International Finance Magazine Jul - Sep 2016 Oil & Gas: US crude weighs in on the movement prices

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July - September 2016

Volume II Issue 4

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EUROPE & AMERICAS Amsterdam

ASIA PACIFIC Singapore

MIDDLE EAST & AFRICA Dubai

25th November 2016

16th December 2016

26th January 2017

pg.04

WHAT IF YOU CAN

pg.48

COPY SUCCESS

WHAT HAPPENS AFTER YOUR PASSWORD IS STOLEN

pg.08

RUSSIAN BANKING SYSTEM FACES A 10% CUT

pg.12

IS FINLAND THE ‘NEW SICK MAN OF EUROPE’?

Note FROM EDITOR

T

he price of oil is more or less established and it is likely to be in the range of $50 per barrel in the near future. As a result, not only are several nations downsizing, but so are banks and ancillaries that service the oil behemoths. Saudi Arabia is unrelenting on production cutbacks in a bid to squeeze out high-cost producers. While many companies have either shut shop or cut back on production, read our story on how US crude is keeping prices in check.

In the last one year, the world has reconciled to lower oil prices. But it will be another two years before we know how the oil producers are coping.

For one, Russia is having a tough time. Lower oil prices coupled with sanctions are taking a toll, but the

Dhiraj Shetty Editor editor@ifinancemag.com

Russians are keeping their heads above water. They have always been a resilient lot and this time is no different. But what we have learnt is that inefficient banks and those with bad debts are being shut.

The process is expected to end before 2018. You might want to know which are the banks that will be doing business post the cleanup.

On the insurance front, there are question marks all over G-SII after MetLife got a court order saying it does not deserve the designation ‘too big to fail’. This has cast doubts over the new system for worldwide regulation of financial institutions. It called for a story on the implications of this development.

This time’s cover story is about a pioneer in social trading. The company was founded in Israel and has dual headquarters in London and Cyprus.

It enables its 4.5 million registered users in more than 170 countries to copy successful traders. The company is turning some very ordinary people into money managers. That’s what entrepreneurship is all about. That’s what we celebrate at IFM. Read on to know more and do write back to us. We look forward to your feedback.

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller, Karan Belani Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Suparna Goswami Bhattacharya Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Ashton Ray, Tanya Jones, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Ashish Shenoy, Sid Jain Accounts Angela Mathews Head of Events Basant Das Registered office INTERNATIONAL FINANCE MAGAZINE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact press@ifinancemag.com Design & Layout Rahil Shaikh Miya

Jul - Sep 2016 International Finance Magazine

INDEX July - September 2016

Volume II Issue 4

COVER STORY

What if you CAN

copy success

pg.48

08 12 18 22

Russian banking system faces a 10% cut

04

BYTE BY BYTE: What happens after my password is stolen?

40

African fintech startups are hot property

44

Is Finland the ‘new sick man of Europe’?

Banking: Impact of negative rates Q1 sukuk issuance promises a good year

International Finance Magazine Jul - Sep 2016

52 56

Tom Price-Daniel

2016 FinTech 50 reveals domination of men

Luke Davis

Bridging the gap between investors and SMEs

Argentina’s national carrier poses biggest challenge in career to its new CEO

SPECIAL FOCUS

The power of US crude

P26-39

OIL & GAS

60 Foray into airline business reduces billionaire Vijay Mallya to a millionaire

74

Data loss can break M&A deals

88

James Stirton

Are you prepared for MiFID II? You should be

94

Kenya’s shopping malls and e-commerce sites are competing for customers

110

No more hanky-panky in Argentina OUT OF OFFICE

78 84

Nick Nesbitt

Route to Solvency II

INSURANCE: MetLife puts puts question mark over G-SII

My wife calls me

partial technology boy pg.116

Jul - Sep 2016 International Finance Magazine

byte by byte

What happens after my password is stolen?

One security firm set up a ‘hacker trap’ to find the answer... and the result is scary Tim Ring

4

International Finance Magazine Jul - Sep 2016

byte by byte

I

n just 10 days recently, hackers were revealed to have stolen over $80 million and the personal data of as many as 270 million people worldwide.

It was late April/early May when cyber-gangs were found to have broken into the Qatar National Bank’s network (stealing hundreds of thousands of customers’ credit card and other data) and the Beautiful People dating website (1.1 million people’s details exposed).

A Russian hacker group then boasted they had the email credentials of 272 million people, including 40 million Yahoo Mail users, 33 million Microsoft Hotmail accounts and 24 million Google Gmail users.

And it was discovered that Bangladesh’s Central Bank had been hit by an $80m cyber-heist which, had a vigilant employee not spotted a spelling mistake

by the hackers and raised the alarm, could have been $1 billion.

It’s a seemingly neverending litany of successful cyber heists. But as a result, police and security firms are warning that for many people and businesses, the shock value of hacking has been replaced by a feeling of ‘so what?’ After all, banks refund the money stolen from people’s accounts, and passwords are always having to be re-set.

To counter this apathy, two security firms recently set out to find out exactly what happens when your password and data are stolen... and the results are undoubtedly shocking.

California-based Bitglass set up a ‘hacker trap’ that reminds you of the World War II movie ‘The Man Who Never Was’ – which tells how British agents staged an air crash and used the dead body of a tramp loaded

with a false ID and fake documents to fool the Nazis into believing that they planned to invade Greece instead of the real target, Sicily.

The decoy In their own ‘Project Cumulus’, Bitglass created a similar fake ‘digital’ identity of an employee of a fictitious retail bank, complete with several online accounts and a host of corporate and personal data held on a Google Drive cloud account, including some real credit card data and work-product.

Bitglass then leaked this employee’s details onto the ‘Dark Web’ – through a staged ‘phishing’ attack – and waited for the hackers to bite. What the bad guys didn’t know was that every available file was embedded with hidden tracking technology.

The Bitglass team didn’t have to wait long: “A torrent of activity resulted within hours of leaking the credentials,” they said.

In fact, a staggering 1,400 would-be hackers from over than 30 countries descended on the data.

They examined the Dark Web credentials, and many quickly downloaded files, including the real credit card information. One in 10 of the attackers used the stolen data to access the victim’s Google account, and 94% of these criminals tried to get into their bank’s web portal.

The hackers came from six continents in all, everywhere from California in the US to Austria, The Netherlands, Philippines and Turkey. Over a third of

5

Our data-tracking experiment reveals the dangers of re-using passwords and shows just how quickly phished credentials can spread, exposing sensitive corporate and personal data Nat Kausik, CEO, Bitglass

Jul - Sep 2016 International Finance Magazine

byte by byte

6

those who could be traced came from Russia and one in six from the US. More than two-thirds were smart enough to cover their tracks by accessing the data from ‘anonymous’ Tor network IP addresses.

The thought of hundreds of hackers descending on your data and prying into your banking and social media accounts will make many people uncomfortable.

And Bitglass is hoping this will persuade more individuals, and employees, to change their online behaviour and at least use different passwords for their different accounts.

CEO Nat Kausik said, “Like many internet users, our fictitious bank employee used the same password across several web services, including social media sites and personal banking accounts. And hackers were unrelenting when it came to

accessing the victim’s other accounts.

“Our data-tracking experiment reveals the dangers of re-using passwords and shows just how quickly phished credentials can spread, exposing sensitive corporate and personal data.”

Buying data is easy It’s a theme taken up by anti-virus firm McAfee which, like Bitglass, recently set out to track out what happens to people’s stolen personal, bank account and payment card data.

McAfee, part of Intel Security, discovered a sophisticated black market in personal data, where the biggest shock was that this sensitive information is now so plentiful, you can buy the Visa, MasterCard or Amex card details of someone in the US for as little as $5-8, or $20-25 for a victim based

International Finance Magazine Jul - Sep 2016

in the UK. The market is so highly developed that, for a slightly premium price, hackers can specify exactly which country-of-origin or card type they want, whether a PIN number is included, and even the amount of money available in the victim’s account for the hacker to steal.

Raj Samani, chief technology officer for Intel Security in Europe, commented on this: “What is particularly significant is how inexpensive it is to purchase this type of data, with payment cards selling for the price of a cup of coffee. We are hopeful that such insights provide a compelling answer to the question ‘So what?’

“Feeling numb to the dizzying statistics is a dangerous trend. We need consumers and businesses to not simply shrug off data

The main advice is don’t use the same password you use for your email to access your online banking and Facebook, etc.

Raj Samani, CTO for Intel Security in Europe

byte by byte

One in 10 of the attackers used the stolen data to access the victim’s Google account, and 94% of these criminals tried to get into their bank’s web portal

breaches but to take active measures to protect their data and not give criminals a shortcut to becoming millionaires.”

Samani agrees with Bitglass: “The main advice is to not re-use passwords across different systems – don’t use the same password you use for your email to access your online banking and Facebook, etc.

“Also enabling 2FA (two-factor authentication) wherever possible is strongly recommended.

That way, even if someone has your ID and password,

they still can’t log-on.

Some sites also allow you to set alerts any time there is suspicious activity or a failed logon.”

That reaction and resolve is being urged as we dig in for a long war against the hackers. As Fernando Ruiz, head of

One way to find out if your credentials have been stolen is via the website https://haveibeen pwned.com

operations at Europol’s European Cybercrime Centre (EC3), said, “The whole internet community, from citizens to companies or governments, is a target for cyber criminals looking for protected data, online banking credentials or sensitive documents. With record numbers of network attacks, this is a constant trend – and the future scenario doesn’t look any better.” IFM editor@ifinancemag.com

7

California-based Bitglass set up a ‘hacker trap’ that reminds you of the World War II movie ‘The Man Who Never Was’

Jul - Sep 2016 International Finance Magazine

Russian banking system faces

a 10% cut Vladislav Vorotnikov

8

International Finance Magazine Jul - Sep 2016

Since the beginning of the year, the Central Bank has closed 15 banks and by the end of 2016, another 60 names could be added to this list

BANKING

I

n 2016, every 10th bank in Russia could lose its operation licence, according representatives of the country’s biggest bank Sberbank. Since the beginning of the year, the Central Bank has closed 15 banks and by the end of 2016, another 60 names could be added to this list.

“We believe about 10% of all banks must leave.

This is about 60-70 banks while a dozen have already been liquidated. And I think most cancellation of banking licences could take place in the first half of the year while cleaning of the country’s banking system could be finished by 2017,” says Mikhail Matovnikov, senior managing director and chief analyst of Sberbank.

The country’s regulator, in official statements, expresses confidence that there are no signs of financial crisis in the banking system.

However, representatives of the Central Bank, in the

»

Sberbank office

beginning of 2016, decided to infuse an additional RUB 600 ($9 billion) to support 10 systemically important banks. Some market participants say with this measure, the regulator in fact set adrift all the other banks.

Rise in interest rate In 2015, Russian banks found themselves in a difficult situation with a tight monetary policy due to a weakening ruble, acceleration of inflation and little possibility for external borrowings. Analysts of Sberbank estimated that the banking crisis in 2014-2015 cost the Russian economy 3.4% of GDP or RUB 2.6 trillion ($38 billion).

According to Sberbank, last year, banks’ assets rose 6.9% to RUB 83 trillion ($ 1.2 trillion), but in fact, but with currency revaluation, it actually decreased by 1.6%. The decrease has been influenced by several factors, including the use of excess liquidity for repayment of expensive

money to the Central Bank, as the interest rate has been raised from 10.5% to 17%.

“This is the result of banks’ adaptation to high interest rates,” says Matovnikov. “Compression of assets primarily took place due to the debt of banks to the Central Bank on refinancing instruments: at the beginning of 2015, it exceeded RUB 7.5 trillion ($ 110 billion), but after a year and two months, it reduced to less than RUB 2 trillion ($29 billion).”

The crisis and high interest rate also affected profit. According to first deputy head of Central Bank Alexei Simanovsky, in 2013, the banking sector’s profit was RUB 994 billion ($30 billion, basing on the exchange rate of 2013), in 2014 – RUB 589 billion ($ 9 billion), in 2015 RUB 192 billion ($ 2.8 billion).

Simanovsky believe this year, it will rise to RUB 500 billion ($7.3 billion), but some market participants believe that the banking sector will not hit the bottom.

Threat of bad debts However, some bankers believe that the banking system will face its most serious problems in the near future and they will be primarily associated with excess bad corporative and public debts.

“We really moving to a banking crisis,” said Boris Titov, Commissioner of the Presidential Protection of Entrepreneurs. “Today, we are facing a huge problem of bad debts in banks. So far, this problem is disguised, but hopeless debts are

9

We believe about 10% of all banks must leave.

This is about 60-70 banks while a dozen have already been liquidated. And I think most cancellation of banking licences could take place in the first half of the year while cleaning of the country’s banking system could be finished by 2017 Mikhail Matovnikov, senior managing director and chief analyst of Sberbank

Jul - Sep 2016 International Finance Magazine

BANKING

»

Alexei Simanovsky, first deputy head of Central Bank

10

catching up with banks.”

Fitch analyst Alexander Danilov says, “Banks, in fact, have been able to put their problems on the backburner with easing of control by the Central Bank. The regulator made it possible for banks to prolong a part of the loans without requirement of reserves, but it is a temporary measure, and in addition, it affects only the Russian reporting while the quality of assets in banks continues to deteriorate.”

Data from the Central Bank shows that at the beginning of 2015, the share of problem, bad and hopeless loans of Russian banks was RUB 3.6 trillion ($52 billion) or 6.8% of the portfolio. On October 1, 2015, it jumped to RUB 4.6 trillion ($68 billion) or 8.3%.

According to Danilov, excluding the profit of Sberbank and a number of other players, the whole

sector becomes loss-making.

“The size of hopeless debts is steadily growing and is obvious. There are no visible improvements,” says Vladimir Mamakin, CFO of Promsvyazbank. “The peak overdue on public debt has not yet passed while the situation with corporate debt is different in each bank, but there is no feeling that the sector has entered the period of growth.”

Mergers and acquisitions The policy of the regulator to support only systemically important banks and removal of assets from 10% of most problematic banks may lead to consolidation in the banking system, market participants believe.

“Currently, we see more and more banks facing cancellation of their licence due to lack of their own funds and reduction of reserves while a significant share of the citizens have

International Finance Magazine Jul - Sep 2016

withdrawn deposits and carried them to the Top 5 banks. So, many banks faced additional problems.

And if they do not agree on mergers, sooner or later, the Central Bank will withdraw their licences,” says Ilya Buturlin, Senior Lecturer, University of Finance of the Russian government.

Most banks outside of the list of systemically important ones, according to numerous reports since the beginning of the crisis, faced the problem of depositors withdrawing their money.

“The main resource base of most banks that have no access to state resources is people’s deposits. The flow of deposits from private and regional banks to the [large] state-owned banks threatens an upheaval in the whole financial system,” forecast Anatoly Aksakov, president of the Association of Regional Banks of Russia.

Yevgeny Yasin, research

Today, we are facing a huge problem of bad debts in banks.

So far, this problem is disguised, but hopeless debts are catching up with banks Boris Titov, Commissioner of the Presidential Protection of Entrepreneurs

BANKING

Systemically important banks 1. Sberbank 2. Gazprombank 3. VTB 4. Alfa-Bank 5. Otkritie 6. Rosbank 7. Promsvyazbank 8.

Raiffeisenbank

9. UniCredit 10. Rosselkhozbank

director of the National Research University, former Minister of Economy of Russia, says, “One of the main problems of the Russian economy is bloated state-owned banks. It is necessary to support all banks in the same way.

It is wrong to create an environment where citizens keep their money only in state-owned banks.

However, the state has an abstract and hypothetical possibility — in the case of a crisis, it would be easy for the Central Bank to save [systemically important]

banks.”

Ultimately, this situation may lead to the number of banks in Russia reducing not just by 10%, but possibly more, over the coming 5 years, according to forecasts by independent analysts. IFM editor@ifinancemag.com

Banks liquidated since the beginning of the crisis D a te

09.12.2015 26.10.2015 04.09.2015 03.08.2015 23.07.2015 07.07.2015 22.06.2015 16.06.2015 15.06.2015 10.06.2015 03.02.2015 15.01.2015 31.12.2014 05.12.2014 05.11.2014

B a n k

11

1.

N-Bank

2.

Investcapitalbank

3.

Nerugnibank

4.

Zelenokumskaya

5.

Agency for Credit Guarantees

6.

Eurocapital Alians

7.

MAK-Bank

8.

Leffko-Bank

9.

Petrokomerts

The main resource base of most banks that have no access to state resources is people’s deposits. The flow of deposits from private and regional banks to the [large] state-owned banks threatens an upheaval in the whole financial system Anatoly Aksakov, president of the Association of Regional Banks of Russia

10. East-European Trast Bank 11. Fresko-Bank 12. Regional Corporative Bank 13. Evropeisky 14. Modern Commercial Bank 15. Novosibirsk Municipal Bank

Jul - Sep 2016 International Finance Magazine

Economy

Is Finland the

‘new sick man

of Europe’?

Suparna Goswami Bhattacharya

12

International Finance Magazine Jul - Sep 2016

Economy

The country of 5 million people has gone from being a highly industrialised nation to one of the worst performing economies in Europe

B

ack in the late 90s, Finland was home to the most valued company in the mobile business — Nokia. The rise of Nokia was accompanied by a growth in the country’s economy. And also the economy’s dependence on the company. In 2000, Nokia accounted for 21% of Finnish exports and 20% of all corporate tax revenue.

Then the mobile handset war began. It not only saw the decline of Nokia but also the Finnish economy.

Rarely has the world seen the fortunes of a developed country so tightly tied to

a single company. And like Nokia, Finland too is struggling to get back on its feet.

Of late, Finland has turned out to be the worst performing country in the Eurozone. Its economy has been stagnant for the past five years leading many to call it the ‘new sick man of Europe’.

Jan Zilinsky from Peterson Institute for International Economics says during the 10 years prior to the global financial crisis, about a quarter of its rise in GDP could be attributed to Nokia’s success. “One lesson we

can take from the crisis is that private spending on research and development is extremely valuable, but no country should rely excessively on a single company.”

Danae Kyriakopoulou, Senior Economist, Centre for Economics and Business Research, says, “The fall of Nokia has certainly played a role in the decline of the Finnish economy. The case of Nokia is interesting because it is the decline of what used to be a very successful company. Hence, it is not wise to be so reliant on one company.”

She says the country has

been hit by a number of adverse external economic shocks that partly explain its dismal performance. “To start with, the economic and financial crisis that hit the Eurozone has had an impact on Finland as well through the channel of demand for exports,” she explains.

The fall in global demand for pulp and paper, mainly driven by rise of electronic media, has adversely affected the economy.

Slowdown in Russia is another important factor.

“The collapse of the Russian economy and the sanctions imposed on trade with Russia have hurt

Jul - Sep 2016 International Finance Magazine

13

Economy

Finnish exports to Russia, which used to be a sizeable source of revenue,” says Kyriakopoulou.

Christophe Andre, senior economist at OECD, says the decline in manufacturing of wood and paper started around the turn of the century and has cut GDP by around 0.75% since 2007. The value of goods exported to Russia has fallen by roughly half over the past three years, subtracting about 1.5% from the GDP. Apart from these external factors, there are some internals ones that contribute to the dismal view of the economy.

Finland has grown highly

uncompetitive when it comes to wages as it allowed fast increase in wages after adoption of the euro. In the post-2010 period, wages grew significantly faster in Finland than in other Eurozone economies.

According to estimates

by Statistics Finland, GDP (adjusted for working days) was 0.3% lower in the fourth quarter of 2015 than a year earlier. GDP has been broadly flat since mid-2012 and is about 7% below its late-2007 peak.

Kyriakopoulou says, “We project growth at around 1% in 2016. However, there are downside risks to this projection, notably related to the international

14

environment on which a small open economy like Finland is highly dependent.”

Some opine that Finland’s situation would have been better had it retained its currency. But Zilinsky would like to differ. “It is not likely that a country like Finland would dramatically devalue its own currency to gain a competitive advantage over its trading partners,” he explains.

“Although a comparison cannot be made between Finland and other European countries, Denmark which did not adopt the euro is not performing significantly better. Neither has the UK managed to use its

“

Although the country has been performing poorly in recent years, it has many structural strengths, like a highskilled workforce and a well-functioning financial system. This should allow growth to restart at some point Christophe Andre, senior economist at OECD

International Finance Magazine Jul - Sep 2016

Economy

The decline in manufacturing of wood and paper started around the turn of the century and has cut GDP by around 0.75% since 2007 currency ‘magic’ to grow at a reasonably fast rate.”

