Wednesday 4 December 2013

Business Model Analysis: the 'C-factor'?

There is fair amount of change happening in financial services regulation in the UK with the creation of new regulators and a new legislative framework.  As Hector Sants warned in 2012, “the changes will not just be structural but involve behavioural shifts from both supervisors and firms.
Amongst all these changes and moves, there seems to be one emerging common factor between the FCA and PRA and between them and the FSA: business model analysis (BMA).  It has a strong overlap with the underlying business strategy.  A BMA has been described as answering six questions:

  1. How does the company create value?
  2. Who does the company create value for?
  3. What is the source of competence?
  4. How does the company competitively position itself?
  5. How does the company make money?
  6. What is the company size ambitions?
A recent speech from Julian Adams, Deputy Head of the PRA and Director of Insurance shows that the supervisor’s interest on BMA is not simply academic: 

“where incumbent firms have suffered competitive pressure in particular business lines, it is not uncommon for such firms to be tempted to increase the level of risk they run to protect their market positions, or ‘diversify’ into other areas in which they may not have the same level of expertise.”

This represents a healthy move away from supervision based on compliance with rules to supervision focused on the business and the underlying risks that arise from the strategy.  The BMA provides then a base line that enables supervisors to understand how trends impact on risk taking or business strategy. 
Given that supervisors have been behind the application of BMA in financial services, BMA remains to a large extent a supervisory tool.  Will it remain so?  Are there potential gains to financial services businesses from undertaking a BMA, even if there is no supervisory visit in the near future? 

I would be interested on your thoughts. 

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