Innovation and regulation: compliance is your greatest ally

By 21 September 2020Uncategorized

Innovation and regulation: compliance is your greatest ally

Regulation is often seen as one of innovation’s greatest enemies. And so are people who oversee the rules. In a highly regulated environment such as the financial sector, it would therefore be difficult to innovate. But is that really the case?

My own experience is different: you can certainly innovate in a highly regulated environment. And the people who manage the rules, such as the security officer, the lawyer and the compliance officer, might even be your greatest allies.


The rules don’t apply to us

The biggest mistake you can make is pretending the rules don’t apply to you or hoping that your innovation escapes the attention of the compliance disciplines. There comes a point in the innovation cycle when you find out that regulation does matter. That moment came quite late for the German fintech startup N26. In the same year the company secured 40 million euros in series B funding, security researcher Vincent Haupert discovered major leaks in the N26 app. He could easily manipulate wire transfers and take over bank accounts. According to Haupert user experience had been N26’s only priority until then. Especially for financial services, trust in security is essential. N26 realized this and took measures to improve the security awareness of the company.


Innovation benefits from constraints

Regulations impose requirements on products and services. This limits the possible outcomes of an innovation process. You would therefore think that regulation slows down creativity and innovation. However, a highly regulated environment also has advantages. First, research shows that constraints can be good for innovation. They offer innovation teams focus and a creative challenge. Innovation without constraints leads to laziness and choosing obvious solutions. Second, the rules themselves can be the motive for innovation. An example of this is the “know your customer”-process. In order to combat money laundering, financial institutions must always know with whom they are doing business. To do this, they have to establish the identity of their customers. Several companies have entered this market. They offer innovative solutions to help financial institutions to identify their customers remotely: easy for customers and efficient for the financial institution.


Compliance by design

Most rules have room for interpretation. This allows companies to distinguish themselves by implementing rules in their own unique way. You can only do this if you know the rules very well. This is an essential skill for an innovation team operating in a highly regulated environment.

Therefore, involve the compliance disciplines as early as possible in the innovation project. In any case, involve them when you are deciding about the direction the solution is heading. If regulation is central to the problem you are going to solve, you should involve the compliance disciplines more intensively.

This close involvement in innovation requires a proactive, cooperative attitude from the compliance disciplines. Instead of testing a solution against the rules, they should help define the solution. Finding someone with this mindset is essential for any innovation project. By the way, most lawyers, security officers and compliance employees I worked with find it the most fun.


Avoid these pitfalls

The ‘compliance by design’ approach also has its pitfalls. There is a risk that the innovation project dives into too many details of the regulations too early, which slows down innovation. Therefore, first map out the regulatory assumptions that must be correct to make the innovation idea a success. Then only test the most risky of those assumptions.

Another potential risk is to end up with multiple non-coordinated frameworks of rules you have to comply with. Each compliance discipline has its own rules that sometimes overlap and sometimes contradict each other. Although some rules are specific to an innovation project, you can prevent each project from having to re-analyze the basic ruleset. An innovation program can take this work off your hands.


Embrace the rules

Embracing the rules early is more than a necessary evil. It helps you to focus, protects you from problems later in the innovation cycle and gives the innovation internal legitimacy. Therefore: do not regard the compliance disciplines as the enemy but as an ally in innovation.

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