Another crucial point to mention is the makeup of Finland’s exports, which are mostly raw materials and capital goods for the manufacturing industry.

These are exactly the parts of the global economy that are slowing most rapidly right now.

However, the scenario can be reversed through reforms to increase productivity in

both the public and private sector. A plus point is that Finland continues to be one of the few countries in Europe to get a triple A rating from Moody’s and Fitch.

Andre justifies the ratings.

“Although the country has been performing poorly in recent years, it has many structural strengths, like a high-skilled workforce and a well-functioning financial system. This should allow

growth to restart at some point,” he explains.

Kyriakopoulou feels the economy needs to rebalance itself towards growth sectors. “In that respect, the knowledge-economy is an attractive candidate. The startup economy is already a big hope for the economy going forward, supported by strong fundamentals in that space.”

Forecast for Finland

2014 2015

2016

GDP growth (% yoy)

-0.4

0.0

0.5

Inflation (%,yoy)

1.2

-0.2

0.1

Unemployment (%)

8.7

9.5

9.4

Public budget balance (% of GDP)

-3.3

-3.2

-2.8

Gross public debt (% of GDP)

59.3

62.7

65.0

Forecast for EA

2014 2015

2016 2017

GDP growth (% yoy)

0.9

1.6

1.7

1.9

Inflation (%,yoy)

0.4

0.0

0.5

1.5

Unemployment (%)

11.6

11.0

10.5

10.2

Public budget balance (% of GDP)

-2.6

-2.2

-1.9

-1.6

Gross public debt (% of GDP)

94.5

93.5

92.7

91.3

Current account balance (% of GDP)

3.0

3.7

3.6

3.4

15

One lesson we can take from the crisis is that private spending on research and development is extremely valuable, but no country should rely excessively on a single company Jan Zilinsky, Peterson Institute for International Economics

Source: European Commission Institutional Papers 20/2016

Jul - Sep 2016 International Finance Magazine

Economy

Life after Nokia

N

okia’s fall started after 2007, culminating in the selling of its mobile business to Microsoft in 2013. As a result of Nokia’s misfortune, more than 10,000 jobs were lost in Finland.

Nokia’s trouble has been Juha Kilponen, visible also in considerably reduced Head of Forecasting, R&D spending and falling role of the ICT sector in general in the Bank of Finland Finnish economy.

The loss of high valued added business is visible also in the sudden and prolonged slowdown of productivity growth at the economy wide level, as well considerable loss of market share in international trade.

It has taken a surprisingly long time for Finland to start recovering.

However, the birth of a number of new ICT companies during the last years suggests that the sector as a whole has been able to adapt reasonably well to the new situation.

Also, Nokia has transformed itself considerably. It is now a global player in networks and wireless technology after divestment of its Devices & Services business, the sale of HERE and the acquisition of Alcatel-Lucent.

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‘Finland took a long time to get over Nokia’s fall’ International Finance Magazine Jul - Sep 2016

Economy

T

he best thing to have happened to Finland after the Nokia episode has been the start-up scene.

There have a been lot of positive developments in the past five years with more and more entrepreneurs being active and following the footsteps of Rovio (maker of Angry Birds), Supercell (mobile Tero Ojanpera, managing partner, game development company) and many others. Finland startVision+ Fund ups scene is getting very diverse with companies focusing on analytics (VertoAnalytics), drones (SharperShape.com), marketing/ adtech (Kiosked), test automation (Optofidelity), food delivery (Wolt), just to name a few, drawing on deep technology expertise of Finland and digitalisation as a global trend.

‘Start-ups have lifted Finland’

I

n its heydays, Nokia’s effect on Finland can hardly be overstated. Its employment in Finland peaked at over 24,000 in 2000 and was nearly 20,000 as recently as 2010.

But it will be in the range of 6,000 by the end of this year.

Arguably Nokia’s impact was even greater in ‘spirit’ — it was a global claim to Petri Rouvinen, fame for all Finns in all walks of life.

Research Needless to say, on both counts, Nokia is Director, ELTA now just like any other large company in Finland — important and recognised, but not overwhelmingly so.

Obviously, Nokia released a large number of people to local labour markets. This was part of its outplacement programme Bridge, which provided support ranging from CV writing to paid employment, loans and IPRs for aspiring entrepreneurs and their companies. Former Nokia employees have established about 500 startups. IFM

‘Ex-Nokia employees have established about 500 startups’

editor@ifinancemag.com Jul - Sep 2016 International Finance Magazine

17

BANKING

18

Banking in the

negative

S

ince midway through 2014, negative interest rates have been used by four central banks and the European Central Bank (ECB). This is to combat low inflation, higher currency valuations and economic stagnation, though the extent of its efficacy is unclear.

The advantages are that it encourages banks to lend if they are to be charged for holding capital. In theory, staving off the debilitating

International Finance Magazine Jul - Sep 2016

The impact of negative rates has been mixed on an institution by institution basis

effects of deflationary conditions and prompting growth.

In contrast, lower rates can crimp banks’ profitability resulting in lower levels of lending and affecting the return on fixed assets, such as yields on government bonds.

Some economists are unenthused by a negative interest policy, and have coined the term ‘zero lower bound’ that rates should not be lower than zero.

The ECB moved into negative rates

Peter Taberner

by reducing the deposit facility rate to minus 0.2% in June 2014 to boost inflation.

Sweden’s Riksbank followed, citing the same motivation for the policy in the first quarter of 2015.

Outside of Europe, the Bank of Japan decided to implement a minus 0.1% deposit rate for the accounts it holds in commercial banks in January, to spur prices and create growth.

Switzerland central bank — the SNB — eventually settled on negative

BANKING

interest rates of minus 0.75% on sight deposit account balances in January 2015, or charging commercial banks for parking their reserves.

This was to counteract the wave of monetary easing on the euro, which placed upward pressure on the Swiss France, as it was now a safe haven currency.

The knock on effect of this was the Danish krona then became a sought after commodity for investors.

For currency control purposes, the Danish central bank cut the key monetary policy interest rate down to -0.75%, from zero in early 2015.

So far, the impact of negative rates has been mixed on an institution by institution basis.

The ECB has seen inflation steadily spiral downwards since the introduction of the negative deposit facility rate, even though this was lowered to

minus 0.4% in March.

In February, deflationary pressures by minus 0.2% had set in, before the inflation level was back to zero in March. According to Eurostat, annual inflation has not managed to climb above 0.5% that was recorded in June 2014.

Demand for the Danish Krona has reduced, the DKK/EUR rate was 0.134 in January 2015, and until a recent spike in value, the krona has remained lower in value compared to the euro, albeit not by a spectacular margin.

As the ECB attempts to kickstart the euro area with an expansion of its quantitative easing programme to €80 billion a month, economists fear that the attractiveness of the Swiss Franc may increase again.

And a deeper negative rate than 0.75% on their sight deposit accounts may be needed.

The pressure on the Swiss franc has not completely subsided; in January 2015, the Swiss franc bought €1.00, and by April the figure was €0.91.

Both Denmark and Switzerland have also had to ponder a sizeable build up in foreign reserves.

Sweden has lowered its policy rate this year from minus 0.35% to minus 0.50%, believing that it was necessary due to global uncertainty and continued low inflation.

Their inflation rate has, however, increased since the negative rates were implemented. After mostly being pegged at below zero throughout 2015, inflation has leapt into positive figures this year, up to 0.8% in March.

Additionally, the benchmark LIBOR rates have also fallen into minus figures against the euro and the Japanese yen.

“

Negative rates are an illustration of the lack of other policy options.

This is not by choice.

Monetary policy has been exhausted; negative interest rates are more of a symptom of this Hosuk Lee-Makiyama, a director with the think tank the European Centre for International Political Economy

Euro-zone Credit Impulse & GDP

Sources – Thomson Datastream, Capital Economics

Jul - Sep 2016 International Finance Magazine

19

BANKING

Experts say

N

20

egative interest rates are not a traditional policy that has been used in times of economic distress, and it’s a strategy that has attracted its fair share of controversy.

Jack Allen, a European economist with macroeconomic research company Capital Economics, said, “In principle, lowering interest rates from plus 0.25% to zero should be same as lowering them from 0% to minus 2.5%. The end result should be the same as an increase in interest rates, in terms of the impact of borrowing and spending.

The minus rates have contributed to the selling of bank equity, as we have seen, particularly in Italy.

So far, it’s difficult to gauge the impact of negative interest rates passed onto consumers and enterprises, even if they are borrowing at an agreed floating rate.

On balance, if it’s necessary to cut rates below zero, then it should be done.

“The main reason behind negative rates is to boost inflation. In most cases, inflation in these countries is close to negative. It usually takes 18 months to 2 years for an effect on the real economy. We think it will be a positive move.”

International Finance Magazine Jul - Sep 2016

Allen also does not see why negative rates can’t be used as a tool to combat economic downturns in the future, and believes that over the next few years, interest rates will be above zero in recovery.

Conversely, Hosuk LeeMakiyama, a director with the think tank the European Centre for International Political Economy, opined, “Negative rates are an illustration of the lack of other policy options.

This is not by choice. Monetary policy has been exhausted; negative interest rates are more of a symptom of this.

“If you want to increase inflation, there are other instruments that come to mind.

If you look at Japan, many accuse them of being exchange rate manipulators and expand their export market, but central banks can do other things.

“Managing trade and supporting export liquidity by negative interest rates can result in spurring imports as well as exports. Fiscal policy

over inflation is far more effective.

“Negative rates is not a sustainable policy. It’s not how you conduct central banking. If you lack inflation and growth, then that is down to structural roots in the economy, and is not a monetary issue.

“Rate reduction into negative figures can be used as a systemic tool, but more money on the markets is really only a short-term measure.”

What the long-term effect of negative interest rates will be is unknown. The Bank of International Settlements has already concluded that there is evidence of mortgage rates in Switzerland being hiked.

Retail customers should remain unscathed, but this is unlikely to silence the doubters over relying on below zero interest rates. IFM editor@ifinancemag.com

BANKING

Annual Cost of Negative Interest for Banks (% GDP)

Policy Rate & Borrowing Costs in Euro-zone (%)

Sources – Central Banks, Thomson Datastream, Capital Economics

Jul - Sep 2016 International Finance Magazine

21

Islamic Finance

22

sukuk issuance promises a good year Helped by more governments and regulators creating legal frameworks to support issuance Tim Evershed

International Finance Magazine Jul - Sep 2016

islamic finance

I

t has been a good year so far for the sukuk bond market with separate reports confirming an increase in issuance during the first quarter with signs of more to come.

The sharia-compliant form of finance has been gradually gaining traction and increasing in usage for some time now. Sukuk has been helped as more and more governments and regulators create legal frameworks to support issuance and as issuers attempt to attract a broader investor base whilst still including Islamic finance investors.

According to research from Fitch Ratings, total new sukuk issuance, with a maturity of more than 18 months, in the Gulf Cooperation Council (GCC), Malaysia, Indonesia, Turkey, Singapore and Pakistan was around $11.1bn in the first three months of the year. Issuance was up 22% from the fourth quarter of last year and 21% from the opening quarter of 2015.

Meanwhile non-sukuk bond issuance of $17.1bn was down 23% quarter-onquarter and 45% year-onyear. Sukuk represented 39.3% of total bond and sukuk issuance in these countries during the quarter — the highest proportion in the past eight years, according to Fitch.

Sovereigns and supranationals led sukuk issuance in the first quarter of 2016, including $2.5bn by the Indonesian government and $1.5bn by the Islamic Development Bank.

Bashar Al Natoor, Fitch’s Global Head of Islamic Finance, says, “These types of issuer are likely to remain dominant, but there is also the potential for bank and corporate issuance, especially as bank liquidity has become tighter as oil prices have dropped.”

Separately, a PwC report on the GCC bond and sukuk markets showed they have improved in Q1 2016 compared to Q4 2015 irrespective of overall activity remaining muted.

“We saw some positive sentiment towards the end of the quarter. However, investors remain price sensitive and susceptible to challenging market conditions, and, therefore, bond and sukuk pricing was higher, generating additional challenges when pricing and closing transactions. In fact several companies put on hold or delay their sukuk/ bond raising aspirations for pricing reasons,” the report said.

The recent decline in oil prices has pushed a few of the Gulf Cooperation Council member states to issue or consider domestic issuance of sovereign debt in 2015.

In sovereign issuances, the Central Bank of Kuwait and the Central Bank of Bahrain were the most active GCC players during the quarter. The Central Bank of Bahrain issued 14 treasury bills ranging between $92 million and $526 million in size and totalling over $2.6 billion.

The issuances with threemonth maturities from the Central Bank of Kuwait

amounted to $2.6 billion while issuances with sixmonth maturities amounted to $1.4 billion.

On the corporate side, ICICI Bank led the way with a $700 million 10-year bond with a coupon rate of 4%.

Steve Drake, head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East region, says: “Bond and sukuk markets were relatively quiet in the first quarter of 2016; albeit activity improved compared to the last quarter of 2015 and is expected to pick up further in the next quarter. However, uncertain market conditions for the remainder of 2016 continue to cause uncertainty within the investor community and the debt market in general.”

However, Fitch’s research shows that since the start of 2009, the proportion of sukuk issuance in five of the last six quarters has now been above the average.

Al Natoor says, “We expect sukuk issuance, both overall and as a proportion of total issuance, to remain relatively strong in the second quarter based on the pipeline of deals and the potential for some governments to issue debt to make up for weak oil revenues. The third quarter is likely to be quieter, due the combination of the summer break and Ramadan. Overall, our expectation is for 2016 sukuk issuance to at least match 2015 issuance.”

23

We expect sukuk issuance, both overall and as a proportion of total issuance, to remain relatively strong in the second quarter based on the pipeline of deals and the potential for some governments to issue debt to make up for weak oil revenues Bashar Al Natoor, Global Head of Islamic Finance, Fitch Ratings

New laws New sukuk laws in some countries should support issuance by helping create a

Jul - Sep 2016 International Finance Magazine

Islamic Finance

FITCH RATING’S ISLAMIC FINANCE COVERAGE 2 Islamic Finance Based Issuers 8 Sukuk Issues

$4,510,000 Volume of Sukuk

Issuance (USD 000’s) 5 Sukuk Programmes/SPV’s

4 Islamic Finance Based Issuers 15 Sukuk Issues

$8,345,187 Volume of Sukuk

Issuance (USD 000’s) 5 Sukuk Programmes/SPV’s

1 Sukuk Issues Volume of Sukuk

$500,000 Issuance (USD 000’s) 1 Sukuk Programmes/SPV’s

22 Islamic Finance Based Issuers 1 Sukuk Issues Volume of Sukuk $500,000 Issuance (USD 000’s) 1 Sukuk Programmes/SPV’s

44 Sukuk Issues

$35,059,270 Volume of Sukuk

Issuance (USD 000’s) 25 Sukuk Programmes/SPV’s

Data as of February 2016

24

standardised structure and improving transparency.

The most recent country to update its sukuk regulation is Oman, where a new law was published last week that includes requirements to set up a trustee structure and a special purpose vehicle.

This follows new rules in Kuwait in 2015. The lack of a specialised legal framework for sukuk has been a key factor in the limited issuance in Kuwait over the past few years and the new rules are therefore a significant step. They provide a broad framework, setting out general terms and structure of sukuk, requirements for appointing trustees and setting up special purpose vehicles as well as rules on governance and ensuring sharia compliance.

Malaysia remains the leader of the global Islamic finance industry in terms of regulation, standardisation and sukuk issuance, representing more than

half of issuance worldwide in 2015. Fitch sees the implementation of the Islamic Financial Services Act 2013 (IFSA 2013) as a key development that enhances the regulatory and supervisory framework of Malaysia’s Islamic financial industry, adding transparency and clarity on issues.

Malaysian sukuk issuance jumped 50.5 per cent to RM22.8 billion in the first two months of 2016, compared to RM15.1 billion for the same period in 2015, says RAM Ratings.

The Malaysian government’s $1.5 billion issuance is expected to be one of the largest in the second quarter of the year and has attracted interest from diverse domestic and international investors.

Activity in Turkey Elsewhere, Turkiye Finans has recently announced plans for Turkey’s first ever sukuk

International Finance Magazine Jul - Sep 2016

issuance to be denominated in Euros.

Al Natoor says, “We expect sukuk issuance, both overall and as a proportion of total issuance, to remain relatively strong in the second quarter based on the pipeline of deals and the potential for some governments to issue debt to make up for weak oil revenues.

“Given the difficult economic environment, issuers are likely to favour issuing a mix of bonds and sukuk, or solely sukuk, rather than solely bonds, as they will not want to exclude part of the market.

The Islamic banking sector, for example, is not allowed to invest in traditional bonds while regional and international investors are increasingly comfortable investing in sukuk.” IFM editor@ifinancemag.com

Bond and sukuk markets were relatively quiet in the first quarter of 2016; albeit activity improved compared to the last quarter of 2015 and is expected to pick up Steve Drake, head of PwC’s Capital Markets and Accounting Advisory Services team in the Middle East

islamic finance

Islamic Finance Based Issuers

by Sector 4% 1 Issuers

Volume of Sukuk Issuance

by Sector (USD 000’s)

7% 2 Issuers

38% $18,408,840

35% $17,069,562

<1% $60,000

27% $13,376,056

89% 25 Issuers Corporates

Financial Institutions Insurance Sovereign/Supranational

25

Islamic Finance Based Issuers

by Region

Volume of Sukuk Issuance

by Region

14%

1%

1%

17%

7% 9%

72%

79% Africa Asia Europe

Middle East North America

Data as of February 2016

Jul - Sep 2016 International Finance Magazine

Special focus: Oil & Gas

26

The power of US crude How Americaâ&#x20AC;&#x2122;s output is influencing the oil industry Peter Taberner

International Finance Magazine Jul - Sep 2016

Special focus: Oil & Gas

L

ast December, United States politicians on Capitol Hill agreed to lift the ban on exporting crude oil, which was in place for 40 years.

The move was part of a $1.1 trillion spending bill approved by the senate, which will fund the federal government until next year.

Crude oil production in the US has been expanding since the turn of this decade, according to the US Energy Information Administration (EIA). Last year, 9,431 thousand barrels of crude were being generated per day, a level that has not been reached since 1972.

Although the EIA predicts that fewer barrels will be on the market from the US with a negative crude oil production growth rate of minus 8.8 % forecast for 2015/16, the trade embargo being rescinded was seen as a major leap forward for oil

producers. This was done despite the international oil market being saturated and prices plummeting.

US crude is a lighter product that requires less processing, and is environmentally friendlier than heavier sour crude.

The markets that should be available to US’s oil producers include Latin America feeding refinery systems in Brazil and Venezuela, and the light crude will be attractive to European trade partners as well.

Andrew Slaughter, Deloitte’s executive director for energy solutions, said, “Since the ban was lifted on January 1 this year, there has been a steady stream of cargos onto international markets. Overall, the market is still in an oversupply situation globally, but the supply and demand gap is narrowing as sources of new production decline.”

There has been a steady decline in US oil production for more than a year. The global market is beginning to burn off inventories, so the market is moving towards equilibrium, Slaughter believes.

“The global market produces 95 million barrels a day. Crude oil in the US accounts for only a small fraction of that.

Exporting means you have trade optimisation. The US refinery system made investments over the years to tailor medium heavy crude, adjacent to Latin America. While the US produces lighter crude, now a proper trade off will happen between the different types of crude, facilitating the market.

Producers will get full value as opposed to the discount system to move the light crude into the US system.

The downside is that margins in some refineries

27

Overall, the market is still in an oversupply situation globally, but the supply and demand gap is narrowing as sources of new production decline Andrew Slaughter, executive director for energy solutions, Deloitte

Jul - Sep 2016 International Finance Magazine

Special focus: Oil & Gas

U.S. Field Production of Crude Oil

28

will be reduced, especially in the east and mid-west.”

Continental Resources is an oil producer that has been a prominent advocate of reintroducing crude exports. Chairman and CEO Harry Hamm opined that free markets are working again, less than six months after the ban was lifted, leaving a more stabilised global oil market.

“Thanks to the technological advancements developed by America’s independent oil and natural gas producers, the world is moving from a concept of ‘resource scarcity’ toward ‘resource abundance’. This

is the modern miracle of American oil and natural gas.

“Imagine a world where access to electricity saves millions of lives a year.

Where free markets work and energy prices are stabilised for consumers worldwide.

