and too much focus on general cost-cutting as further barriers.

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