"The world is currently facing a conundrum: on the one
hand, financial innovation is broadly beneficial and is
needed to address many of society's challenges; on the
other, negative outcomes associated with financial
innovation are too serious to ignore," said Giancarlo
Bruno, Senior Director and Head of the Financial Services
Industry, World Economic Forum.
Key findings
- Innovation, almost by definition, introduces uncertainty
- This uncertainty occasionally gives rise to unintentional negative outcomes
- The relationship of the financial services sector to the rest of the economy makes it vital to reduce the likelihood of negative outcomes with widespread consequences
- Unintended consequences or negative outcomes cannot be predicted reliably for individual innovations
- Concerns over possible negative outcomes do not require an entirely new "innovation governance framework," but enhancements to existing governance procedures. This is best done by adapting existing risk management mechanisms and other processes to be more sensitive to the specific contribution of innovation to uncertainty and risk
- "Positive innovation" continues to be necessary. It can provide opportunity in four key areas: financing and growing the private economy; promoting inclusiveness; increasing efficiency, access and the customer experience; and rebalancing risk across sectors of the economy
The report concludes with recommendations to change and enhance existing risk management frameworks and processes in order to minimize their exposure to uncertainty and risk.
"The report takes the position that the primary responsibility for improving the management of financial innovation lies with banks and insurers," said Stefan Lippe, Former Chief Executive Officer, SwissRe and Chair of the Steering Committee, Switzerland. "It provides a taxonomy of potential negative outcomes and recommends initiatives for companies, industry bodies and regulators. For institutions, it recommends improvements to existing enterprise risk management techniques, new product impact assessments, better design of incentives, and enhanced consumer orientation."
"Managing financial innovation is like being in a game where you think you know the odds of success, but you don't really even know the rules. Fortunately, there are some mechanisms available to deal with this challenge," said Peter Carroll, Partner at Oliver Wyman, USA.
Recommendations for banks and insurers
- Review and adapt enterprise risk management (ERM) to address the incremental risks and uncertainties introduced by financial innovation, starting with careful, step-by-step re-evaluation of the ways in which risks are enumerated, measured and managed and with specific emphasis on assessing the ways in which innovation introduces uncertainty
- Revisit new product development approval processes to address the idiosyncrasies of financial innovation properly
- Redesign incentives to provide the right motivation
- Recommit and refocus innovation efforts to be customer oriented
Recommendations for regulators
- Acknowledge the importance of innovation and its role in a competitive, free market structure and thereby in a pro-competitive market place
- Strengthen systemic risk oversight in light of the incremental risks and uncertainties introduced by financial innovation
- Collaborate with the industry to monitor and oversee its efforts in managing innovation risks to drive sustainable financial innovation
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