“Where Saudi Arabia, Iran and Russia are no longer allowed to use energy as a weapon. That world is within our reach. It all comes down to one thing – the freedom to develop America’s vast energy resources.”

It remains to be seen just what impact US’s

oil production will have on their international competitors and on geo political scenarios.

Paul Ashworth, a North American macro economist with research company Capital Economics, said, “The United States is a net importer of oil, and it’s not going to be a net exporter of oil. In general, there is a long time possibility that North America as a whole could be self-sufficient in oil, with the addition of Canadian imports.

“The United States in theory might not need Saudi imports, but we are nowhere near that situation.

Currently, US production has fallen back due to the expenses involved.”

On a geo political level, Ashworth does not believe that there is a substantial risk that US’s level of oil production has the capacity to upset other major oil nations.

“It will come down to price. At the moment, shale oil is more expensive. The only thing that will get US’s produce up is if prices rebound. I guess that shale oil is a fairly new technique, the cost of getting the oil will fall as technological advances surge forward.

“If enough time, effort and money is invested over the next five to ten years, the price of extracting oil will be reduced.”

Gas production The global effect of gas production in the United States also has to be considered.

The EIA can confirm that throughout 2015, just over 28.8 million cubic feet of gas was produced. The decade began with 20.1 million cubic feet of gas being extracted.

Outside of a dip in demand in the early part of the eighties, due to the deep

The presidential factor

T

here will be a further twist to come, with the outcome of this year’s race for the White House.

Untypical of any Republican candidate, Donald Trump has so far stoked an anxious feeling in the oil industry, as he has made few

International Finance Magazine Jul - Sep 2016

overtures.

In contrast, Hilary Clinton has pledged that she will have 500,000 new solar panels installed, and to cut back on oil consumption by a third, a frightening vision for the domestic oil industry.

Special focus: Oil & Gas

recession at that time, since the 1940s, gas production has gradually increased to be an influential part of the US’s energy mix.

Ashworth added, “Gas and oil markets are very different, as oil can move around very easily to a country like Saudi Arabia. Gas is has to be liquefied and put into a ship. The

United States might be opening gas export terminals soon.

“Gas prices are very different if you are comparing Europe, the United States, and Japan. The United States is not producing enough gas to cover its domestic market, so therefore is not exporting much.

“Generation of electricity from the

old style coal production is changing to gas production for environmental reasons, amongst other reasons.

Domestic demand for natural gas will go up.” IFM editor@ifinancemag.com

U.S. Field Production of Crude Oil (Thousand Barrels per Day) Decade

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

1850s

Year 9 0

1860s

1

6

8

7

6

7

10

9

10

12

1870s

14

14

17

24

30

33

25

37

42

55

1880s

72

76

83

64

66

60

77

77

75

96

1890s

126

149

138

133

135

145

167

166

152

156

1900s

174

190

243

275

320

369

347

455

488

502

1910s

574

604

609

681

728

770

822

919

920

1,037

1920s

1,210

1,294

1,527

2,007

1,951

1,700

2,112

2,469

2,463

2,760

1930s

2,460

2,332

2,145

2,481

2,488

2,723

3,001

3,500

3,324

3,464

1940s

4,107

3,847

3,796

4,125

4,584

4,695

4,749

5,088

5,520

5,046

1950s

5,407

6,158

6,256

6,458

6,342

6,807

7,151

7,170

6,710

7,054

1960s

7,035

7,183

7,332

7,542

7,614

7,804

8,295

8,810

9,096

9,238

1970s

9,637

9,463

9,441

9,208

8,774

8,375

8,132

8,245

8,707

8,552

1980s

8,597

8,572

8,649

8,688

8,879

8,971

8,680

8,349

8,140

7,613

1990s

7,355

7,417

7,171

6,847

6,662

6,560

6,465

6,452

6,252

5,881

2000s

5,822

5,801

5,744

5,649

5,441

5,184

5,087

5,077

5,001

5,354

2010s

5,476

5,637

6,476

7,454

8,708

9,431

Source: U.S. Energy Information Administration

Jul - Sep 2016 International Finance Magazine

29

Special focus: Oil & Gas

30

Bearing the brunt

The slump is draining billions of dollars from the banking system, stock markets are volatile, investment is slowing and that means banks are laying off staff

OF Oil priceS International Finance Magazine Jul - Sep 2016

Tim Evershed

Special focus: Oil & Gas

T

he fallout of the dramatic fall in the price of oil and gas has been widespread with jobs, investment and the budgets of major producing countries bearing the brunt.

Over the past 18 months, oil prices have fallen by over 70%, from a high of $115 a barrel in early 2015 to $28 a barrel earlier this year.

A recent rally has seen it rebound to around $40 a barrel but this is still well below the market high.

Meanwhile, natural gas prices peaked at over $6 a British Thermal Unit (BTU) two years ago but have dropped to around a quarter of that value.

The fall is due to a combination of stock buildup over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for

the year will be weaker than previously forecast.

The result has been savage with the fall in prices ending the US fracking boom of the past few years and triggering layoffs of more than 258,000 workers globally, according to an analysis by industry consultant Graves & Co. This was underscored by a 61% drop in the number of active oil rigs in the US last year. In fact, the US solar industry now employs more workers than oil and gas, a report from the Solar Foundation claims. Three years of growth in the solar sector has seen employment levels, mainly for panel installers, increase to over 200,000.

Governments have recognised this trend of jobs moving away from the oil and gas to other sectors and have responded with training schemes.

For example, the Scottish government has made a ÂŁ12 million fund available so that oil and gas workers who lose their jobs amid the industry downturn can be given the opportunity to retrain as teachers.

Although the it is usually the workers closest to the wellhead that are most in danger of losing their jobs in a downturn, the extent of these price falls have meant that job losses have rippled outwards.

The oil slump is draining billions of dollars from the banking system, stock markets are volatile, investment is slowing and that means banks are also laying off staff. Banks in the United Arab Emirates have cut an estimated 1,500 jobs in response to the slump, with expatriate bankers bearing the brunt of redundancies.

Lower oil prices are also

Due to the low price environment, energy companies are shelving and cancelling new projects and reducing staff numbers. It may only be a matter of time before companies also reduce spending on maintenance, health and safety measures, and employee training.

If this is the case, then, based on past experience, such cuts in spending will lead to an uptick in losses Andrew George, Chairman of Marshâ&#x20AC;&#x2122;s Global Energy Practice

Jul - Sep 2016 International Finance Magazine

31

Special focus: Oil & Gas

Over the past 18 months, oil prices have fallen by over 70%, from a high of $115 a barrel in early 2015 to $28 a barrel earlier this year

32

squeezing the domestic budgets of Middle Eastern oil and gas producing countries that are simply not used to austerity measures.

Saudi Arabia announced budget cuts for this year to address the alarming deficit of 15% of GDP run up in 2015. Subsidies for water, electricity and petroleum products are likely to be cut, and government projects reined in as the government responds to IMF predictions it could go bankrupt within five years without changes to its economic policy at both home and abroad.

Dhaval Joshi, an economist at BCA, a London-based research company, says, “A commodity bubble has deflated three times in the past 100 years: the first was after World War I; the second after the 1980s oil shock; the third is happening right now. For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt.”

Impact on football world cup?

Qatar is the world’s largest exporter of liquefied

natural gas, which accounts for $60 billion of its annual revenue. However, some predictions have this plunging as far as $37 billion within the next decade as US shale gas production and alternative natural gas sources for emerging Asian economies take their toll.

This drop in revenue comes at the worst possible time for Qatar as it embarks on a number of stadia and infrastructure projects for the 2022 FIFA World Cup. In addition, it will also have to sustain its generous resource-funded

“

A commodity bubble has deflated three times in the past 100 years: the first was after World War I; the second after the 1980s oil shock; the third is happening right now. For the big producer countries, this is a major headache, the ramifications of which are only starting to be felt Dhaval Joshi, economist at BCA, a London-based research company

International Finance Magazine Jul - Sep 2016

Special focus: Oil & Gas

welfare system and finance an ambitious military expansion that included $23 billion in arms deals in 2014 alone.

The energy companies will, of course, be under pressure. They will have to shed jobs, cut the wages of retained staff and send out profit warnings to investors.

In addition, periods of significant pricing falls have been historically met by cuts in infrastructure spending, the shelving of new projects and less investment in health and safety measures.

Less spending, more losses Cost-cutting decisions such as these by the industry appear to have led to increased losses in the past, according to research from Marsh, the insurance broker.

Similar reductions occurred between 1980 and 1986 when Brent crude oil price fell from $35 to $15 per barrel, in the late 1990s when the price fell below $10 per barrel, and in 2008 when the price fell from over $100 to $32 per barrel. A period of increased frequency of, or larger, losses have typically followed soon after.

Already, companies have been cancelling projects and making staffing reductions.

It is estimated that

projects worth up to $380 billion have been shelved, according to consultancy group Wood Mackenzie.

“Due to the low price environment, energy companies are shelving and cancelling new projects and reducing staff numbers.

It may only be a matter of time before companies also reduce spending on maintenance, health and safety measures, and employee training. If this is the case, then, based on past experience, such cuts in spending will lead to an uptick in losses,” says Andrew George, Chairman of Marsh’s Global Energy Practice.

“If economic predictions come to fruition, it could be some time before we see a let up in low pricing, with oil and gas companies set to face increasing challenges over the next decade. On top of a decreased ability to withstand volatility, new risks are emerging from technological and socioeconomic developments,” George adds.

However, there are some winners as low oil prices and surging output have been a boon for the oil tanker business with up to 200 new tankers currently being built around the globe to add to the current fleet of

2,000 vessels. And demand for so-called floating storage, in which producers and traders store spare oil in tankers to sell later at a profit, is also booming. IFM editor@ifinancemag.com

Similar reductions occurred between 1980 and 1986 when Brent crude oil price fell from $35 to $15 per barrel, in the late 1990s when the price fell below $10 per barrel, and in 2008 when the price fell from over $100 to $32 per barrel Jul - Sep 2016 International Finance Magazine

33

Special focus: Oil & Gas

34

North Sea companies are

heading south Their net rate of return has plummeted Peter Taberner

I

n a depressed commodities market, the profitability of the North Sea oil and gas sector has declined.

According the UK’s Office of National Statistics, the net rate of return of those companies who operate in the UK’s continental shelf, areas

International Finance Magazine Jul - Sep 2016

beyond the section of the sea over which the UK has sovereign rights, has plummeted.

In the fourth quarter of 2007, returns were 65.5%, as Brent Crude prices rose. Post-2010, after a rebound following the financial crises, prices began to continually fall.

Returns were a relatively paltry 0.6% in the final quarter of the last year, as the cost of oil capitulated to under $40 per barrel.

Ian Thom, an oil and gas analyst with research company Wood McKenzie, said, “The reduction of profits are clearly a result of the oil

Special focus: Oil & Gas

prices coming down from $100 per barrel to $30 or $40 per barrel. Also, many of the oil fields have high operating costs. Of course, there are many factors that would drive up operating costs, like resource or high labour costs. Between 2012 and 2014, there was cost inflation, and that placed the UK at the higher end of costs. When the prices fell, companies focused on reducing costs and capital expenditure.

“The main thing for providers is resetting the cost base, and to make new investment and projects work. On the design side, can the operators revise their blueprints to ensure that costing is more efficient?

“Also, standardisation could increase. Operators have bespoke approaches.”

Chancellor George Osborne has attempted to give the North Sea a helping hand by saying that

the Petroleum Revenue Tax would be ‘effectively abolished’.

He cut the same tax last year, significantly down to 35% from 50%.

This follows the findings of the Wood Report, published in 2014, which made recommendations on how the UK could receive a £200 billion boost with the recovery of 3 to 4 billion barrels of oil.

The key points of the report were a shared strategy for maximising revenue and greater collaboration, resulting in the sharing of infrastructure and reducing legal delays.

Also, there was the creation of the regulatory body, the Oil and Gas Authority, which was formed last year to help develop the industries.

Despite government support, Mike Tholen, economics director of the trade association Oil & Gas UK, is not optimistic.

“In these conditions, the UK North Sea industry will continue to struggle to sustain its current scale.”

The lobbying group believes that more than £330 billion has been paid to date on UK oil and gas production.

However, the treasury has noted that tax take on production will fall in 2015/16. The trend will continue up to 2021.

Tholen added, “Although the sector has seen success recently in reducing its cost to produce a barrel of oil or gas by a third, unfortunately the indications suggest that the oil price will remain lower for longer. So it’s crucial the pace of these efforts doesn’t abate.” IFM editor@ifinancemag.com

“

Although the sector has seen success recently in reducing its cost to produce a barrel of oil or gas by a third, unfortunately the indications suggest that the oil price will remain lower for longer. So it’s crucial the pace of these efforts doesn’t abate Mike Tholen, economics director of the trade association Oil & Gas UK

Jul - Sep 2016 International Finance Magazine

35

Special focus: Oil & Gas

Green will

flourish

Reduced oil prices have little impact on renewable sector, as it is linked to electricity

36

Suparna Goswami Bhattacharya

T

he fossil fuel divestment movement began somewhere around the fall of 2012. At that time, oil prices were $111 per barrel and investment in the oil industry was at an all-time high.

Hence, the ‘green movement’ gathered momentum. Celebrities across the globe joined the movement forcing many companies to shift away from oil. Various reports showed that the vast majority of fossil fuel reserves are unburnable if global temperature rise is to be limited to 2°C. Cut to 2015-16, oil prices are around $30 per barrel. Though it might be good news for oil importing countries, experts fear that lower oil prices may act as a deterrent for the growth of the renewables sector.

International Finance Magazine Jul - Sep 2016

“If oil prices continue to be this low, what is the motivation for people moving towards greener technologies.

By people, I do not mean those who are pioneers of the green movement, but commoners — people who make their choice depending on what works out cheaper. This includes even governments of developing countries,” says an expert from Credit Suisse.

Additionally, lower oil prices would discourage investment in renewables.

Estimates from Wood Mackenzie, a global energy, metals and mining consultancy group, indicate that $380 billion of global investments in oil projects has been deferred or cancelled. Low prices resulting from a near-term oversupply have increased the financial risk of such projects and reduced the industry’s cash flow

available for investment.

Geoffrey Styles of GSW Strategy Group says, “So far, the movement towards green energy hasn’t played a role in the cuts in oil investment because this shift has not yet materially affected the global demand for oil, which continues to grow.”

However, the larger context of the global response to climate change creates new uncertainties for future oil investment that may have an effect in the longer term, he adds.

Changes in oil investment have been largely heterogeneous across countries since the collapse in prices.

For example, Iran has witnessed a surge in energy-related investment since sanctions were lifted and other countries are pushing ahead with extraction-related projects that will

Special focus: Oil & Gas

come online in the longer term. However, oil-related investment is trending downwards in a number of countries.

This is not so much related to the fall in energy prices in the past year and a half, but expectations that the supply glut will linger over the next year. This is what producers look at and it is what has driven down expansionary capital expenditure in the energy sector.

Stability in oil prices Jessica Lovering, Director of Energy at The Breakthrough Institute, does not agree with the analogy and argues that lower oil prices will not impede growth of renewables. “Renewables are predominantly a part of the electricity market, and not related to oil. However, people’s opinion of the need for renewables does decline

with the price of oil, but it doesn’t seem to translate to the market. It’s a different story for coal and gas, which are substitutes for renewables, but oil is not,” says Lovering.

Abhay Bhargava, associate director & regional head — Middle East, Energy and Environment Practice, Frost & Sullivan, says, “Demand for renewables has a more direct linkage to prices of electricity.

Globally, demand for renewables has witnessed an upswing owing to rising electricity prices, need for energy security and growing environmental consciousness.”

In 2014, the IMF predicted that a decline in oil prices would lead to a period of strong growth of the global economy.

However, the prediction has not come true.

Falling capital expenditure in the energy

sector in Canada, Norway and across the Middle East has done more to harm these economies than help them. At the same time, oil importers have not seen the boost that cheaper energy was expected to deliver.

“Despite this, I do not foresee any sort of energy crisis. The technology that has enabled extraction from shale fields and tar sands will not disappear and, going forward, will put a ceiling on oil prices,” says Hill. It is unlikely that prices will climb over $100 per barrel and the price floor of below $30 a barrel was already reached earlier this year. “This should keep energy prices within a comfortable price range for the foreseeable future, warding off any potential impending energy crisis,” says Hill.

All said and done, there is a need to strike a balance between renewable and non-renewable sources of energy. You can’t have one replacing the other.

“While renewables are great to have, they do suffer from the issue of intermittency and availability of natural resources (wind, sun), which cannot really be guaranteed.

Hence, a balanced approach is required to arrive at sustainable solutions from a long-term perspective, which enhances the net energy security position for any nation,” says Bhargava. IFM

“

So far, the movement towards green energy hasn’t played a role in the cuts in oil investment because this shift has not yet materially affected the global demand for oil, which continues to grow Geoffrey Styles, GSW Strategy Group

editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

37

Special focus: Oil & Gas

Getting ready for winter Declining gas production in EU countries might necessitate greater imports Peter Taberner

38

T

his winter maybe months away, but the mild conditions of the last cold season is unlikely to have an impact on how European gas companies approach the end of this year, due to the amount of gas in storage.

According to Gas Infrastructure Europe, a representative organisation of European institutions, across all

International Finance Magazine Jul - Sep 2016

of the European Union members; the amount of gas that was in storage up to May 9 was 37.6% of the maximum capacity of available storage room.

Trevor Sikorski, head of natural gas and carbon at research consultancy Energy Aspects, said, “From May last year to this year, storage in Europe has increased to 32 billion cubic metres (bcm) from 26 bcm. It’s above average, but not by a huge margin.

“We have also experienced a cold April, which has hiked the demand for gas, which has reduced the level of storage. The main difference for gas markets is the mount of Liquefied Natural Gas (LNG) that will be available to European markets. There should be two US LNG trains and three from Australia online. The demand in the EU will not be able to take up all of the energy, supply will

Special focus: Oil & Gas

outstrip demand.”

He also believed that since the financial crash, the gas market has structurally not fallen very far. The competition from coal and nuclear power, and the spread of renewables, has resulted in the decline of thermal power.

“We have seen investment on gas supply and LNG, especially in Russia. The expansion of LNG markets will be a big thing, and provide a different dynamic.

Russia will not want to crush prices in the market.

There are a lot of very gas specific projects coming online.”

Individually, each gas company will decide on its strategy for next winter.

Outside of levels of storage, extra amounts of gas can be procured through suppliers and in the spot market, if necessary.

WINGAS has 20 years of experience in the

German gas market, and is a provider of gas that is bought from the North Sea and Russia.

They believe that demand has been stable in most sectors, and has only decreased in power plants.

The mild winter last year did not have any significant impact on its sales.

“Gas prices will probably stay low. Suppliers and storage operators are forced to become even more cost efficient, within their own organisation,” spokesperson Nicholas Neu said.

“Production in Europe will decline, which means imports must increase.

Demand will also be high in the long term. Not least because natural gas can and must play a major role in the European energy shift.”

Dutch based company Gasunie, an independent state owned gas infrastructure company, provides the gas market

with storage facilities, in the form of Energy Stock.

This is a fast cycle storage, which enables very fast injection and withdrawal operations, supporting specific needs in energy trade.

Chris Glerum, Gasunie’s manager of external communications, opined on the overall gas situation, “There is a growing European import gap, as declining indigenous gas production is causing the change of European gas supply flows.

“Energy transition and carbon dioxide reduction targets have an impact on the role of gas and positioning in the energy mix. Low gas prices in Asia and worldwide gas price convergence will make Europe an attractive market for spot LNG supply.” IFM editor@ifinancemag.com

“

We have also experienced a cold April, which has hiked the demand for gas, which has reduced the level of storage. The main difference for gas markets is the mount of Liquefied Natural Gas (LNG) that will be available to European markets. There should be two US LNG trains and three from Australia online. The demand in the EU will not be able to take up all of the energy, supply will outstrip demand Trevor Sikorski, head of natural gas and carbon at research consultancy Energy Aspects

Jul - Sep 2016 International Finance Magazine

39

FINTECH

African fintech

startups are

hot property Investors are attracted by the size of the market, a significant value proposition and a huge pool of exit opportunities Tom Jackson

40

I

nvesting in fintech is on the rise globally, none less so than in Africa, where innovative ways of delivering financial services are required more than anywhere else.

According to the inaugural fintech report released by KPMG and CB Insights, 2015 was a record year for fintech startups when it comes to funding, with the $19.1 billion invested globally representing a 106 per cent jump from 2014.

