Regulation and Innovation in Leasing

The Essentials of Innovation

Innovation, on the other hand, seems to exemplify the polar opposite of burdensome regulatory requirements. Innovative companies embody enhanced collaboration and employee engagement, not just for their own sake but for the specific purpose of coordinating and promoting achievable objectives. They eschew seemingly unnecessary reporting and burdensome duplication of effort and activity. The essence of innovation in businesses is the establishment of an “architecture of innovation,” in which a culture of creativity and a well-understood system of expectations and rewards are implemented and embraced at every level.

It has been said that innovation in business is based upon the development and clear articulation of strategic options and objectives to which all of those involved are committed. Importantly, innovative companies establish strategic options for what might and should happen rather than focusing on what might not or did not happen. This is in contrast to regulations and compliance requirements, which often focus on history and on remedial activities instead of prospective and forward-looking objectives. Real innovation takes place in real time, from moment to moment, not just in future planning or in analyzing past performance; it is the culture of innovation that controls business activities every day.

Even more importantly, innovative companies deploy their architectures of innovation in interactions with all their stakeholders, including vendors, lessees, funders, and their own employees and managers. They synchronize their own growth and innovative processes with those of the businesses and people they come in contact with on a regular basis, being sensitive to the needs, demands and best practices of all. They rely on consistent feedback and open relationships, and they encourage these relationships through specific objectives.

Given the encroachment of more and stricter regulations throughout the leasing industry, does it sound as though these ideals of innovation can be maintained, or even survive at all? Regulation is universal. It applies uniformly to every affected industry, every affected business and every market opportunity ' one size fits all ' whereas innovation thrives on specific circumstances, specific markets, individual processes, unique opportunities and unique insights. Regulation is compulsory. It is almost always irreversible; it is driven by politics and generally controlled by government, and its specific details are defined by bureaucrats ' whereas innovation is freely changeable, entirely optional, driven by measurable needs and objectives, controlled by business realities, and defined by markets.

On the surface, it appears that regulation and innovation are completely incompatible; but perhaps there is more mutual benefit here than meets the eye.

The Notion of 'Disruption'

The formal study of innovation in business today has focused on the notion of “disruption” as a primary propelling factor. The idea of “disruptive innovation” as the key to organizational and operational transformation has been discussed at length, and it is generally accepted that new and disruptive “architectural” thinking about existing issues and processes is the spark for revolutionary change.

The catalysts for this kind of disruptive change may be market or customer needs, budgetary constraints or requirements, the necessity for consistent and measurable growth, or even extrinsic forces that affect the company's performance, including competition from more innovative and more forward thinking businesses. Equipment leasing companies are not immune to these forces, and many of the most successful companies constantly strive to develop and maintain a culture and architecture of innovation, whether in operations, in marketing and sales, or in their use and deployment of legal resources and their means of adapting to changing legal realities.

But what about the impact of new and increasingly burdensome regulations as a disruptive influence? Aren't they particularly disruptive when laying out business strategy, forecasting legal staffing and technology needs, or developing and maintaining adequate compliance processes? Well, then can the disruptive effect of new regulations be harnessed and used as a tool of innovation?

Strange Bedfellows ' But OK Mates?

Of course, new and changing regulations have obvious negative effects, including draining of financial resources, sapping of human resources, and straining of both legal and accounting resources; and there are some equally obvious benefits to compliance, such as avoiding penalties, maintaining the company's good reputation in the marketplace, being viewed as a good “corporate citizen,” and even regulatory compliance for its own sake.

But what about the “disruptive benefits” of regulations when regulatory compliance is considered as part of an architecture of innovation? Perhaps developing a robust regime of compliance may provide opportunities for differentiation in the marketplace; or it may offer justifiable reasons for shaking up traditional ways of doing things, whether in operations, in marketing or in the legal department. Perhaps the process of complying with new regulatory requirements may result in identifying hitherto unknown problems, whether in daily workflow or in more far-reaching and strategic decision-making processes. Or it may be possible that merely establishing new systems for complying with changing regulations will stimulate new ways of thinking about “old” issues and activities.

In specific areas of business, innovation and regulatory compliance may turn out to be reasonably good mates in spite of being strange bedfellows. Here are some points to consider in assessing the burdens and benefits of each.

Operational Management

• Using regular audits and compliance practices to help clarify short-term objectives and sharpen the focus of those involved in designing processes.
• Providing feedback from compliance audits to pinpoint operational roadblocks, providing the opportunity to restructure long-standing procedures and clear out dead wood that may not have been obvious until a closer inspection was compelled by compliance requirements.
• Creating opportunities for everyone involved, from senior management to paralegals and documentation specialists, to refocus operational objectives.
• Even taking into account the burdens imposed by regulatory compliance itself, using the compliance process as a tool for streamlining business practices and interfaces with disparate stakeholders of the legal department and the company.

Financial Management

• Viewing regulatory auditing as offering an effective means or incentive for self-examination, even if only in the form of internal or “pre-” audits to assure compliance before the regulators arrive.
• Establishing compliance as a policy, not just as a nuisance or an interruption, thus providing the “disruptive” benefit of rethinking financial methods and processes over and above mere compliance with extrinsically imposed requirements.
• Encouraging a culture of compliance, both with regulations imposed from the outside and with best practices developed internally, making compliance a matter of course rather than a periodic interruption of business.

