This article was originally commissioned for the May/June edition of the Actuarial Post.
The forthcoming referendum on Scottish independence is exercising the minds of the great and the good in Westminster. The business community is also weighing in on the arguments and to date has focused on the dangers that might result from a vote for a change in the status quo in either referendum. These include the danger to employment levels and talk of companies pulling out of Scotland in the event that the Scottish people opt for the independence route.
However, not much thought is being given to the operational issues for businesses that will arise if the result is a ‘Yes’. For the financial services sector, in particular, there are likely to be a lot of these due to the fact that an independent Scotland will have to have a different currency, unless the Westminster lobby back down, and the fact that there will be a new financial services regulator in Scotland.
Most multi-national insurance companies operate each country semi-independently with separate infrastructure yet rarely do they have to decide what to do when a region splits asunder, as will be the case if the Scots vote ‘Yes’. This problem is unique to the western world and there is no template of action to follow.
Life and pension companies in the UK have never felt the need to offer different product sets north and south of Hadrian’s wall. This is because the needs of the individuals on both sides of the wall have been generally the same, and identical financial services regulations apply. Post-independence, the needs of the populace will hardly change but the likelihood is that the regulatory environment will transform pretty quickly. A Scottish version of the FCA is unlikely to arrive into office and decide to keep everything the same. If only to justify their budget, we can expect to see substantial amounts of new ‘Scottish’ regulation emerge from the new regulator in the first two years.
This means that new variants of existing financial products will be required for sale north of the border. Will companies be able to respond to this in a cost efficient manner or will they be faced with the choice of either withdrawal from the Scottish market or of installing a completely separate infrastructure that will only handle the Scottish side of the business? (I assume no one will abandon the Rest of the UK (RUK) in order to focus on Scotland based on the disparity in the size of the markets).
In order to have minimal disruption in their operations, companies should be looking now at how they use their systems in order to make products available through a single system that will be fully compliant in whatever market they are operating. This has always been a requirement in large federal jurisdictions like the USA and Canada, where the need to operate across state or provincial borders is a given, and this amount of flexibility in the core business infrastructure is now going to be required for the UK.
The key point here is that the needs of individuals are the same throughout the UK and therefore it is merely the regulations that have to be applied. Older systems used to have both regulatory and product rules hard-coded within them, giving little flexibility for re-use of products in multiple countries. More modern systems see these areas as completely separate. Regulatory rules are held separately from product rules allowing the same product to be sold in a number of different markets by ensuring that the correct regulations are applied to the product during the sales process automatically, depending upon where the product is actually sold.
Life and pension companies need to review their systems to see how well they can cope with operating in a multi-regulatory environment. If they can’t, then serious consideration needs to be given to how the company is going to operate in the event of the ‘Yes’ vote succeeding. Just duplicating the infrastructure to cope with having to operate in two environments is going to seriously increase operational costs yet trying to run both on a single system that is not designed to do so will mean a lot of extra work to duplicate products and code in new regulatory requirements. There will also be an overhead in terms of marketing and brand management as, despite the border, people will still be accessing the same media and therefore two products will mean an increase in the amount of media space that is required.
This is an opportune time for companies to review systems across the organisation and to assess which ones will be impacted by the scenario of dual country operation. Once this is done, a business case can be created to assess the value of moving to a platform that can handle the intricacies of multiple regulatory zones, while allowing the company to focus on single products that will be able to compete in both marketplaces – rather than having a ‘tartan’ version of every product for the Scottish market. This will increase the maintainability of the system and the focus of the brand management can be on a single entity rather than being split across two.
The bright side of this is that it will also empower the company to operate across other national borders, opening up the possibility of selling the same products throughout the EU. So in the event of a ‘No’ vote, the company will have a modern infrastructure that can support more strategic opportunities into the future.
Actuarial Post is an online publication offering actuaries insight into the market, an extensive library, news and the latest job listings. With a dedicated comment section; the most talked about topics in the actuarial market are discussed by actuaries dealing with the issues on a daily basis. Articles focus on the latest trends changes in regulation and the areas of pensions, investment, life and insurance.
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