International Finance Magazine Jul - Sep 2016

The same growth can be seen in Africa, where research released by tech startups portal Disrupt Africa found the fintech sector was the second most attractive for investments in technology startups in 2015, attracting 29.6 per cent of total investments, more than $55 million.

Many of the rounds were sizeable, with the likes of South Africa’s WiGroup ($26.7 million), Nigeria’s Paga ($13 million) and Kenya’s Kopo Kopo ($2.1 million)

FINTECH

leading the list.

Investors are attracted by the size of the market, a significant value proposition and a huge pool of exit opportunities, according to Andrea Bohmert, whose South African VC firm Knife Capital has invested in a number of fintech startups.

“Africa has the largest amount of people that are excluded from the traditional financial system, or if not excluded, then they have to pay a premium price,” she said. “Including this part of the population will have a significant leverage on many sectors: retail, travel, logistic, health, education, government.

I actually cannot think of a sector that will not be affected.”

The statistics bear out Bohmert’s view

that exclusion creates a huge opportunity for innovative fintech solutions.

McKinsey & Company puts the number of adult Africans that lack access to formal financial services around 330 million, approximately 80 per cent of the continent’s adult population.

“Financial inclusion is still a huge challenge for African countries. Much of the continent’s population is still unlikely to make use of banking products. The ‘traditional’ services offered by financial institutions were most often developed for totally different regional markets, and do not address the demands and needs of the continent’s consumers, which has also resulted in lacklustre uptake of the services on offer,”

said Gabriella Mulligan, co-founder of Disrupt Africa. “Fintech products crafted for local markets will soar, and provide the key to increasing financial inclusion across Africa.”

Africans have already demonstrated that they are willing to turn to innovative solutions to solve these problems. Mobile money has been a huge success on the continent, with transactions hitting $656 million in 2014.

Vahid Monadjem, chief executive of South African enterprise payments provider Nomanini, says M-Pesa has been a precursor to other innovations in financial inclusion.

“It is enabling a number of other new business models, which include

41

Africa has the largest amount of people that are excluded from the traditional financial system, or if not excluded, then they have to pay a premium price Andrea Bohmert, partner, Knife Capital

Jul - Sep 2016 International Finance Magazine

FINTECH

»

Akinola Jones’s Nigerian startup Aella Credit raised a total of $7.2 million last year

42 innovative ways to finance solar electricity systems for home, crop insurance for smallholder farmers and credit scoring for formerly financially excluded consumers,” he said. “The first financial rails are still being laid down, and already the potential to run new services on them is clear.”

Investment, as a result, is flooding into the sector.

Monadjem says fintech has the ability to attract both impact investors, focused on the socio-economic results of the innovation, and more commercial investors, smelling huge returns.

Akinola Jones’s Nigerian startup Aella Credit raised a total of $7.2 million last year, and he says investors see in fintech the

opportunity to both impact lives and make significant returns. “Also, Africa presents country specific challenges in the areas of lending and payments that can be replicated across emerging markets. Fintech in Africa is a cost saver and an efficiency builder,” he said.

As Monadjem says, the sector is still in its infancy, but there is no suggestion that growth will not continue. Jones says Africa’s large young, tech-savvy population will continue to use innovative fintech services.

“The populace is looking for easier ways to do business with all the infrastructure challenges that abound. The financials are also very attractive,

International Finance Magazine Jul - Sep 2016

as some fintech solutions provide complementary services to large banks,” he said.

Attractive though the sector is, startups in the space still face challenges. Bohmert says fintech startups in Africa often struggle with the complexities in regulatory environments, which are different in each country.

“Many startups underestimate how difficult it is to integrate their solution with banks or other institutions, how much time and money it costs to get accredited, and that this is often a process beyond their control,” she said.

“Some either are not ready to get the accreditation, others don’t survive long enough

We believe it is important for entrepreneurs to connect not just with peers but with industry experts who can share their insights with the entrepreneurs, and may well trigger some very differing thinking that sees the entrepreneur make significant changes to their business Dominique Collett, senior investment executive at RMI

FINTECH

for the accreditation to come through. Getting it working in one place is great, but scaling across multiple institutions or even countries is a totally different issue.”

With this in mind, a number of organisations have started support programmes or accelerators to assist African fintech startups in reaching their potential. These include international banks, such as Barclays and Citibank, as well as smaller groups such as Sasware in Nigeria and Rand Merchant Insurance (RMI) in South Africa.

Dominique Collett is a senior investment executive at RMI, which has launched the AlphaCode incubator for fintech startups in Johannesburg. She says hubs like AlphaCode can play a part by helping entrepreneurs make the

right connections at the right time.

“We believe it is important for entrepreneurs to connect not just with peers but with industry experts who can share their insights with the entrepreneurs, and may well trigger some very differing thinking that sees the entrepreneur make significant changes to their business,” Collett said.

“These connections and conversations often lead to exciting new projects and partnerships, generating new strategic directions that take businesses to a different level and helps them scale.”

Challenges in building a strong team, and boosting distribution networks are other areas where startups can use the help of support organisations, she said.

Mulligan said with

this level of support, it is impossible to imagine anything other than serious growth for the sector.

“The fintech space is coming into its own in Africa. The best is yet to come. There are increasing numbers of highly innovative, world class entrepreneurs developing new products, and this trend will continue as countries increasingly are prioritising tech learning and putting in place support for startups,” she said. IFM editor@ifinancemag.com

43

It is enabling a number of other new business models, which include innovative ways to finance solar electricity systems for home, crop insurance for smallholder farmers and credit scoring for formerly financially excluded consumers Vahid Monadjem, chief executive of South African enterprise payments provider Nomanini

Jul - Sep 2016 International Finance Magazine

OPINION

OPINION

Tom Price-Daniel

44

Poor in

gender

diversity International Finance Magazine Jul - Sep 2016

The 2016 FinTech 50 reveals a group of organisations dominated by men

OPINION

E

very industry is feeling the influence of technological advances, with rapid digital developments making waves and offering new possibilities across many different sectors.

The financial services industry is no different, with the innovative fintech sector combining cutting edge digital systems with complex financial requirements to improve efficiency without sacrificing compliance.

Spearheading this sector is FinTech City, an organisation bringing together the global fintech community and producing the FinTech 50, an annual list of the industryâ&#x20AC;&#x2122;s most innovative and transformative European start-ups. Now in its fourth year, the list recognises pioneering businesses and places them in front of key investors and potential customers.

Even though this community represents an eclectic mix of originality and vision, a clear lack of gender diversity is apparent.

At a time when traditional organisations are facing scrutiny for their lack of female representation, the 2016 FinTech 50 reveals a group of organisations dominated by men. The lack of women was most evident in senior positions; of 355 leadership positions, only 33 are held by women â&#x20AC;&#x201C; only two of whom are CEOs. Despite the ongoing debate over gender representation and equal pay, the divide is still clear in even the most

advanced and innovative organisations. So, what can feasibly be done to encourage women into this sector and ensure that employee and leadership teams demonstrate equal representation?

The pioneersâ&#x20AC;&#x2122; approach The amalgamation of technology and financial services is resulting in a burgeoning sector, with rapid advances making it one of the fastest growing arenas in the UK. Success is no longer measured by a rise in employees, profits and customers over a period of decades, but can be achieved within a matter of months, with agile and progressive start-ups easily winning global contracts.

With their flexibility and malleable business plans, fintechs have the opportunity to carve new pathways and define their own standards, which means that matters such as equality and diversity should be embedded from day one. Established businesses are often held

down by traditional or ingrained policies, which were created years ago, back when the business world had entirely different attitudes to gender and diversity.

Fintech companies, however, are not shackled to these concepts, but are free to set a precedent that encourages variety and integrates the skills of diverse individuals.

Recent statistics from McKinsey found that more diverse workforces can deliver clear financial benefits, with greater gender diversity on the senior executive team corresponding to a high performance uplift: for every 10% increase in gender diversity, profits rose by 3.5 percent.

These figures offer a clear call to action that fintech trailblazers should pursue; by giving women the opportunity to fill roles throughout the company, firms will be in a much stronger position to maximise profits.

As such, the innovative

and forward thinking approaches that make fintech companies successful should be applied to their core values, helping to implement a structure that futureproofs both development and success.

The talent pool & pipeline Broadly speaking, the financial services and technology industries both have a reputation for inequality when it comes to gender representation.

This is by no means down to deliberate prejudice, but rather as a result of many underlying factors, including a long-held tradition of having male workers in the sector, and the lack of females pursuing careers in either industry, even from an early age.

Overall, the 2016 FinTech 50 includes fewer women in leadership roles than the previous list in 2015, signaling that there is significant work to be done to reverse this trend and encourage a more diverse fintech community.

Jul - Sep 2016 International Finance Magazine

45

OPINION

The lack of women was most evident in senior positions; of 355 leadership positions, only 33 are held by women â&#x20AC;&#x201C; only two of whom are CEOs

46

In order to achieve this goal, organisations must identify existing female talent and encourage women to follow a career in this sector. Talented females should then be nurtured towards leadership positions, with firms using their flexibility and freedom to ensure roles are created with the requirements of their diverse workforce in mind.

The pool of women in the financial services and IT sectors is relatively limited, so fintech businesses should look for the desired skills in other industries. The 2016 Fintech 50 included only two females in senior marketing CMO positions, one CFO, and one chief legal officer, highlighting areas where women could be encouraged to make sideways moves to such roles in the fintech sector, bringing with them expertise and a wealth of specialist experience.

The fintech community

can also capitalise on the attractive prospect of working for a pioneering and fast growing company, and make considered efforts to approach schools and universities to generate interest and engagement with students at crucial points in their career decision making. Coding and analytics, for example, is already becoming ingrained in education curriculums. Businesses can continue to ensure all students leave education with the necessary skills by informing them of the options available and qualifications needed from an early stage. By supporting young people in arming themselves with knowledge and information they need to succeed, fintech firms can help demolish vocation stereotypes and build up a pipeline of talent with an equal representation of men and women.

International Finance Magazine Jul - Sep 2016

Competing with the big names Giants such as Google, Facebook and Twitter are well-known for their ability to attract vast numbers of graduate applications.

However, whilst these technology heavyweights seem to have the pick of the bunch when it comes to recruitment, financial technology is the disruptive newcomer when it comes to destination employers. As the FinTech 50 continues to host the most promising and pioneering start-ups and help them towards becoming industry leaders and eventually household names, the industry must work to define the reputation it wants, highlighting the exciting, successful and innovative nature of this work in order to attract the next generation of talent.

Fintech start-ups can also learn from their technology predecessors, taking on board the famously defined company values of organisations such as Apple, and learning from the importance of internal culture from Amazon, which thrives on healthy competition and big ideas.

Any business that takes care to build a positive reputation and meet the requirements of its prospective employees is likely to win over talented individuals and compete with more established

companies.

The future of fintech The FTSE 100 is subject to quota fulfillment and on-going monitoring for gender diversity and pay, with the Lord Davies report setting out targets for women on boards. While the fintech industry is in the early stages of development and not yet under the microscope, the FinTech 50 statistics demonstrate that female representation in senior positions is poor, and suggests that the industry should take steps to address this issue now, before it gains a reputation for inequality that mars its innovative status.

While enforced quotas might not be the answer, the fintech community and developing start-ups should address the diversity of their workforce in the early days. By learning from more established organisations and applying their sense of originality and agility to their core business values, fintech firms will be well placed to encourage and engage skilled men and women for both graduate and senior positions as they continue to grow and thrive. IFM editor@ifinancemag.com

Tom Price-Daniel is Director, Alderbrooke

COVER STORY

COVER STORY

48

Follow

eToro enables people to copy successful traders who post their trades, but not the amounts

THE leader T

he stock portfolio of a stroke nurse at Brighton and Sussex University Hospitals in the UK is up 6.72 percent on eToro over the last three months, with a risk level of just 2.

“Consistency discipline and a reliable trading system are the elements I trust when I trade,”

International Finance Magazine Jul - Sep 2016

explained the nurse, who had been an analyst at Amex for several years.

“Behind every trade, there is a trend identified, a target and a stop.” Risk scores can range from as low as 1 to a high of 10.

The eToro site is a pioneer in social trading. People from around the world — with the notable exceptions of the

Tom Groenfeldt

US and Canada — can enroll, deposit money with the firm, which is a broker, and then invest directly or by copying successful traders who post their trades, but not the amounts.

Once an investor chooses someone to follow, he registers the decision and the amount to dedicate to that leading trade, and eToro’s computers keep the

COVER STORY

trades in line.

The most successful traders with many copiers can earn substantial sums, up to 2 percent of assets under management for traders whose copiers are investing $300,000 (in aggregate) or more with them.

The company, which was founded in Israel and has dual headquarters in London and Cyprus, has 4.5 million registered users in more than 170 countries around the world trading currencies, commodities, indices, ETFs and CFD stocks online and says thousands of new accounts are created every day.

More than 6,000 eToro traders based around the world are being copied, said Nadav Avidan, head of communications at the firm. “They are becoming a new generation of money managers.

They definitely have real potential to create a very profitable work from home

arrangement, but as in any online business, you need to be professional in what you do and give the right attention to those who copy you.”

Cooperation, community and interaction are the key components of the eToro trading experience, the company says on its web site. It has a staff of community managers and market analysts to help traders.

One of them, Mati Greenspan, explains “My expertise is in providing topnotch analysis of the financial markets.” He has published articles on the eToro web site on simple market strategy, trading news and simple portfolio strategy.

Avidan said that one Norwegian investor started on the site at 19 and by the time he turned 20, he was on the front page of his country’s leading newspaper and was managing a few million dollars.

“If you are an amazing trader and can get people to copy you, with $50 million in assets following you, you can get $1 to $2 million a year, and you can do it in your pajamas from your sofa at home.”

The best investors with growing numbers of copiers are using low risk strategies and have a real sense of social responsibility, he said. “They care about what is happening to their community, care about explaining.”

When the company recently launched in Russia, he went to Moscow to show eToro’s public relations agencies how the site works.

Avidan pulled up a trader he is following, but not copying. The trader had experienced poor returns in January .

“On his post, he said that January was a weak month and then explained what he was planning for February. Almost no one left him because he is

“

They are becoming a new generation of money managers. They definitely have real potential to create a very profitable work from home arrangement, but as in any online business, you need to be professional in what you do and give the right attention to those who copy you Nadav Avidan, head of communications, eToro

Jul - Sep 2016 International Finance Magazine

49

COVER STORY

Cooperation, community and interaction are the key components of the eToro trading experience, the company says on its web site

50

communicating everything to his audience and they understand what is happening. Most people when they first start with financial markets think it is win win win all the way. But after a few weeks, they see that the market can always surprise you, no matter how experienced you are. Once you get the idea the market can go both ways, all that is left is the trust you have in the person you trust with your money.”

Investors at eToro can trust the investors they are copying because they know the leader is making the same investments they are.

“In traditional money management, you are trusting someone in a suit and tie, and you have nothing in common with in term of aligned goals.”

Both want to make money, but the money manager doesn’t necessarily make more by helping an investor make more.

“The investment manager wants to get a raise, a promotion, move up the hierarchy and if that means he has to sell the products the bank is telling him to sell, then he will. He and the investor are not in it together.”

By contrast, at eToro the

International Finance Magazine Jul - Sep 2016

lead investor and the traders are in it together.

“With COPY, if you copy me, say with $1,000, from the first second of establishing this relationship, we have the exact same goal. Every time I (the lead investor) do something with my money, I am doing it because I think I will make more money from my money. That means if you, the copier, saw a loss of 10 percent you know the leader lost 10 percent of real money. It really helps people to understand we are all in this together and doing our best to make the most profit from the

market.”

The eToro selection of assets includes most major US equities, plus equities from the UK, Germany, France, Spain and Italy. The platform also includes ETFs, currencies, commodities and indices and operates in eight languages.

“We are a brokerage. We execute your orders and take a small fee on each transaction. When you are a social trading network, one of the basic things you learn very fast is that people share more when they are happy. People who make profits will want to engage in the social aspects of the platform; if you are making profit you want to share it with the world.”

Helping people to profit keeps the social network engaged, alive and interesting, he added.

“That means the social network is a business objective for us, not just nice to have.”

Other social networks that offer trading may post one new story a day, providing little incentive for members to come back and participate.

“If you go to our platform, in less than a minute you get new updates — so many people from all over the world are discussing the markets. If you enjoy talking about the markets, then it makes sense. You would feel

COVER STORY

The platform appeals to people in their 20s and 30s who are comfortable sharing useful information rather than simply posting pictures of what they had for breakfast the need to go back and see what others are saying.”

The platform appeals strongly to people in their twenties and thirties who are comfortable with social networks and sharing useful information with others — tapping the wisdom of the crowd rather than simply posting pictures of what they had for breakfast.

“People understand that sharing is a way to achieve thinking.”

That concept is not

widespread in finance where investment banks don’t want to share secrets, except perhaps with their biggest customers.

By contrast, eToro wants to become the most successful investment house in the world, with its clients.

“If you did your analysis of Twitter and have an understanding of why it is tumbling, and what elements are going to drive the stock back up, it makes no sense not to share it. We

are not in competition, you don’t need to gain points over me. We share because we want everyone to be successful and have more people join our agenda and invest in the future we want to see.”

So the boards at eToro continue to offer a range of advices, like one trader’s views to play it safe on the possibility of Brexit.

“Trade what you see, keep it small and low leverage, take profits more often and

set your stop loss in the green.”

Meanwhile, OilyTycoon admits he, or she, can’t follow self-advice on oil.

“Another way to reduce trading stress is to stay away from oil. Wish I could practice what I preach, though.” IFM editor@ifinancemag.com

51

‘Real chance for ordinary people’

T

he rise of social trading worldwide has led to rapid growth in the number of people engaging with global markets, said Yoni Assia, cofounder and CEO, eToro. “What was once the preserve of the few, with access often limited by geographic location, is now open to anyone who wishes to take control of their money – regardless of where they live. From a fire marshal who lives outside of Barcelona, to a horse trainer from the Netherlands, eToro gives a real chance to what the industry refers to as ‘ordinary’ people. And when tapped into the wisdom of the crowd, and joined by millions of other traders, we see that those so called ‘ordinary’ traders have as good a shot at beating the market as any investment firm in the world.”

Jul - Sep 2016 International Finance Magazine

OPINION

OPINION

Luke Davis

Bridging the gap between 52

investors

and SMEs

Over a third of UK’s investors with more than £100,000 in investments would invest in SMEs but do not have the knowledge to do so International Finance Magazine Jul - Sep 2016

OPINION

S

mall and medium enterprises (SMEs) are global enablers of innovation, growth and productivity.

Their flexibility, drive and willingness to take risks have made them invaluable contributors to industry progression, whether it is in finance, construction or digital technology. Despite this, many British SMEs could be in trouble. This was addressed back in 2015, when Prime Minister David Cameron acknowledged a £1 billion funding gap that is preventing the growth of SMEs, fuelled in part by institutional lending reducing at a rate of £5.7 million a day.

Regardless of the sector or country they operate in, small businesses require funding to upscale.

Traditionally SMEs would have turned to bank loans as the answer to this problem; however, since the

global financial crisis took hold in 2008, banks have become far more hesitant with the money they lend to businesses. With bank loan approvals declining, an alternative needed to be found – the solution came in the form of private equity investments.

The consequences have been significant, with alternative finance platforms revolutionising traditional lending practices. In an industry once dominated by large banks, private equity schemes such as equity crowdfunding, P2P lending and tax-incentive investment policies have diversified the range of avenues available to SMEs to secure finance.

Britain acts as a microcosm for this wider trend. SMEs account for 99% of all private sector firms in the UK; they are propelling the British

economy forward with a combined annual turnover of £1.8 trillion in 2015 – this represented 47% of total private sector revenue.

However, these businesses would not be able to flourish without access to capital and this is where the UK has excelled in recent years.

A major factor driving business progression in the UK has been government-backed taxincentive programmes – only a few remain, but these are schemes that encourage private equity investment into qualifying businesses by offering tax breaks to investors.

The most significant of these programmes is the Enterprise Investment Scheme (EIS).

Launched in 1994, the EIS has raised £12.3 billion for over 22,900 individual companies, proving to be an invaluable source of finance for British SMEs.

The scheme is growing every year; 2,795 companies raised £1.56 billion in 2013/14, a notable rise on the year before when 2,470 companies raised £1.03 billion.