Business Management

• As perhaps an even more fundamental benefit, using regulatory compliance to impel senior management to reassess the entire organization and its effectiveness at carrying out overall strategic and business objectives.
• Utilizing regular compliance audits as a means of providing regular reviews of management effectiveness at all levels.
• Repurposing audit and compliance tools to focus on isolating inefficiencies in the organization, and even for identifying promising new leadership, which may have gone unnoticed without this kind of disruptive influence.

In Summary

There is little doubt that the impending tidal wave of new and changing regulations affecting the equipment leasing industry will foster continuing concern about the costs of compliance and the deleterious effects on non-compliance, and there is no doubt that many hours of time and significant financial resources will be devoted to understanding and complying with all of them. There may, however, be at least a sliver of silver lining in thinking of regulatory compliance as a source for innovative thinking and fresh approaches in all facets of the leasing business, including the operational, law, and documentation functions ' all of which may benefit from the “disruptive benefits” of clearly defined and well-thought-out compliance practices.

Paul Bent is an attorney and senior managing director of The Alta Group, LLC, and leader of Alta's Legal Support Services practice, providing expert witness and litigation support services for clients in matters involving equipment leasing, secured financing and related issues. His investment banking experience includes M&A and large-ticket leasing transactions throughout the world. He may be contacted at [email protected] or at www.thealtagroup.com.

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Successful equipment leasing companies strive to incorporate innovative ideas into their business, whether in operations, marketing or financing itself. Innovation is a key to remaining competitive and to being a market leader. At the same time, though, the current equipment leasing marketplace is facing increasingly burdensome regulations and compliance requirements, which often have the effect of sapping corporate energy, time and resources, and distracting management from focusing on new ideas. It would seem that these two factors are inherently incompatible ' that they cannot be reconciled for the benefit of a leasing business. But are the imperatives of innovation and compliance always mutually exclusive? This article explores these very different but perhaps not always incompatible concerns.

The Current Regulatory Climate

Most equipment leasing companies are coming to grips with the increasing demands imposed on the industry (or closely related industries, such as commercial banking) by a panoply of new federal and state statutes and related regulations. These include, among others:

• The Sarbanes-Oxley Act of 2002, with its financial disclosure requirements, scrutiny of off-balance-sheet financing structures, punishment of “white collar” crimes, and related costs of compliance and reporting.
• The Third Basel Accord (Basel III), requiring greater levels of stress testing, increased capital adequacy and liquidity provisions, and, again, related costs of compliance.
• The Dodd-Frank Wall Street Reform and Consumer Protection Act, the 800-pound gorilla of the current business regulatory world, with its abundant new federal agencies (FSOC, CFPB, OFR, etc., etc.), its still to come Section 1071 data gathering and reporting requirements for non-bank finance companies, its requirement for corporate “living wills,” its new risk retention (“skin in the game”) rules and credit reporting requirements, its myriad other new regulatory and reporting strictures, and, of course, its related burdens and costs of compliance.
• Many others yet to come, including the PPACA (“Obamacare”), which may affect a number of industries impacting equipment leasing; HIPAA, which affects the retention and use of confidential personal information; ECOA, which is amended by Dodd-Frank to include new regulations for non-bank financial institutions; FCRA; and others too numerous to mention.

Many of these increasingly burdensome requirements are well known in the equipment leasing industry, and all have one thing in common ' ever-increasing costs of compliance, both in time and in financial resources.

The Essentials of Innovation

Innovation, on the other hand, seems to exemplify the polar opposite of burdensome regulatory requirements. Innovative companies embody enhanced collaboration and employee engagement, not just for their own sake but for the specific purpose of coordinating and promoting achievable objectives. They eschew seemingly unnecessary reporting and burdensome duplication of effort and activity. The essence of innovation in businesses is the establishment of an “architecture of innovation,” in which a culture of creativity and a well-understood system of expectations and rewards are implemented and embraced at every level.

It has been said that innovation in business is based upon the development and clear articulation of strategic options and objectives to which all of those involved are committed. Importantly, innovative companies establish strategic options for what might and should happen rather than focusing on what might not or did not happen. This is in contrast to regulations and compliance requirements, which often focus on history and on remedial activities instead of prospective and forward-looking objectives. Real innovation takes place in real time, from moment to moment, not just in future planning or in analyzing past performance; it is the culture of innovation that controls business activities every day.

Even more importantly, innovative companies deploy their architectures of innovation in interactions with all their stakeholders, including vendors, lessees, funders, and their own employees and managers. They synchronize their own growth and innovative processes with those of the businesses and people they come in contact with on a regular basis, being sensitive to the needs, demands and best practices of all. They rely on consistent feedback and open relationships, and they encourage these relationships through specific objectives.