The success of the EIS as a business funding model has encouraged other countries to adopt a similar tax-efficient investment scheme, the most recent being Australia. By bringing together investors and innovators, tax-efficient investment schemes like the EIS have played a critical role in supporting the growth of SMEs and, in turn, the nation’s private sector.

Despite these positives, there are still a number of hurdles that are inhibiting SMEs from reaching their full potential. While a huge amount of focus in the UK has been placed on helping budding entrepreneurs, start-ups and micro-

Jul - Sep 2016 International Finance Magazine

53

OPINION

Prime Minister David Cameron acknowledged a £1 billion funding gap that is preventing the growth of SMEs, fuelled in part by institutional lending reducing at a rate of £5.7 million a day

54

businesses, other more mature SMEs looking to take the next step in their business journey are lacking support. Instead, they are confronted by a finance deficit that is hindering their transition from fledgling small businesses into thriving mid-size enterprises.

Research has shown that over half of British SMEs are failing to survive for more than five years, and a lack of finance has been identified as one of the main reasons why. Bridging this gap overnight is no easy task, but with greater access to private equity

and alternative finance – a market that grew by 84% in 2015 to deliver £3.2 billion worth of vital investments, loans and donations – we could be on the right track.

The question now is whether the UK has the structure in place to ensure that private equity, in its various forms, will continue to propel SMEs forward. Recent research

by IW Capital revealed that British investors continue to hold positive sentiment towards Britain’s business progression, with 71% of investors, who hold an investment portfolio valued over £40,000, confident in

International Finance Magazine Jul - Sep 2016

the growth capabilities of SMEs. These are reassuring findings, proving that serious investors are, at the very least, supportive of Britain’s business capabilities. However, given that there is such a large collection of investors who are confident in the future growth of SMEs, why are these businesses still confronted with a £1 billion funding gap? This boils down to a simple case of a lack of investor knowledge.

We found that over a third (34%) of the UK’s investors with more than £100,000 in investments

would invest in SMEs but do not have the knowledge to do so. This is a staggering finding; it equates to £126 billion in untapped potential private investment funds.

Confidence in SMEs and the desire to invest in them are both clearly present, but the knowledge required to turn this positive sentiment into business investment is evidently lacking.

This issue is particularly pertinent in light of Britain’s Spring Budget in March, which did little to alleviate the disproportionate tax bill paid by the country’s high earners. The average income tax bill for people in the UK earning over £100,000 – the top 2.7% of the British taxpayer population – is a hefty £81,700. In addition to this, investors with over £40,000 worth of investments pay an average £26,058 in income tax – more than four times the national average.

To ensure a more effective tax planning strategy, a large number of British investors are turning to one of the few remaining government-backed taxefficient investment options available to them that also supports business growth: the EIS. This is demonstrated by the fact that over half (54%) of the UK investors we surveyed with an investment portfolio over

OPINION

£40,000 are considering investment through the EIS as part of their tax strategy for the 2016/17 financial year. For this reason, tax-efficient investment schemes designed to propel business progression are well-placed to begin plugging the funding gap faced by British SMEs. The UK has always prided itself on being a world leader in innovation and business trends. Much of this stems from the nation’s SMEs who have been turning to private equity finance platforms and alternative finance to overcome traditional lending barriers and inject much needed capital.

Although ensuring that new ventures have the finance needed to get an idea off the ground is vital, to truly foster the UK’s reputation as a trailblazer of business and technology, we have to ensure that growing businesses do not lose momentum. This calls for a greater focus on scale-up funding and development finance.

If investors are confident that SMEs can expand and want to invest in promising business, then as an industry, we have to provide them with the tools and resources to do so.

Uncovering a population of investors who are eager to back growing businesses is resoundingly positive, but the number of people lacking the knowledge to do so has encouraged us to launch a new initiative – Race to Scale.

In partnership with leading industry bodies and prominent crowdfunding

platforms - such as Seedrs, SyndicateRoom, Crowdcube, Growthdeck and Envestors - we’re opening a call to entries for companies in need of scale-up funding, to submit their business proposals.

Successful companies will then be selected to pitch in front of a live audience in a bid to secure a share of £100 million in development finance.

Although a key objective of Race to Scale is to raise capital for promising businesses, we are determined to raise investor awareness. In order to do this, we have teamed up with the UK Business Angels Association (UKBAA) and its new investor accreditation programme.

As the first quality controlled angel investor training scheme, the UKBAA’s accreditation programme will enable new and less experienced investors to gain the

relevant skills and information needed to form an effective investment decision. Coupled with a series of events and ongoing investor support, we hope to instill confidence into the UK investor and ensure that they feel informed enough to invest in some of the best business talent that Britain has to offer, and ultimately help growing companies to fulfil their potential.

On the world stage, the UK has set an example to follow. Thanks to its booming alternative finance industry, the wealth of innovative SMEs that form our private sector, and the success of government initiatives such as the EIS, Britain acts as a valuable case study for other nations to take inspiration from.

If the nation fails to act and address investor education around private equity and alternative finance, no longer will

Britain serve as benchmark in these fields and business investment is destined to be limited. To ensure that similar nations worldwide do not stumble at the same hurdles and let SME momentum stagnate, as an industry, we have to prioritise knowledgesharing for both companies and the investors who lack the means to back promising business. IFM editor@ifinancemag.com

Luke Davis is CEO, IW Capital and co-founder & chairman of Crowdfinders

Jul - Sep 2016 International Finance Magazine

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Aviation

Dear passengerS, the captain is

perplexed

Argentina’s national carrier poses the biggest challenge in the career of its new CEO Ana Mano

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S

ince nationalisation in 2008, Aerolíneas Argentinas was being bankrolled by a generous federal government, a situation that is no more. Elected on a conservative platform, Argentine President Mauricio Macri chose to end systematic subsidies to airline services provided by the state’s inefficient carrier.

The argument was simple:

the government considers unacceptable subsidising air transport services that benefit ‘the richest segment of the population’ while the country lacks basic infrastructure and social services.

Under the old credo, money was not an issue for the management of Aerolíneas Argentinas.

Every time more was needed, the former President Cristina

International Finance Magazine Jul - Sep 2016

Fernández de Kirchner would print pesos to finance a roster of social programs, and the airline whose services were expected to connect the interior of the country and heat up the regional economies.

However, several years later, the airline accomplished nothing of the sort. Nationalisation only brought losses and additional personnel. The fleet grew from 28 to 74

airplanes, but the flights remain expensive, and there are no direct links between major cities; passengers have to fly through Buenos Aires, the main hub.

Even before Macri took office, the skeletons were visible. Excesses included former CEO Mariano Recalde receiving at least two salaries, one from Aerolíneas Argentinas and the other at subsidiary Austral. In the post

Aviation

nationalisation period, the airline ran consistent budget deficits after nearly doubling its headcount, according to the official information available.

What now?

With a fiscal deficit hovering around 7% of Argentina’s GDP last year, Kirchner left office at the end of 2015 leaving several unpaid bills. In the case of Aerolíneas Argentinas, the inheritance was translated into a projected budget deficit of 15 billion pesos (about $1 billion at the time the estimate was made) for 2016. This is the highest shortfall since returning to state hands eight years ago.

The immediate problems include a renegotiation of debt in arrears with aircraft supplier Boeing, estimated at $110 million when a new management arrived in January. As the year progresses, uncertainty in

relation to fuel prices and complicated salary talks this coming August will add pressure on the company.

The state’s wherewithal to support the airline will be vital, but will come at a cost. With the money demanded by the ailing airline to cover its deficit, the government could pay 39 million pensions or 170 million child support benefits, according to Isela Constantini, whom Macri appointed to be the airline’s new CEO. The plan is to cut the deficit to zero in four years, which calls for a deep reorganisation. In a letter to employees that was leaked to the press in early May, the CEO urged all departments ‘to accelerate’ cost cuts because the government had ‘again decided to cut subsidies’.

After the leak, a spokesperson said the company is now expected to

receive $260m in subsidies this year compared with about $420m it had sought.

Constantini was president of General Motors for Argentina, Uruguay and Paraguay before taking on the Aerolíneas Argentinas job. Turning around the company could be her biggest career challenge.

The expropriation of Aerolíneas, as its prior owners called it when the move was challenged at a World Bank arbitration court, reflected a strategy of renationalising key public services begun in 2003.

The tidal wave of state capitalism embraced the national post service, the private pension system and oil company YPF, which were taken over by the government. In the case of Aerolíneas Argentinas, the move meant an exponential growth of its workforce to 12,200 employees, and the loss of $2 million per

»

Shortly after being confirmed as CEO, Isela Constantini said she knew Aerolíneas Argentinas had excess employees, but was trying to figure out ‘where’ they were

day, according to a recent appraisal.

The skeletons Shortly after being confirmed as CEO, Constantini said she knew the company had excess employees, but was trying to figure out ‘where’ they were.

It was clearly a strategy to buy time.

According to SkyTeam data from 2014, Aerolíneas Argentinas boasted the highest employee rate per transported passenger, and the highest number of employees per airplane, among its 23 members.

After several weeks on the job, Constantini has been avoiding direct confrontation with the six unions that represent the workers. But layoffs and voluntary dismissal programs will be inevitable to deflate the labour cost bubble, say observers.

Constantini hired two consultancy firms for a more detailed diagnosis of the situation, and the study is expected to indicate how best to allocate resources going forward. Unprofitable routes to Europe should be closed, as should domestic flights that take off with 50% empty seats.

There is also room to grow cargo services because the company was subutilising its cargo capacity.

Nevertheless, it faces growing competition as the government authorised rivals to operate new routes, so streamlining and boosting efficiency is of the essence.

In 2009, McKinsey & Company said state-owned enterprises continued

Jul - Sep 2016 International Finance Magazine

57

Aviation

Excesses included former CEO Mariano Recalde receiving at least two salaries, one from Aerolíneas Argentinas and the other at subsidiary Austral to control vast swaths of national GDP. In the case of Latin America, this percentage was 15 percent in the year after Aerolíneas Argentinas nationalisation.

President Mauricio Macri has been saying the company will remain under state control. But for McKinsey, that would be inefficient as state-run enterprises ‘struggle to meet the private sector’s performance levels, and potential profits remain unrealised’.

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There is hope Franco Rinaldi, who wrote a book on Aerolíneas Argentinas, says a state-run airline can be profitable, citing the example of Ethiopian Airlines, Air China and Cathay Pacific.

During his research for the book, he concluded selling a 49% stake to Scandinavian airline SAS in 1987 was a missed opportunity. Even

nowadays, he defends a merger as an interesting option for the incumbent administration, but cautioned job cuts will be mandatory. Layoffs were a deal breaker when Etihad bought Alitalia in 2014, he says.

Constantini admitted publicly that Aerolíneas’ management is not professional, remarking on several occasions the company was ‘run from the political [circles]’. The company’s last audited balance sheet was published in 2013 and KPMG was still auditing the numbers related to 2014 when Constantini took the helm. “At Aerolíneas, the employees don’t know how much is left at the end of the month,” Constantini said in a televised interview.

But not everyone is critical of the old ways. According to Martín Fernández, who

International Finance Magazine Jul - Sep 2016

teaches statistics at the University of Buenos Aires, the nationalisation strengthened the 66-yearold Aerolíneas Argentinas.

He pointed out that the company’s sales doubled to $2 billion in 2013 from the level they were when Spanish travel group Marsans was running it.

He used data from the last audited balance sheet to verify sales outgrew demand in the period, increasing yield per passenger.

Another positive development involved the lowering of the budget deficit by 71% five years after nationalisation, to $250.5 million, says Fernández. Nevertheless, the government was still bankrolling the airline, which for him was not a problem. Based on recent disclosures, he calculated that the company was returning to the state’s purse 17% more than it received as subsidies, a net sum of about $40 million, in the form of taxes.

The point is where was all that value going.

Shortly after the new managers came in, a mini-scandal erupted.

Sol, a regional passenger carrier, stopped service without any prior notice after Aerolíneas Argentinas unilaterally revoked an operating agreement with the company. Some 300 people were out of

a job. Nevertheless the arrangement meant the unjustified transfer to Sol of some $66,000 per day since September 2015.

Signing the contract with Sol was one of the last acts of Mariano Recalde as CEO of Aerolíneas Argentinas.

Many years before, another deal would raise some eyebrows. It was the acquisition of 20 Embraer E190 jets in 2009, which cost about $730 million, according to press reports. The purchase was financed by the Brazilian Development Bank (BNDES). After the announcement, it emerged the E190s were allegedly overpriced. This triggered an investigation by the Argentine Anti-Corruption Office. That probe is on and Aerolíneas Argentinas said it will cooperate if asked to.

Embraer, the seller of the E190s, is also being investigated in the United States for possible violations of the Foreign Corrupt Practices Act in operations in five countries. In late 2009, federal judge Sergio Torres authorised raids in the headquarters of Aerolíneas Argentinas in connection with the possible payment of bribes amid the acquisition of the jets. IFM editor@ifinancemag.com

People in the news

T

wenty-eight is often the age when most people have just about established themselves on the professional front and now looking at charting out their lives on the personal front. But it was different for Vijay Mallya.

When his father Vittal Mallya died in 1983, the UB Group had interests in brewing (UB), distilling (McDowell’s), polymers (Hindustan polymers), batteries (UB-MEC), petrochemicals (UB Petrochemicals), pharma (stakes in Aventis Pharma, Bayer India) and food (Cadbury India). At that time, group’s market capitalisation was about a few million dollars. As of 2013, it had revenue of $5.4 billion and market capitalisation of approximately $12 billion.

His exclusive VIP-only parties on his private yacht The Indian Empress were the talk of the town. At 95 metres, The Indian Empress is one of

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the larger private yachts in the world.

His quest for the perfect abode led him to buy over 25 properties across the globe, including one at Island of Sainte-Marguerite. Mallya had his own Boeing 727 to fly to any of his two dozen estates around the world. The jet also doubled up as his office.

His investments included an Indian Premium League cricket team and a Formula One team. He has a collection of over 250 vintage cars.

But as it happens in life, nothing is permanent. Like his rise, which was relatively quick, his fall has been meteoric and larger than life. His foray into the airline business — Kingfisher Airlines — in 2005 led to his downfall and affected his hold over his other businesses as well.

Kingfisher Airlines went down and so did Mallya who is now trying to stave off creditors to whom he owes close to $2 billion. That did not, however, deter him from carrying on

A doomed

flight Foray into airline business reduces billionaire Vijay Mallya to a millionaire and then to a fugitive from lenders Suparna Goswami Bhattacharya

International Finance Magazine Jul - Sep 2016

with his lavish lifestyle. And, that is where the story takes a twist. Very seldom in history has the shutting down of a company led to the kind of backlash that Mallya is facing.

“The reaction of the Indian public has not been only about the shutting down of a company. The fact is, Mallya has been brash about it,” says Xavier Prabhu, brand consultant and the founder of PR-Hub, a Public Relations company in India.

For the uninitiated, after the shutdown of Kingfisher Airlines, employees of the company were not given salaries for months together. In fact, Kingfisher still owes Rs 300 crore to over 3000 employees. At least one person committed suicide due to the financial travails.

Malavika Harita, CEO, Saatchi & Saatchi Focus Network, feels that Mallya’s on-the-face image has been largely responsible for his negative image in public. “When you have

People in the news

an employee committing suicide due to non-payment of dues, there is no way you can justify partying or holding a birthday bash in Goa. An entrepreneur should be responsible enough to take care of employees. If you are unable to pay salaries, lie low.

Do not continue the same in-your-face lifestyle,” says Harita.

His over-the-top birthday bash had irked many in the country, including the Reserve Bank of India (RBI) governor Raghuram Rajan.

“If you flaunt your birthday bashes even while owing the system a lot of money, it does seem to suggest to the public that you don’t care,” he had said.

Brand consultants and experts blame him for underestimating public sentiment.

“People close to Mallya know he is not somebody who says sorry easily. His personality is such. The only error, I feel, he made was not coming out in the open and saying sorry. That is a big fiasco, which has hurt his image a lot,” says Harish

Bijoor, founder, Harish Bijoor Consults, a brand consultant firm.

A business going bankrupt is nothing new.

In fact, the world is replete with examples of businesses shutting down.

“I do not think people are blaming him for his business failure. I am sure there are companies in India who owe more to banks than what Mallya does. However, his attitude towards his employees has been the problem,” says Prabhu.

IFM spoke to a former Kingfisher employee who quit the company after not being paid a salary for a month. “Those were horrible days. I did not have a family to support then, but I knew how some of my colleagues, who had families to support, suffered. The management did not communicate much to the employees. We were just asked to be patient,” she says.

In fact, most of the brand consultants say that his flamboyant image was well accepted by the public and

nobody had a problem with it.

“I do not think India does not accept flamboyancy. Having

said that, I must say the social conscience is on the rise around the world and people do not accept unnecessary over-the-top lifestyles,” says Harita, adding that even in the US, during the 2008-09 financial crisis, there was a huge backlash when people responsible for the fraud were seen flying around in first class.

Experts believe that it will be difficult for Mallya to resurrect his personal brand.

Santosh Desai, Managing Director and CEO, Futurebrands, says, “See, nothing is impossible. But his is a typical boom-andbust story. Sure, failure is looked down upon in India, but people do not face humiliation for it. In his head, he is still the king. So, do not think he will make any extra effort to resurrect himself in the eyes of the public.”

Harita echoes

be really really difficult for him.”

Prabhu feels that it is important for people, especially public figures, to know their circuit breaker.

“As a brand you need to know how much you can push. Mallya clearly did not follow this rule. He continued to take people for granted and, as a result, he has now become the poster boy of loan recovery. Now he has to start from scratch to create new assets.”

Clearly, the ‘king of good times’ has a tough road ahead of him. “I think he will always be known as the king of good times.

Maybe we can tweak this a little and say the king of good times who fell down upon bad times. I feel it is possible for him to recreate his personal brand, as bad times do not last forever. But this will need humongous amount of money,” says Bijoor. IFM

editor@ifinancemag.com

Desai’s views. “What will be his new avatar? All his companies are no longer his. Unless he recreates his personal brand, I do not see much happening. It will

Jul - Sep 2016 International Finance Magazine

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INTERVIEW INTERVIEW

‘East Asia is a very important market for deVere Group’ Interview with the CEO Nigel Green

62

International Finance Magazine Jul - Sep 2016

Nigel Green, CEO, deVere Group

Jul - Sep 2016 International Finance Magazine

INTERVIEW INTERVIEW

Congratulations on winning International Finance Magazine’s ‘Best International Advisory Company EAST ASIA’ award.

Thank you. It’s an honour to receive it. This award – our seventh in as many months – is a reflection of the unbridled energy and commitment of our deVere Group teams in Hong Kong, China (Shanghai), Japan (Tokyo) and throughout the East Asia Region. The award showcases the dedication to providing our clients with a result-focused service.

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Tell us more about deVere’s operations within East Asia.

East Asia is a very important market for us for three important reasons.

First, this region is where you’ll find some of the world’s biggest and

most influential financial hubs, including Hong Kong, Shanghai and Tokyo.

Clearly, as one of the world’s largest independent financial advisory organisations, we need to have a presence in these territories.

Second, these dynamic, global financial centres are home to and are constantly attracting more expatriates and international investors.

We’re widely recognised as the leading cross-border financial specialists and the vast majority of our 80,000plus clients fit into these two groups.

Third, there is an enormous growth potential for the financial advisory companies across East Asia.

There are, for instance, cities in China that are amongst some of the most highly-populated in the world. So, there’s a huge

demand for financial advice, yet most international firms don’t yet have a presence outside the main capitals.

Plus, as the population of East Asia becomes more affluent and as the middle class grows, the opportunity for businesses like ours to grow is massive.

Does this mean that you have plans to expand across East Asia?

Yes, demand for our specialist advice is increasing within all the areas in which we currently operate [Hong Kong, Shanghai and Tokyo] and also outside these cities too, in places such as South Korea. As such we plan to meet this soaring clientdriven demand with a careful, controlled, strategic growth across this region and on a more global level too.

What sets deVere apart from other firms within the international financial industry?

There are several key distinguishing factors. First is our truly global presence.

We currently do business in more than 100 countries.

If you’re an expat or an international investor, you are, typically, more likely to have a transient lifestyle.

Indeed, 25 per cent of all expats move to a different city or country each year.

These people need and expect a continuity of service and advice. As we have a global network of 71 offices, located in most of the major expat destinations, such as Dubai, Abu Dhabi, Geneva, New York, London, Hong Kong, Cape Town, Doha and Sydney, deVere is uniquely placed to take care of them wherever they are now and wherever they’re likely to be in the future.

Second is our wellestablished alliances with the world’s most respected financial institutions.

This means we have an unrivalled suite of products, many of which are exclusive to deVere clients, to help them achieve their longterm financial goals.

And third, we are always looking at ways to stay ahead and innovate for our clients. It’s in our DNA. What is your ambition for deVere?

I’ve said before that I would like deVere to be the British equivalent of Bank of America Merrill Lynch.

That’s a big ambition.

How will you achieve

International Finance Magazine Jul - Sep 2016

INTERVIEW

this?

By remaining true to our core strategy: to continue to put our clients at the heart of everything we do.

What will the next five years hold for the international financial services industry?

The international financial services industry is going to be defined by its unprecedented growth over the next five years.

Ongoing and increasing client demand will be the key driver of the sectorâ&#x20AC;&#x2122;s expansion. As people and companies become ever more globalised, the need for professional crossborder financial advice is set to skyrocket.

Other important factors that will help shape the next half decade will be a growing reliance on technology and social media in how we interact and communicate with clients.

up their portfolios now, in these more volatile times, in order to grow their wealth.

The first point is regarding the long-term benefits. No one can accurately predict when the markets will finally reach the bottom â&#x20AC;&#x201C; it could be a month, it could be six months, who knows.

But what we do know is that over the longer term, the performance of stock markets is fairly predictable: they go up. Indeed, for this reason, over a longer time horizon, investing in equities is almost universally recognised as one of the best ways people can accumulate wealth.

By not topping up and diversifying portfolios now,

investors are pushing back the longer-term benefits they could be starting to reap. Why forsake the long-term gains that would be generated on money invested now?

The second, the buying opportunities. The seesawing markets are a chance for investors to put new money into markets at lower prices. A slump in the market means that there are high quality equities available at more attractive prices.

Of course, no one knows for sure what will happen in the immediate future but, as stock markets typically rise over a longer-term period, now is the time to capitalise on the more favourable

prices of decent stocks.

Whatâ&#x20AC;&#x2122;s next for deVere Group?

I recently joked whilst being interviewed at the London Stock Exchange that we want world domination. But I was only HALF joking! IFM editor@ifinancemag.com

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What will be the major challenges for the sector?

Challenges include shifting regulatory landscapes and developing client expectations. That said, we embrace challenges as they force you to grow, to evolve and become even better.

What about challenges for your clients for this year and beyond?

As has been muchpublicised of late, the markets are currently volatile. But investors should be using this to their financial advantage.

There are two key reasons why they should be building

Jul - Sep 2016 International Finance Magazine

Energy

Taking the

off-grid route

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International Finance Magazine Jul - Sep 2016

Miriam Mannak

energy

The number of households that rely on off-grid solar as their primary or secondary energy source is expected to rise from 25 million in 2015 to 99 million in 2020

A

ccess to electricity is something people living in the affluent North tend to take for granted. In many parts of the South, however, there is no such thing as flicking a light switch when the night settles in. Take Africa, particularly the region below the Sahara.

Here, three out of four people rely on charcoal, kerosene, candles, and fossil-fuel powered stopgap technologies for their daily and nightly energy needs.

A recent study by the World Bank Group’s Lighting Global Program, written in collaboration with Bloomberg New Energy

Finance and the Global OffGrid Lighting Association, shows that off-grid solar innovations are changing this scenario slowly but surely.

“Solar-powered portable lights and home kits offer a better service at lower cost,” the authors of the OffGrid Solar Market Trends 2016 Report write. “These products have improved energy access for an estimated 89 million people in Africa and Asia, and provide enough power to lift 21 million individuals to the first rung of the energy ladder.”

Off-grid solar promise The number of

households that rely on offgrid solar as their primary or secondary energy source is expected to rise from 25 million last year to 99 million in 2020, of which 44 million are in Africa. This makes the continent one of the world’s most powerful off-grid solar markets.

Kenya, Tanzania and Ethiopia are the continent’s leading markets, accounting for 66% of sales in the region.

Born and bred in Nkhata Bay, a small rural village on the shores of Lake Malawi, Dikirani Thaulo knows what it means not to be able to switch on the lights after sunset. “Like 99% of my village, my family and

“

Most solar technicians in Malawi work in cities, whilst it is rural people who suffer the most as a result of energy insecurity Dikirani Thaulo, solar technician, Nkhata Bay, Malawi

»

Kenyans who opt for off-grid power systems are able to socialize, listen to the radio and enjoy quality time together due to having electricity at night. For the others, their lives pretty much stop after sunset (6 pm)

Jul - Sep 2016 International Finance Magazine

67

Energy

‘Grassroots and off-grid solar, besides being a powerful player in electrifying Africa, is a viable business opportunity despite the fact that customers typically tend to be poor’ that the Zayed Solar Academy trains rural solar technicians and engineers.

“Most solar technicians in Malawi work in cities, whilst it is rural people who suffer the most as a result of energy insecurity,” says Thaulo, who after completing his studies became one of the Academy’s teachers. “Solar is the way forward when it comes to electrifying rural Africa. It is reliable, clean, always there, and it doesn’t pose health risks as opposed to kerosene and charcoal.”

Data by the World Health Organization (WHO) shows that 50% of global premature deaths among

children under the age of five are due to pneumonia caused by soot inhaled from indoor open fires.

Thaulo says, “Women and children are most at risk of smoke from indoor fires and household pollution. They spend more time indoors than men.”

Pioneering off-grid solar ventures Off-grid solar might help improve people’s access to electricity and it also happens to be a viable business venture. The Bloomberg/WorldBank report suggests that $276 million was invested in the global off-grid solar

M-Kopa, one of the pioneers in installing off-grid solar systems, offers two small solar panels, two lamps, a rechargeable radio, flashlight and a plug point for cellphone charging

»

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I relied on kerosene, which is bad for your health. We used candles too,” says the 22-year old solar technician, explaining how candles are nothing but a luxury in his home country, one of the poorest nations in the world. “One candle in Malawi costs one-fifth of what most people earn per day.”

Little did Thaulo know that one day he would contribute to solving the issue of poor energy access in Malawi. “After finishing high school, I met Gail Swithenbank. She was involved in a newly-built solar academy in Nkhata Bay,” he recalls, explaining

International Finance Magazine Jul - Sep 2016

“

Customers pay us via their cellphones, either daily or weekly, at a rate of $0.40 per day. Once you have paid off the value of the system, it is yours to keep Char Larson, co-founder, M-Kopa

energy

Data by the World Health Organization (WHO) shows that 50% of global premature deaths among children under the age of five are due to pneumonia caused by soot inhaled from indoor open fires industry last year, a 15fold rise from 2013. This figure is expected to grow further, to $3.1 billion by 2020. Africa once again, is taking the cake. “Kenya, Tanzania and Ethiopia are Africa’s leading markets, accounting for 66% of all [off-grid solar] sales in the region. In Kenya, more than 30% of people living off the grid have a solar product at home,” the authors write.

“Pioneers have helped to create a vibrant market.”

M-Kopa is one of those pioneers. Meaning ‘mobile lending’ in Swahili, this venture has been installing off-grid solar systems in people’s homes for the past four years. These are then paid off in small amounts via cellphone payment systems such as M-Pesa.

“Our systems feature two small solar panels, two lamps, a rechargeable radio, flashlight, and plug point for cellphone charging,” says co-founder Char Larson. “Customers pay us via their cellphones, either daily or weekly, at a rate of $0.40 per day. This is approximately ten cents lower than the average daily kerosene expenditure in the region. Once you have paid off the value of the system, it is yours to keep.”

To prevent non-payment, M-Kopa’s systems are fitted with a wireless switch that

is connected to a customer’s phone. “When someone doesn’t pay, the lights go off.

Once they start paying again via their phone, the power comes back on,” Larson continues.

Growing demand He adds that the demand for off-grid solar systems in East Africa – where at most only one-fifth of the people have access to electricity – is huge. “We are adding 500 new customers to our database every day, of which the bulk lives in Kenya,” he says. “We are servicing one in every 20 Kenyan households at the moment, so yes, solar is a good business venture in

East Africa.”

In Tanzania, Off Grid Electrics is rolling out one pay-as-you-go solar system after another. “To use the energy generated by our systems, one has to send us a mobile payment via M-Pesa,” explains cofounder Xavier Francois.

“When we receive your payment, we automatically send you a password, which has to be entered into the system’s meter for you to have electricity.”

Xavier agrees with Larson that grassroots and off-grid solar, besides being a powerful player in electrifying Africa, is a viable business opportunity – despite the fact that

customers typically tend to be poor. “We are growing by 12,000 households per month. The demand is there, making off-grid solar a great investment opportunity.” IFM editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

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INTERVIEW INTERVIEW

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Peter Meyer, CEO, Middle East Association presenting the IFM award to Mohsin Aikal, Head of Consumer Finance, Noor Bank

‘Credit Bureau will give confidence to explore new frontiers’ Interview with Mohsin Aikal, Head of Consumer Finance, Noor Bank

International Finance Magazine Jul - Sep 2016

INTERVIEW

What are the biggest challenges and opportunities in the consumer finance space in the UAE? With over 50 banks, the UAE has always been a very competitive market. 2016 in particular will present some additional challenges.

Firstly, full adoption of the Credit Bureau (which started at the end of 2014), will have a short term impact on Retail Asset growth. Secondly, while oil prices have recovered from the $20 range and are at close to $50, they are nowhere near the $100+ mark that a lot of us had gotten used to. This will certainly have an adverse impact on government revenues and hence spends, trickling down into the entire economy. The UAE GDP growth forecast has already been revised downwards and consumer finance growth is also expected to be slower this year. We are also likely to see higher credit provisions in 2016 in line with the slowdown in economic activity.

However, UAEâ&#x20AC;&#x2122;s fundamentals remain strong and we are likely to see a strong recovery and robust growth over the medium term, especially towards the lead up to Expo 2020 in the UAE. There is an immediate opportunity associated with the availability of a UAE credit bureau; information will pave the way for prudent financing to those who have so far been left out by banks. In the absence of a centralised repository of individual credit data,

banks have shied away from lending to several segments.

The bureau will give lenders the confidence to explore new frontiers and offer credit to individuals who have so far been left out.

The presence of a credit bureau is a fundamental structural change that will prevent over leveraging of individuals, yet widen the population that is eligible for credit. It will improve

credit quality and enhance the customer experience.

It lays the foundation for sustainable and responsible credit growth in the UAE economy.

What are the benefits of Islamic Banking from a consumer finance perspective versus conventional banking?

While conventional and Shariâ&#x20AC;&#x2122;a compliant

financing may appear to be similar (in terms of product and pricing), there are some subtle, but important, differences. The most significant customer advantage is the fact the amount of profit or markup charged to an individual is fixed for the entire duration of the personal finance contract. With a conventional personal loan, events such as missed

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Mohsin Aikal, Head of Consumer Finance, Noor Bank

Jul - Sep 2016 International Finance Magazine

INTERVIEW INTERVIEW

back can add further value to your personal budget.

»

Mohsin Aikal, Head of Consumer Finance, Noor Bank

72

installments and/or installment postponements result in additional interest being charged to customers.

This is not the case with Shari’a compliant personal finance as the profit amount is fixed in advance.

Why is debt consolidation proving popular in the UAE, and when should customers avail it?

The primary reason for debt consolidation is to lower the cost of debt servicing by aggregating multiple facilities (such as personal finances, credit cards and overdrafts) into one single facility (with a lower cost). It makes sense whenever there is an opportunity to consolidate higher priced facilities into one lower priced personal finance facility. Even if it does not result in additional cash in hand, a consumer

can save by paying less every month to service debt.

What debt consolidation options does Islamic finance offer for bank clients?

A personal finance can be availed and used to pay off multiple credit facilities across banks.

Alternatively, a low cost credit card can also be used to absorb the outstanding balances across higher priced credit cards.

What are some aspects that consumers should consider when availing a debt consolidation? a) Find a credit card that offers you a lower rate than what you are currently paying. b) Look at the rate longevity. An offer that advertises ‘0% on balance transfer’ is probably limited to three or six months. Find

International Finance Magazine Jul - Sep 2016

out what the rate is going to be once the introductory period expires. You might be better off getting a card with a constant low rate versus one with a time bound rate respite. c) A low rate card product is even more relevant if you intend to continue using it for additional purchases. Don’t unnecessarily stack up unpaid balances at a higher rate. This will just dampen the savings from the card balance switch. d) Be aware of how the ‘deal’ is structured.

Some banks may have a teaser packaged as ‘0% on balance transfers’. While this is true of interest/profit rates charged, a processing fee might be lurking. e) Evaluate all other features that cards with comparable rates offer.

Dining discounts, free valet parking, air miles and cash

What is Noor Bank’s new Personal Finance product feature and how does it benefit customers?

The product is a very simple initiative to offer convenience and value to our customers. Our customer research (and feedback) concluded that one of the leading purposes for consumer financing is to acquire land/property in their home country. In most places, availing the finance and then remitting the funds are two distinct processes that require time and effort from customers. The Personal Finance remittance feature simply integrates these two processes so that once an application is approved, it is also remitted to the destination account (chosen by the customer with just a visit to the branch). The customer is entitled to a preferential FX rate and a transaction fee waiver. IFM editor@ifinancemag.com

Mergers & Acquisitions

74

Data loss can break

M&A deals International Finance Magazine Jul - Sep 2016

In 2014, over 339 deals collectively worth ÂŁ256 billion collapsed with a major cause being the loss of information located in documents, emails, devices or IT systems Tim Evershed

Mergers & Acquisitions

R

ecent research has shown an alarming trend for mergers and acquisitions (M&A) deals to be delayed, or even collapse altogether, due to the loss of critical data.

In 2014, over 339 M&A deals collectively worth £256 billion collapsed with the loss of information located in documents, emails, devices and IT systems a major cause. It was the worst year for deals derailing since the credit crunch-hit year of 2008 and raises questions about data security amongst the parties involved in what is usually a complex, sensitive and supposedly confidential process.

The research, which included responses from over 500 M&A professionals, including bankers, lawyers, consultants and accountants, highlighted the barriers faced when closing

deals.

“Considering the sensitive nature of M&A deals, it’s alarming to think that data loss remains such a big issue for the industry.

With recent advancements in technology and security policies, dealmakers should be in complete control of the information they need to close a deal efficiently and to a tight deadline,” says Stephen Dearing, MD of EMEA, ansarada, which carried out the research.

There are a huge number of factors that can have an impact on a smooth M&A transaction.

Dearing says, “The challenges and frustrations on M&A deals can manifest themselves in many different ways. It can be from a support point of view, if a company is working with an organisation that doesn’t have local language service support on a large international deal. It can be

through technology issues or downtime mid-deal if an organisation hasn’t got the platform to support the transaction. It can be through security and data loss.”

Data loss can be caused by something as simple as someone like a lawyer or a banker leaving their laptop behind on a train.

If they are running a deal, the device may contain a lot of sensitive information.

Alternatively, it could be a leak to the press from one side or the other, or a third party, before the details of the deal are ready to be released into the public domain.

These scenarios would likely delay deals but larger large security breaches, such as a breach of confidentiality or a mass data loss, could stop the deal completely.

“If it is not a fair process, then it has to be restarted, rebooted from scratch.

It has to go out to tender

Considering the sensitive nature of M&A deals, it’s alarming to think that data loss remains such a big issue for the industry. With recent advancements in technology and security policies, dealmakers should be in complete control of the information they need to close a deal efficiently and to a tight deadline Stephen Dearing, MD of EMEA, ansarada

Jul - Sep 2016 International Finance Magazine

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Mergers & Acquisitions

In one such case, BHP Billiton’s attempted takeover of Canadian fertiliser firm Potash Corp in 2010 fell apart. It transpired that of the eight different law firms working on the sell side, four had been hacked by the Chinese

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again, win the mandate and start over because it could be deemed an unfair process. That could obviously jeopardise the deal completely and result in weeks and months of hold-ups to a deal,” says Dearing.

In one such case, BHP Billiton’s attempted takeover of Canadian fertiliser firm Potash Corp, a multi-billion billion deal, in 2010 fell apart due to data loss.

The Australian mining giant had a $40 billion takeover bid for Potash on the table but found the deal process dogged by

problems. Eventually, it transpired that of the eight different law firms working on the sell side, four had been hacked by the Chinese.

Naturally, BHP felt the integrity of the process was flawed and the deal collapsed.

“The Chinese didn’t want to buy Potash, and the Canadian government wouldn’t have sold out to them. All they wanted to do was scupper the deal and it was scuppered,” says Rick Welsh, CEO of Sciemus.

M&A insurance provides coverage for the transactional risk on deals with a number of elements

for both sell and buy sides.

These include warranty and indemnity insurance, tax liability insurance, litigation buy-out insurance and contingent insurance in respect of specific identified matters or indemnities.

“Warranty and indemnities insurance is intended to cover unknown risk related to the warranties, and occasionally indemnities, in the transaction,” says Thomas Mannsdorfer, Underwriting Director, M&A Insurance at ANV. However Mannsdorfer says data loss is not always covered by M&A insurance,

The Chinese didn’t want to buy Potash, and the Canadian government wouldn’t have sold out to them. All they wanted to do was scupper the deal and it was scuppered Rick Welsh, CEO of Sciemus

International Finance Magazine Jul - Sep 2016

Mergers & Acquisitions

adding, “M&A insurance would not respond directly to data loss. Indirectly, it could respond. There could be a specific data warranty or an IT warranty being breached and leading to a data loss, which would fall within the definition of loss in most standard wordings.

“There is also a specific data extension but that’s not very well known in the market at the moment. We are not seeing demand for that yet, but we are seeing more demand for data warranties, which can be linked up to data protection or IT warranty.”

According to Welsh, law firms have tended to lag behind the banks and other financial services sector companies in recognising and managing their exposures in this area.

He says, “Going back three or four years, law firms didn’t even realise that this was an exposure and didn’t believe they were exposed. The banks, on the other hand, have understood that they have

an exposure and in the UK the Financial Conduct Authority has been prime amongst the people telling banks that they have an exposure. That is general cyber security exposure and in regard to the information banks hold on M&A, they are targets.”

Due to regulatory pressures, particularly in the US, the financial services industry has been forced to face up to its cyber security responsibilities.

This was due to a number of incidents that compromised sensitive financial data.

Other industries that have been forced to follow have included healthcare, credit cards, hospitality and retail, as breaches have highlighted issues within their systems.

M&A dealmakers can take precautionary steps to help maintain data security and integrity. These include avoiding the use of email and ensuring the security and permissions of documents are properly implemented before

bidders are given access. In addition, individuals can be made accountable for the security of the documents in their possession by a dynamic watermark, which helps prevent document leaks.

Dearing says, “Often features and efficiencies can compromise securities.

On the whole, people want a secure process and security is paramount for dealmakers. At the top end of M&A transactions, there is nervousness around deals collapsing. Run your deal on a highly-secure, robust and reliable platform because that lends itself to a much smoother transaction.” IFM

“

Warranty and indemnities insurance is intended to cover unknown risk related to the warranties, and occasionally indemnities, in the transaction Thomas Mannsdorfer, Underwriting Director, M&A Insurance at ANV

editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

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OPINION

OPINION

Nick Nesbitt

78

Route to Solvency II International Finance Magazine Jul - Sep 2016

Pushing existing systems and processes harder is not enough for compliance

OPINION

I

n January 2016, Solvency II, the new insurance industry regulatory regime, established capital requirements and risk management standards designed to increase policyholder protection across the whole of the European Union. Aiming to reduce the possibility of consumer loss or disruption in the event of a large-scale meltdown, the new rules require insurers to hold enough capital to absorb significant losses.

Comprised of three key ‘Pillars’ — financial requirements to ensure adequate liquidity; governance & supervision to improve risk management; and reporting & disclosure to improve transparency of market risks — Solvency II compels insurers to undertake a serious rethink of their business processes. Pillar Three, however, comes with technical complexities that could make it the trickiest to resolve:

insurance companies are expected to demonstrate that all data received from administrators and data vendors is complete, accurate and appropriate.

In the lead up to implementation in January and with the quarterly submission timeline shrinking from the initial 8 weeks to about 5 weeks in 2019, corporates have been scrambling to get solutions in place that not only make submission timely and efficient but that also support multiple data reconciliation criteria and reporting tools, which can produce fast and flexible data analysis.

However, for Solvency II compliance, the harsh reality is that simply pushing existing systems and processes harder is not enough to address the demands of the regime’s rigorous reporting cycle.