Given the encroachment of more and stricter regulations throughout the leasing industry, does it sound as though these ideals of innovation can be maintained, or even survive at all? Regulation is universal. It applies uniformly to every affected industry, every affected business and every market opportunity ' one size fits all ' whereas innovation thrives on specific circumstances, specific markets, individual processes, unique opportunities and unique insights. Regulation is compulsory. It is almost always irreversible; it is driven by politics and generally controlled by government, and its specific details are defined by bureaucrats ' whereas innovation is freely changeable, entirely optional, driven by measurable needs and objectives, controlled by business realities, and defined by markets.

On the surface, it appears that regulation and innovation are completely incompatible; but perhaps there is more mutual benefit here than meets the eye.

The Notion of 'Disruption'

The formal study of innovation in business today has focused on the notion of “disruption” as a primary propelling factor. The idea of “disruptive innovation” as the key to organizational and operational transformation has been discussed at length, and it is generally accepted that new and disruptive “architectural” thinking about existing issues and processes is the spark for revolutionary change.

The catalysts for this kind of disruptive change may be market or customer needs, budgetary constraints or requirements, the necessity for consistent and measurable growth, or even extrinsic forces that affect the company's performance, including competition from more innovative and more forward thinking businesses. Equipment leasing companies are not immune to these forces, and many of the most successful companies constantly strive to develop and maintain a culture and architecture of innovation, whether in operations, in marketing and sales, or in their use and deployment of legal resources and their means of adapting to changing legal realities.

But what about the impact of new and increasingly burdensome regulations as a disruptive influence? Aren't they particularly disruptive when laying out business strategy, forecasting legal staffing and technology needs, or developing and maintaining adequate compliance processes? Well, then can the disruptive effect of new regulations be harnessed and used as a tool of innovation?

Strange Bedfellows ' But OK Mates?

Of course, new and changing regulations have obvious negative effects, including draining of financial resources, sapping of human resources, and straining of both legal and accounting resources; and there are some equally obvious benefits to compliance, such as avoiding penalties, maintaining the company's good reputation in the marketplace, being viewed as a good “corporate citizen,” and even regulatory compliance for its own sake.

But what about the “disruptive benefits” of regulations when regulatory compliance is considered as part of an architecture of innovation? Perhaps developing a robust regime of compliance may provide opportunities for differentiation in the marketplace; or it may offer justifiable reasons for shaking up traditional ways of doing things, whether in operations, in marketing or in the legal department. Perhaps the process of complying with new regulatory requirements may result in identifying hitherto unknown problems, whether in daily workflow or in more far-reaching and strategic decision-making processes. Or it may be possible that merely establishing new systems for complying with changing regulations will stimulate new ways of thinking about “old” issues and activities.

In specific areas of business, innovation and regulatory compliance may turn out to be reasonably good mates in spite of being strange bedfellows. Here are some points to consider in assessing the burdens and benefits of each.

Operational Management

• Using regular audits and compliance practices to help clarify short-term objectives and sharpen the focus of those involved in designing processes.
• Providing feedback from compliance audits to pinpoint operational roadblocks, providing the opportunity to restructure long-standing procedures and clear out dead wood that may not have been obvious until a closer inspection was compelled by compliance requirements.
• Creating opportunities for everyone involved, from senior management to paralegals and documentation specialists, to refocus operational objectives.
• Even taking into account the burdens imposed by regulatory compliance itself, using the compliance process as a tool for streamlining business practices and interfaces with disparate stakeholders of the legal department and the company.

Financial Management

• Viewing regulatory auditing as offering an effective means or incentive for self-examination, even if only in the form of internal or “pre-” audits to assure compliance before the regulators arrive.
• Establishing compliance as a policy, not just as a nuisance or an interruption, thus providing the “disruptive” benefit of rethinking financial methods and processes over and above mere compliance with extrinsically imposed requirements.
• Encouraging a culture of compliance, both with regulations imposed from the outside and with best practices developed internally, making compliance a matter of course rather than a periodic interruption of business.

Business Management

• As perhaps an even more fundamental benefit, using regulatory compliance to impel senior management to reassess the entire organization and its effectiveness at carrying out overall strategic and business objectives.
• Utilizing regular compliance audits as a means of providing regular reviews of management effectiveness at all levels.
• Repurposing audit and compliance tools to focus on isolating inefficiencies in the organization, and even for identifying promising new leadership, which may have gone unnoticed without this kind of disruptive influence.

In Summary

There is little doubt that the impending tidal wave of new and changing regulations affecting the equipment leasing industry will foster continuing concern about the costs of compliance and the deleterious effects on non-compliance, and there is no doubt that many hours of time and significant financial resources will be devoted to understanding and complying with all of them. There may, however, be at least a sliver of silver lining in thinking of regulatory compliance as a source for innovative thinking and fresh approaches in all facets of the leasing business, including the operational, law, and documentation functions ' all of which may benefit from the “disruptive benefits” of clearly defined and well-thought-out compliance practices.

Paul Bent is an attorney and senior managing director of The Alta Group, LLC, and leader of Alta's Legal Support Services practice, providing expert witness and litigation support services for clients in matters involving equipment leasing, secured financing and related issues. His investment banking experience includes M&A and large-ticket leasing transactions throughout the world. He may be contacted at [email protected] or at www.thealtagroup.com.

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