Pillar of pain The new reporting requirements focus on the construction,

implementation and supervision of the risk models used for capital requirements. Data needs to be extracted from multiple sources and compiled in a consistent manner to feed the two main narrative reports: the Solvency and Financial Condition Report (SFCR) and the Regular Supervision Report (RSR).

Both cover quantitative and qualitative components, introducing more than 60 templates comprised of 20,000-plus data points.

Ensuring data integrity for that many inputs really needs a considerable level of automation, from the validation of standard Solvency II ETLs to the performance of basic validations, like for instance, completion checks.

You will also need to crosscheck all data entry between the two reports.

The bulk of the work around Pillar Three then comes from gathering, consolidating, reconciling and validating data from a variety of sources.

That means ETL, data entry, calculation and consolidation with stringent audit trails and traceability — all on a potentially bruising schedule.

Frequency of reporting depends on the size of a company’s market share and can be annually and/or quarterly.

This gets even more complicated for insurance groups, where consolidation is required before group reporting. Security and access to sensitive financial data included in the reports, such as asset values, becomes an issue as well. Will your approach to Solvency II compliance allow you to restrict relevant data to relevant users?

Finding and implementing a solution for Pillar Three that suits existing processes and still ticks Solvency II’s workingday timetable box has been – and still is – a challenge for any insurance company.

Most in-housedeveloped, and virtually all spreadsheet-based systems, are likely to groan under the weight of these requirements.

What can be done?

Building your own solution as a stop-gap could be an option, however the optimal choice is an automated system centred on a reporting database.

Reporting needs to be repeatable and auditable on a regular basis, and spreadsheets require manual intervention that consumes loads of staff resource, and the evolving nature of regulation means future-proofing will always

Jul - Sep 2016 International Finance Magazine

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OPINION

be required of the software.

Are you prepared to keep up with EU regulators using internal resources alone?

There are many Pillar Three solutions available in the market and understanding the pros, cons and level of suitability to your business for each option takes time.

Obviously, it is essential to conduct a thorough analysis of the options and consider the likely ease

of implementation. This analysis requires input at both CFO and IT level.

At a minimum, any such solution needs to deliver seamless integration with current IT systems and software, built-in validations and data integrity checks, capability of flowing through results from Pillar One and other analysis. It is also very important that Pillar Three reports should require

minimal effort from the business.

In addition, the solution should be user friendly and also maintain auditability and traceability of results.

Last but not least, it should also contain consolidation functionality to make group reporting easier for the business.

While investment in technology should ideally have taken place from the outset and prior to Solvency

Moving to comply 80

T

VM, a Netherlands-based company which specialises in transport-related insurance, faced a significant challenge in preparing for Solvency II compliance. It needed to create a uniform, efficient and compliant reporting environment in the run-up to the interim Solvency II reporting deadline in 2014.

The company’s existing systems, however, relied on linked Excel documents requiring many manual entries. That created long closing periods and a poor audit trail. In addition, all of its Solvency II reports had to be manually generated, which was time consuming and potentially prone to errors. TVM decided it had to replace its manual systems with a uniform consolidation and reporting solution, and provide finance with a consolidated ‘single version of the truth’.

Ideally, this would mean: • Aligning processes to simultaneously address statutory, Solvency II and internal management reporting • Automating consolidation and reporting environment for 30

International Finance Magazine Jul - Sep 2016

•

•

separate company entities, with minimal need for manual entries/corrections Creating a single solution for data collection, data storage, entry forms, consolidation and reporting Providing built-in financial controls and validations, with full traceability and transparent audit trails

Phased implementation By selecting an automated reporting solution, TVM gained access to prebuilt data models, reports and entry forms that fully address Solvency II’s Pillar 3 requirements. It was implemented in three phases: Statutory reporting was the first phase – collecting statutory data from multiple sources, managing data dependencies, consolidation and reporting, then installing the Solvency II automated Application.

Solvency II solo reporting came next – mapping general ledger data to balance sheets, ensuring consistency between statutory and Solvency II data, and planning and implementing solo QRTs.

II’s implementation, there is still time for insurance companies to reduce risk and cost by automating their reporting and compliance processes as soon as possible. IFM editor@ifinancemag.com

Nick Nesbitt is Consulting Services Director at Tagetik UK

Finally, TVM addressed group and management reporting – aligning solo and group reporting data, balance sheet and other QRTs, and reconciling the two reporting methods.

The benefits By moving to an automated, pre-built system, TVM was able to meet the 2014 interim deadline and prepare the ground for full Solvency II implementation by the 2016 deadline. By doing so, it became the first European insurance company to establish a totally integrated and standardised statutory and Solvency II-compliant reporting process.

Replacing manual-based systems with fully automated reporting has given TVM a simple and cost effective solution for meeting the reporting requirements of Solvency II timely and efficiently.

About TVM TVM is an international, independent insurance company specialising in professional transport (road and water). Founded in 1962 as mutual by and for entrepreneurs, TVM has offices in the Netherlands and Belgium, and cooperation partnerships all over Europe.

A specialised European road transport insurer, the company offers products and services to defined market segments within the transport sector.

Two programs

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to reward customers

E

xcellence in customer service combined with an award-winning suite of innovative and easyto-use products are what drive Gulf Bank. Ensuring that its service and products meet the evolving needs of its customers and rewarding them for their loyalty is paramount. Recently, the bank launched two major incentive programs with these objectives in mind.

The first is the Gulf Rewards loyalty program, which was launched in October 2015. This program rewards customers with Gulf Points and is the fastest and most rewarding points program of its kind in Kuwait.

The second program is Gulf Bank’s Entertainer App. This innovative app was launched in November 2015 and gives the bank’s customers instant ‘Buy 1 Get 1 Free offers’ on their mobiles in Kuwait and abroad.

Under Gulf Rewards, the bank’s credit card customers earn Gulf

International Finance Magazine Jul - Sep 2016

Gulf Bank launches Gulf Rewards and Gulf Bank Entertainer App to meet the evolving needs of its customers and reward them for their loyalty

Points whenever they use their cards.

Customers can then exchange their Gulf Points for free flights at any time, as well as make bookings from a selection of over 300,000 hotels worldwide. Gulf Rewards also works seamlessly with the bank’s Gulf Bank ‘Entertainer’, Kuwait’s first geolocator mobile application, and offers customers exclusive deals in Kuwait, UAE and in London, UK. Both Gulf Rewards and Gulf Entertainer systems are linked, so that customers using their Gulf Bank credit cards on the Entertainer app automatically earn points on their Gulf Rewards account.

Automatic enrollment All existing Gulf Bank credit card holders are automatically enrolled in Gulf Rewards, and the program is free for the first year. After the first year, the bank charges a nominal membership cost, which varies, depending on the type of credit card.

Customers can choose to opt out of

the program if they wish. Points are earned for each and every transaction made with a Gulf Bank credit card; the more a customer spends on their credit card, the more points they will earn.

Customers using their Gulf Bank cards for international transactions, or when they are abroad earn even more points.

Redemption With Gulf Rewards, it is easy for customers to spend their points on the program’s wide range of exclusive travel and hotel accommodation offers. Spending points is made as straightforward as possible by using the special Gulf Rewards secure online webpage, which can be found on the bank’s website at www.egulfbank.com. Here, customers can view their points, check their points balance, and use their points to instantly book online flights and hotel accommodation around the world, as well as benefit from a range of exclusive special offers that are

COMPANY NEWS

updated frequently.

Unlike many rewards systems, Gulf Rewards customers can use their points to book flights virtually on any airline without being limited by ‘blackout dates’ for busy holiday periods or travel times, as well as having access to one of the largest hotel booking databases worldwide. For added convenience, Gulf Rewards travel service redemptions are handled through Gulf Bank’s dedicated travel partner, Alghanim Travel, the largest and oldest travel distributor in Kuwait.

Alghanim Travel offers customers both online services through http:// www.alghanimtravel.com, as well as walk-in services through its offices in key centres across Kuwait.

Convenience With the launch of the new Gulf Rewards program, the bank sought to reward its existing customers, and attract new customers interested in benefitting from the wide range of benefits the program offers. This program is unique in Kuwait in that customers can book flights and vacations at a moment’s notice, choosing their

flights or hotels from one of the widest selections of airlines and hotels in the world. The program is a core part of Gulf Bank’s commitment to building long-term relationships with its customers by providing customers with the widest and most exclusive choices, as well as the fastest and most flexible services available.

Real value One of the benefits of the Gulf Rewards program is its flexibility. If, for example, a customer accumulates 100,000 Gulf Points, these can be redeemed in a multitude of ways.

For example, they can be redeemed for five economy roundtrip tickets to Dubai, or three economy roundtrip tickets to Beirut, or two economy roundtrip tickets to Europe, or even an economy roundtrip ticket to the USA, depending on how the customers wishes to use them. Or, if they wish to treat themselves, customers can use their points to upgrade to travel business or first class. Similarly, customers can use their Gulf Points to stay in a wide range of accommodation, from a five star luxury to boutique hotels and family-

run guest houses. With all these ways for customers to use their points, imagine what could be done with 1 Million Gulf Points?

The redemption procedure is very easy and straightforward; customers simply log into the Gulf Rewards dedicated webpage on the Gulf Bank website at www.e-gulfbank.com/ gulfpoints-en. They can view their points, check their balance, review travel and accommodation options, make reservations using their points and benefit from exclusive special offers.

Gulf Bank ‘Entertainer’ As part of the Gulf Rewards program, the bank has launched its Gulf Bank ‘Entertainer’ mobile application. This is Kuwait’s first location-based rewards program to give customers instant ‘Buy 1, Get 1 Free’ offers in Kuwait, the UAE and London. This exclusive app offers ‘instant’ deals on your mobile phone, which customers can then use in restaurants, hotels, spas, as well as on children’s activities and interests at participating merchants in Kuwait, UAE and in London, UK. In addition to the ‘Buy 1, Get 1 Free’ offers from participating retail merchants in Kuwait, the UAE and London, customers also benefit from ‘Buy 1, Get 1 Free’ offers at participating international hotels in over 25 countries around the world, including Belgium, Egypt, France, India, Indonesia, Lebanon, Malaysia, Maldives, Thailand, Turkey and the

United Arab Emirates.

Customers are able to locate participating merchants through the geo-locator on the webpage using Google Maps. Through the system they will receive instant offers at restaurants, entertainment venues, kid’s activities and spas. Every time a customer makes a payment transaction on a participating Gulf Bank credit card through the ‘Entertainer’ app, they automatically earn points in the Gulf Rewards program.

The Gulf Bank ‘Entertainer’ app is free for existing Gulf Bank credit card holders to download via the App Store for iOS/ iPhone and the Google Play Store for Android. Once downloaded, customers need to send an SMS with Y (and the last 6 digits of your card) to 65805805 to receive their activation code.

After entering the activation code and required details, the app will be ready to use.

Alternatively, customers can also visit www.e-gulfbank. com/entertainer-en to receive an activation code.

To find out more about the bank’s Gulf Rewards campaign and the Gulf Entertainer App, customers can visit the bank’s bilingual website at www.e-gulfbank. com, call the Customer Contact Center on 1805805, or visit one of Gulf Bank’s 55 branches in Kuwait. IFM editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

83

MetLife (US)

Prudential Financial (US) AIG Aegon

(US)

(The Netherlands)

Allianz (Germany)

Aviva (UK)

Prudential (UK)

Axa (France)

Ping An (China)

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Sitting

it out International Finance Magazine Jul - Sep 2016

Question mark over G-SII after MetLife gets court decision that says it does not deserve the designation â&#x20AC;&#x2DC;too big to failâ&#x20AC;&#x2122; Tim Evershed

INSURANCE

D

oubts have been cast over the new system for worldwide regulation of financial institutions that have been deemed ‘too big to fail’ after US life insurance giant MetLife won a court decision that says it does not deserve the designation.

MetLife had been designated as a ‘global systemically important insurer’ (G-SII) by the International Association of Insurance Supervisors (IAIS). The G-SII designations are part of the fledgling programme to list and regulate those ‘Systemically Important Financial Institutions’ (Sifi), including major banks, with $50 billion in assets or more.

At present, nine insurers have been listed as G-SII by the IAIS. Among the US firms, we have MetLife, AIG and Prudential Financial. They are joined

by UK insurers Aviva and Prudential, and major European carriers Aegon, Allianz and Axa. Chinese insurer Ping An is the sole Asian company on the list.

The designations subject the companies to stricter regulatory oversight, as well as requirements to hold higher capital reserves against losses, along with other restrictions. This has prompted a number of concerns from the companies themselves regarding the onerous nature of the regulatory demands.

Analysts have suggested that insurers will respond by simplifying their business offerings, shifting quality of capital, or even take the potentially far-reaching step of attempting to ‘dedesignate’ themselves.

MetLife has led the way by first announcing a plan to separate a substantial portion of its US retail segment as well as

considering other structural alternatives.

“Even though we are appealing our Sifi designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business.

An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden,” MetLife said in a statement.

However, it has now also had success in the US courts with District Judge Rosemary Collyer rejecting the Financial Stability Oversight Council’s rationale for classifying MetLife as a Sifi.

The ruling undermines the attempts of the US government, through the Dodd-Frank Act, to increase regulation on major insurers.

“

From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States Steve Kandarian, MetLife CEO

Jul - Sep 2016 International Finance Magazine

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INSURANCE

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“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” MetLife CEO Steve Kandarian said. “This decision is a win for MetLife’s customers, employees and shareholders.”

The decision was followed by cautious signals from the other two US insurers on the G-SII list, AIG and Prudential Financial, that they may follow MetLife’s lead. However, the US government is also likely to appeal the decision.

Whatever the outcome, questions over the new international regime will persist. What form will it eventually take? Who will be on the final list of G-SII insurers? And how long will it take to implement the new regime?

In addition, there is a secondary list of 50 insurers designated as ‘Internationally Active’ that will also want answers to this type of question.

“Looking at it through a credit lens, there are potential upsides and downsides to the numerous scenarios, but we are still far off and there are a lot of significant hurdles,” noted Tracy Dolin, credit analyst, Standard & Poor’s.

“Not the least of these is establishing a truly unified and effectively implemented capital standard. Given jurisdictional differences and the aggressive time frame for G-SII capital standard implementation, we could be facing a situation like we did with Solvency II that required a series of extensions.”

The IAIS has designed the capital requirements in

order to deter insurers from becoming larger and more complex. It hopes to achieve this by requiring G-SIIs that fall into the higher risk brackets to hold more capital than those in the lower risk brackets.

“We believe that the IAIS still has significant work to do in creating a risk-based global Insurance Capital Standard (ICS) for G-SIIs and other internationally active insurance groups (IAIGs),” says David Prowse, Senior Director, Fitch Ratings.

“The ICS is envisaged as a common methodology across jurisdictions, but the requirements have been watered down to allow for two valuation approaches in early versions before moving to full comparability in the longer term. No timescale has been laid down. The implementation

We believe that the IAIS still has significant work to do in creating a riskbased global Insurance Capital Standard (ICS) for G-SIIs and other internationally active insurance groups (IAIGs) David Prowse, Senior Director, Fitch Ratings

International Finance Magazine Jul - Sep 2016

INSURANCE

“

of an ‘appropriately’ riskbased ICS is ambitious, given local differences in accounting regimes, product risk profiles, and asset risk,” Prowse continues.

However, this is a bigger issue for non-European companies as Solvency II means European insurers hold capital well in excess of the regulatory minimums and all G-SIIs have sufficient capital to cover even the most punitive G-SII capital requirements.

The list of G-SIIs is flexible with the Financial Stability Board announcing changes to it last November when Italian insurer Generali was removed after it scaled back its banking interests and replaced by Aegon.

“The changes to the list prove that regulators’ view of the systemic risk of an insurer can change.

This could be a significant consideration for insurers on the cusp of joining the list or those already on

it that only have limited exposure to non-traditional business. They may makes changes in an effort to be removed from the list,” says Prowse.

Although Generali has been removed from the G-SII list, it remains on the longer list of ‘Internationally Active’ carriers and will have to maintain its capital and regulate its risk appetite to the appropriate standards.

“Those that did not make the G-SII list may yet be added or declared internationally active insurance groups (IAIGs), about 50 in total. This is yet another acronym in an increasingly full bowl of regulatory alphabet soup that subjects insurers to enhanced oversight. We anticipate proportional G-SII-like regulation for this sub-group, including higher capital standards and possible creation of resolution plans,” says Dolin.

For the time being at least, there are more questions than answers with the G-SII regulations remaining a work in process and the waters muddied in the US by the MetLife court decision.

“The relationship between the proposed capital standards and local regulatory standards is a key uncertainty. The goal of achieving globally consistent capital standards is complicated by the lack of consistency in the valuation of insurance assets and liabilities,” concludes Prowse. IFM

Not the least of these is establishing a truly unified and effectively implemented capital standard. Given jurisdictional differences and the aggressive time frame for G-SII capital standard implementation, we could be facing a situation like we did with Solvency II that required a series of extensions Tracy Dolin, credit analyst, Standard & Poor’s

editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

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OPINION

OPINION

James Stirton

Are you prepared

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for MiFID II? You should be New regulations are always delayed; then suddenly, they arrive

M

iFID II’s arrival in commodity markets was delayed from January 2017 to January 2018. However, the chair of the European Securities and Markets Authority (ESMA) recently suggested that even the proposed 12-month delay may actually not be enough.

While the many regulatory technical standards are still being outlined, EU member states are procrastinating ratification. This means that there is a lot of uncertainty about what actions are required to implement MiFID II and we are already hearing that many smaller firms are scaling back their implementation efforts.

International Finance Magazine Jul - Sep 2016

It would be a shame if that points to a wider industry trend, because this latest set of rules to regulate commodity trading has serious and complex operational implications that require an equally measured and wellplanned technology response.

MiFID II consists of a directive, which must be implemented by each EU Member State, and a regulation, which is applied across the EU. As with the recently implemented EMIR and REMIT regimes for commodity trading, technical standards and other secondary legislation need to be drafted and adopted by ESMA before legislation can be implemented.

Although it is too soon to make

major changes, the experience of EMIR in 2014 – beset by delays then rushed in with a 90-day final deadline – means steps to comply with MiFID II need to be taken now. Even with so much up in the air, there are things you can do to mitigate exposure to regulatory risk.

Smart technology investments can help by surfacing exposures in the trading portfolio and providing quick assurance that trades and related activities happening today are at least aligned with the current direction of travel for MiFID II compliance. This has already been shown through EMIR and REMIT, which compelled many companies to invest in or revisit their

OPINION

regulatory identifiers and formats. The system should be able to simplify the threshold monitoring for non-financial counterparties (e.g. energy intensive businesses operating a hedging strategy) and facilitate risk mitigation obligations, including EMIR’s requirement for periodic portfolio reconciliations. IFM editor@ifinancemag.com

Commodity Trading and Risk Management (CTRM) systems. MiFID II could well necessitate another round of IT upgrades, particularly in the in the area of reporting to trade repositories.

While it is still too soon to make firm or detailed recommendations, beginning the due diligence process with vendors should begin now, if it isn’t already underway.

How energy sector can prepare Despite the possibility of an extended deadline, there are alternatives in terms of what large energy consumers and financial services companies can do now to prepare for MiFID II. Managing the process by spreadsheet is not one of them. There are electronic reporting and data storage requirements involved in each set of regulations that will quickly overwhelm manual processes.

Outsourcing may be a solution, but it comes with its own costs and risks.

There is the added overhead of an ongoing contract to manage. So, how active you are in the energy trading arena will determine your breakpoints financially. But in the end, do you really want to outsource a liability you will ultimately be held accountable for should any errors or delays in compliance occur?

A third party provider will most likely not be responsible for paying fines.

Even if you could negotiate a contract that held them financially liable, what would an infraction mean to your brand reputation? The collateral cost of cleaning up a public relations nightmare could be devastating.

That leaves accepting higher energy prices by abandoning a hedging strategy altogether, or automating the process.

After weighing the options, automation is the best business decision.

Automating regulatory processes requires a basic energy trading and risk management (ETRM) system, which is a

comprehensive regulatory solution for commodity trading and corporate financial compliance. ETRM is generally not a standalone application and needs to incorporate contract data, hedge accounting, revenue allocation and the all import regulatory reporting requirements for your geographic markets.

In light of the evolving standards for EMIR and REMIT, you will want to choose a solution that allows you to upgrade and manage your regulatory compliance process quickly. Another qualifier to consider is the ability to install software on a captive system and maintain it internally, or purchase a software-asa-service (SaaS) contract and maintain it virtually in the cloud. Implementing this option could affect your overall total cost of ownership as you integrate the system into other areas of the business.

Direct connectivity to trade repositories should also be a core capability, including all required

Conclusion If it isn’t geopolitics or extreme weather injecting risk into the energy value chain, today’s regulatory environment constantly evolves new rules and penalties creating uncertainty.

The fastest and best approach to meeting MiFID II’s regulatory requirements is an automated solution.

James Stirton is senior energy consultant, EMEA at Allegro Development

Jul - Sep 2016 International Finance Magazine

89

OPINION

OPINION

Ben Greenwood

90

BANKING

Modernising finance:

caught between a rock and a hard place?

International Finance Magazine Jul - Sep 2016

With a growing technical debt, maintaining a complex web of IT comes with an inherent risk of eventual obsolescence

OPINION

B

ritain’s financial institutions are stuck between juggling the challenges of maintaining a ‘museum of IT’ to simply keeping the lights on, or investing in new IT architectures but risking the wrath of the regulator for any service outages or failures.

Take RBS as an example.

Years after an IT system crash that led to a backlog of 100 million unprocessed payments and customers being unable to access day-to-day services, it was fined £56 million by the Financial Conduct Authority and Prudential Regulatory Authority.

Approximately 10 per cent of the UK population was affected, highlighting the dependency that financial services organisations have on IT systems and the responsibility they are

expected to shoulder.

With a growing technical debt, maintaining a complex web of IT comes with an inherent risk of eventual obsolescence. Legacy systems are highly likely to suffer failures in the long run, risking longer outages and heftier fines. Financial services organisations need to reduce the risk of damaging outages and face up to the fact that the sector is becoming an ‘innovate or die’ industry.

New challenger brands are emerging – from mobile payment providers to peerto-peer lenders – that have a model designed to meet the needs of digital natives.

To keep pace with their rivals, all financial services providers need to consider whether they should modernise to improve performance.

So what’s the problem?

Whilst all businesses are dependent on their IT systems, few carry the burden of compliance – and the deterrents for failure – to the same degree as organisations in the financial sector. As a result, it’s no surprise that executives in the industry are facing a myriad of challenges.

Our recent survey of 100 executives in finance revealed that a quarter citied one of their biggest IT challenges as infrastructures and networks being unable to keep up with demands.

Poor customer service from existing service providers (25 per cent), high software and hardware costs (23 per cent) and a lack of internal controls over the network (21 per cent) were also cited as difficulties. As the financial industry becomes increasingly digitalised, an overwhelming 41 per cent

are also facing growing concerns over data security.

The key for financial institutions is to balance modernisation with regulatory compliance.

When thinking about the benefits that they would like an IT solution to provide, 39 per cent citied faster internet connectivity, 32 per cent listed increased flexibility with the network and 28 per cent said more control of their network.

Surprisingly, financial executives were less driven

by CAPEX or OPEX benefits (15 per cent) and increasing collaboration (16 per cent).

The results reflect the pressures facing organisations in financial services. Take the example of the transparency required under MiFID II. This latest regulation mandates that information for pre and post-trade transactions need to be made available for contracts which are traded over the counter (OTC). It also places new demands on products beyond equities and includes bonds, commodities, derivatives and structured finance. As a result, this drastically increases the amount of data that trading companies are responsible for sharing and requires access to a high-bandwidth secure network that can carry information in seconds to meet the requirements.

However, despite the desire for enhancing the performance of networks and connectivity services, our survey revealed that financial services executives are still concerned about turning to the cloud to support the delivery of

Jul - Sep 2016 International Finance Magazine

91

OPINION

applications and data. In total, 58 per cent claimed that they were concerned about the risk of security breaches in the cloud. In addition, 27 per cent were worried about the cost of implementation, 18 per cent admitted there was reluctance at the C-level and 22 per cent claimed the necessity to meet financial regulatory requirements was a challenge.

Organisations in financial services have a decision to make. They need to consider if an internal IT team can satisfy the demands for quality, compliance and customer protection versus conducting the due diligence of outsourcing IT and embracing the cloud.

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The modernisation see-saw As the regulator continues to focus on how to maintain the stability of the financial industry and ensure fair treatment of customers, the FCAâ&#x20AC;&#x2122;s recent guidelines

on outsourcing in banking provide a common sense approach for organisations that are considering whether to build, buy or outsource IT requirements as part of modernisation initiatives.

All financial institutions need to invest in resilient services that are compliant with existing regulations and can mitigate against potential outages. For example, in-cloud services capable of scaling to meet demand, or private networks that remove financial systems from the risks of the public internet.

In addition, introduction of the Senior Managers Regime, the Certification Regime and new conduct rules means the regulator has strengthened its approach to holding individuals accountable within the banking sector.

Senior managers now need to think carefully before introducing third-party technology

International Finance Magazine Jul - Sep 2016

or off-the-shelf services.

Satisfying personal liability concerns and reassuring compliance officers requires organisations to consider the accreditations that each supplier holds. Financial institutions also need to consider whether the service provider has experience in helping similar organisations respond to regular audits or FCA and SEC driven enquires.

Care should also be taken when new IT products are integrated with existing systems. Ultimately, organisations want to implement a combination of whatever works best for their business. Moving to the cloud should not necessitate a complete overhaul of a companyâ&#x20AC;&#x2122;s operations but should be used to augment whatever existing IT infrastructure is already in place. This approach is centred on delivering more flexibility to organisations. It allows businesses to combine their

own dedicated hardware with the burstable capacity and enhanced functionality of the hybrid cloud so that they can scale resources ondemand to meet business requirements.

Furthermore, this approach puts companies in the driving seat of the ICT landscape. Organisations who want to deploy cloud projects can start by considering which applications or content can be entrusted to run in a public cloud, and what business critical information should be stored in a private environment due to security or privacy concerns. This enables brands to spin up additional services in the cloud to meet customer demand but ensures that operational functions, such as processing payment mechanisms, remain in the backend to deliver a private environment for compliance standards.

Such strategies help form the foundation for IT cloud success and enables financial institutions to maximise their investment in existing hardware but also utilise the latest technologies for new projects, or when hardware is at the end of its life span.

Finally, financial services should have a risk management procedure in place that ensures systems are backed up on a regular basis. By planning for the worst case scenario, it will make recovering from a system failure more straightforward, minimising business interruption and reducing the risk of a fine or payment of compensation to customers.

OPINION

The big picture

Access the best stories in the world of business at your convenience

Read IFM magazine

T

he focus on modernising the infrastructure supporting the foundations of the UK economy is not going to change. Especially since incoming FCA chief Andrew Bailey is very familiar with the technology implications of relying on legacy IT in insurance and banking as increasing amounts of transactions, customer data and storage for historical databases apply significant pressure on creaking infrastructure.

As a result, organisations that can successfully implement secure and flexible next generation IT systems are going to lead the pack.

Financial technology continues to develop at a rapid pace. Thriving in an ever-changing global economy will require financial institutions to think and connect beyond their current footprint.

Increasingly being able to connect to multiple sites, venues, trading partners,

exchange venues and market data providers will be the backbone for finance.

Take the case of financial trading. Every second counts and any delay can have huge financial implications.

Modernising IT by investing in scalable connectivity and incrementally increasing network bandwidth should be a business imperative.

Organisations that fail to do so risk the stability and foundations of their business operations in the long term. IFM

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editor@ifinancemag.com

Ben Greenwood is director of financial services at British cloud and network provider Exponential-e

Jul - Sep 2016 International Finance Magazine

retail

94

Kenya is going

big in

retail

International Finance Magazine Jul - Sep 2016

Shopping malls and e-commerce sites are competing for the patronage of a growing consumer class Amoxers Wachira

Retail

I

n most suburbs around Nairobi, Kenya’s capital, vast farmlands are giving way to mega shopping malls that are gradually changing the landscape of the city. The shiny shopping malls are part of a retail revolution that is being fuelled by a burgeoning middle class which has an insatiable thirst for consumer goods.

An African Development Bank report shows that there is a significant rise of people in Africa with a big disposable income.

The report estimates the number of the middle class, classified as those spending between $2 and $20 daily, stands at 313 million.

In East Africa, 29.3

million people fall in this category, representing an average of 22.6 per cent of the population; 44.9 per cent of Kenya’s population, 18.7 per cent in Uganda, 12.1 per cent in Tanzania, 7.7 per cent in Rwanda and 5.3 per cent in Burundi.

Coupled with Africa’s heavy adoption of the mobile phone, successful mobile payments platforms and higher penetration of the internet, these factors explain why shopping malls are sprouting fast, bringing around a new shopping experience to Africans.

Take the case of Garden City Mall, East and Central Africa’s biggest shopping mall. Only a year after it opened its doors to shoppers, the modern

shopping mall is home to world renowned brands which are bringing more choice to local consumers.

The first phase of Garden City Mall consists of 33,000 square metres of retail space, including 120 local and international brands spread across three levels, with the first floor anchored by Game, which is part of the Walmart Group, alongside Kenya’s largest supermarket chain Nakumatt.

A few miles away from the expansive mixeduse shopping mall is its predecessor, Thika Road Mall, which also hosts a number of multinational brands competing for the same customers. And more shopping malls are coming

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An estimated 30 per cent of shopping (in Kenya) is now through formal retail chains compared to South Africa that has a 60 per cent rating Malcolm Horne, managing director, Broll Property Group

Jul - Sep 2016 International Finance Magazine

retail

»

Parinaz Firozi, Managing Director, Jumia Kenya, says the online retailer grew orders by a 900 percent margin in one year

96

up.

Among them is Two Rivers Mall, which is arguably the biggest construction project in East and Central Africa. The yetto-be-completed mall sits on 102 acres in the diplomatic blue zone neighbouring upmarket Runda and Gigiri. The project is valued at Kshs13 billion. On completion, it will become the biggest destination mall in Nairobi after Garden City Mall.

Combined, the three biggest shopping malls offer retail space of approximately 1,500,000 square feet, according to Skyscraper City, a leading built environment data integrator, signaling the rise and rise of shopping malls in east Africa’s biggest economy.

These are part of a bigger picture of a country that is continuously registering

unprecedented growth in retail, demonstrated by the surge in supply of retail space. Statistics corroborate this growth.

According to Broll Property Group, a South Africa-based consultancy with presence in major markets in sub-Sahara Africa, Kenya is increasingly rising as a shopping destination in Africa. Broll’s managing director Malcolm Horne says an estimated 30 per cent of shopping is now through formal retail chains compared to South Africa that has a 60 per cent rating.

The online story Far from the shiny malls, however, is a revolution that is claiming the lion’s share of retail sales: online shopping. Seen as a less costly mode of selling products, and already a big hit in populous nations like

International Finance Magazine Jul - Sep 2016

Nigeria, online commerce, which involves buying of goods over the internet, is gaining traction in East Africa, and Kenya is leading the way.

One of the e-commerce sites, Jumia Kenya, owned

by Africa Internet Group, has recorded impressive returns only three years after setting shop in Kenya, after a successful launch in Nigeria in 2012. Parinaz Firozi, Managing Director, Jumia Kenya, says the online retailer grew orders by a 900 percent margin in one year, thanks to an innovative way of reaching local consumers. Since then, Jumia has been used as a launch pad by various international brands venturing into the Kenyan market.

Other e-commerce sites have also noted the huge potential in this space.

Elsewhere, leading online food ordering portal Hellofood announced that its 2015 food orders and sales grew by 300% as local and international restaurants of all sizes expedited their adoption of the company’s online marketplace platform. This growth corresponds with the spike in the number of internet users in Africa.

According to Communications Authority of Kenya (CA) quarterly sector statistics report Q3 2014/2015, the number of internet users stands at 29 million. Internet subscriptions stand at 18.8 million while mobile subscriptions dominate at 18.6 million bringing to 99 percent the number of Kenyans browsing the

“

At the moment, e-commerce is largely an upper class product while people in lower economic classes will continue shopping in malls Bitange Ndemo, associate professor, University Of Nairobi School Of Business

Retail

Âť

Sandton City is one of Africaâ&#x20AC;&#x2122;s leading and most prestigious shopping centres.

web via phones and to 72.7 percent the number of people with access to internet in Kenya.

This is the reason why many online retailers are creating mobile applications that allow for seamless online shopping, as they jostle for customers who are increasingly using the mobile phone to place

orders online. From food distribution to taxi cab hailing, clothing, electronics, imported toys, gardening tools and even household goods, more online shops continue to open their doors to virtual customers. This has apparently created opportunities for thousands of entrepreneurs who are

also making profits by displaying and selling their wares online, eliminating the need for a physical premises.

Why e-commerce?

Sellers list their product on an online portal where consumers can see them, compare prices and place orders. The e-commerce

97

Listing on an online market place offers sellers more value since most e-commerce companies invest in site traffic, a rather expensive affair for a sole proprietor Estelle Verdier, co-founder, Jovago Kenya

Jul - Sep 2016 International Finance Magazine

retail

98

site, which takes an agreed commission only for items sold and offers storage and warehousing for free, then dispatches the product to the buyers’ address. Sellers make significant profits as they are exempted from costs such as rent, wages, salaries, government and city council charges.

Estelle Verdier who heads Jovago Kenya, a hotel booking site, says that listing on an online market place offers sellers more value since most e-commerce companies invest in site traffic, a rather expensive affair for a sole proprietor.

On the flipside, online shoppers emerge as the real winners as they enjoy competitive prices, quality products, doorstep deliveries and variety.

For online buyers, the experience can only get

better, especially with free flowing investments that are aimed at scaling online commerce.

In March this year, Africa Internet Group , the parent company of leading e-commerce platforms Jumia and Jovago, secured more than €300 million in funding from new and existing investors AXA, a worldwide leader in insurance and asset management, MTN and Rocket Internet as well as a new investor, Goldman Sachs. Apart than this, other players in this industry are making heavy investments to ramp up their e-commerce sites.

Experts say that the exponential growth of e-commerce will continue unabated, buoyed by a thriving economy.

According to CA, Kenya’s e-commerce industry

International Finance Magazine Jul - Sep 2016

is worth Ksh4.3 Billion compared to South Africa’s Ksh54 Billion.

Professor Bitange Ndemo, associate professor at the University Of Nairobi School Of Business says that the fact that Kenya aspires to become a middle income economy is evidence of bright prospects for e-commerce. “As the economy grows, you get more people moving out of poverty. This will be the source of new e-commerce users.”

What about shopping malls?

Prof. Ndemo explains, “Eventually both e-commerce and shopping malls will find some balance but at the moment, e-commerce is largely an upper class product while people in lower economic classes will continue

shopping in malls.”

Despite the apparent rise of e-commerce however, a few hurdles stand in the industry’s path to reaching its full potential.

The CA cites high custom duty, taxes paid on imports and inadequate cybersecurity systems as major impediments. IFM editor@ifinancemag.com

Kenya Number of internet users:

29

Retail

Internet subscriptions:

Mobile subscriptions:

million

million

18.8

million

Mobile phone users accessing the web through phone:

18.6

Kenyans with access to internet:

72.7%

99%

Source: sector statistics report Q3 2014/2015, Communications Authority of Kenya (CA)

Percentage of the population in East Africa

99

The middle class in Africa:

313

44.9

4.3

million ...............................

Classified as people who spend between $2 and $20 daily

Ksh Billion ................................

South Africa: Ksh

54

Billion

Source: CA

18.7 Kenya

Worth of e-commerce industry Kenya:

Uganda

12.1 Tanzania

7.7

5.3

Rwanda

Burundi

Source: African Development Bank

Jul - Sep 2016 International Finance Magazine

OPINION

OPINION

Elva Ainsworth

100

How HR can help you

International Finance Magazine Jul - Sep 2016

Managing people is hard enough, and changing them is virtually impossible!

OPINION

P

eople need managing, motivating, monitoring and mobilising – never mind directing, driving and delighting! And they may indeed delight you with their creativity and determination, but at the same time they may frustrate or even worry you with their independence and lack of strategic understanding. Yet, they are critical to your business and your future success is dependent on how well they operate as individuals and as a whole body.

They form and control the organisational culture you have and they deliver the results at the end of the day.

The latest technology and great analytics will only take you as far as your people will allow… so the key

question is how do you take them to the next level?

We are not born knowing the answer to this question but a lot is now known about how to motivate and encourage performance and the good news is that HR is there to help you.

HR can support you in managing and transforming your people, to assist you in achieving an ‘upgrade’ of skill and aptitude if you will allow them to.

360 degree feedback – a process whereby data is gathered from all around the employee (including the boss, direct reports, peers, customers and others), is one of the main ways HR can do this with and for you. A 360 initiative is a potent transformational intervention that can give you access to the gearchange you need but, as

with any powerful tool, it is one to be treated with respect and care. This overview will guide you through what is required to successfully implement a 360 project, how to use the insights and ‘truth’ that your organisation will get to see for the best results and how to track progress for continued and embedded behavioural changes.

Successfully implementing 360 360 degree feedback can tell you how people are behaving, how they feel, what they like, what they don’t like, how well someone is rated, what they think the priorities should be, what should be maintained, what is special right now, what needs to change and what your current culture really

looks like. However, if you want to design your 360 for transformation and painfree success, then there are some key principles to work to and things to avoid.

First, get clear on your purpose and vision for this exercise, making sure you have stakeholder commitment. Next, choose your point on the assessment: development continuum, as your position on this will determine the structure, size and type of 360 tool. If accuracy and consistency is important, you will want a longer, validated instrument with trialled content and robust benchmark comparisons.

On the other hand, if your focus is learning and development, you will want a survey that is on-brand, as short as it can be, with the process fully ‘driven’ by the

Jul - Sep 2016 International Finance Magazine

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OPINION

are prepared and ready and then support them through the understanding of their data. They could easily go into justification, denial, resignation, projection — to name but a few of the possible emotional reactions!

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participant.

Full coaching and feedback will then be essential to support the emotional journey excited by the data. Once you have translated your competency and/or values model into workable 360 content and positioned it into an attractive and gripping wrapper, you should trial the survey before going live.

Your outputs should be on brand and attractive: The tool is now designed and ready to provide fresh insights and will summarise the range of views and

perceptions at work.

Starting to look at this data is the real emotional part of the process. It might be just fine, but, just like getting your exam results delivered, there is always apprehension about them until you know what they are. When they arrive, there is also always a reaction, whether relief or disappointment (or something in between). Real growth only happens when there is sufficient comfort and space to process new information, so you need to make sure your participants

International Finance Magazine Jul - Sep 2016

Empower HR department Your Human Resources function can put in and monitor your people processes but they cannot do the job of managing people for you. But, what HR can do is to create a structure or environment that makes it easy for people to shift and learn themselves, and they can take on the job of encouraging a learning and growth culture - for a ‘growth mindset’ (Carol Dweck).

HR can be an agent of transformation and there are three important aspects to enabling change: 1. Understand the forces of resistance: work out how to unpick it when it emerges and how to avoid it in the first place 2. Understand how people can change: we now know that every day the brain generates thousands of cells that split into two which allows the brain to continually reshape itself in response to experience and needs 3. Know that people can change anything: if you want to change

something and see it as possible and then manage to convince others it is possible, then anything is indeed a possibility HR can be an agent of transformation by selling the new way, by providing the mirrors allowing people see the current reality and by encouraging and having critical conversations. HR can aim for the magical result and dramatic state shifts if they are brave but they need the commitment within the organisation.

First, get clear on your true intentions and clarify a primary objective and then ask HR to co-create a process, strategy or programme with you and some other key champions.

You will then have a partner for your ambitions.

How to help employees take critical feedback There are three factors you need for an intervention to be transformational: • INSIGHT – people themselves need to be seeing or learning something fresh • HONESTY – people need to be prepared to tell the truth about what works and what doesn’t work • ACTION – people need to actually do something different 360 degree feedback can offer great information on the truth about what others around you think and feel. How can you know you are making accurate assumptions about your team unless you check? You cannot count on knowing everything already. You

OPINION

will inevitably not know the whole picture. Even the best cannot know what is behind them or in their blind spot.

In the ‘Discovery’ methodology of feeding back 360 data, these responses are acknowledged and worked through whilst there is a structure to prevent individuals hiding behind common coping strategies.

This methodology takes the participant through a process starting by connecting with their goals, exploring their data with them fully, curiously and creatively and then giving them full choice as to what they choose to do with this new understanding. HR can help them get clear where their current ‘attitudes’ have taken them, make them safe and give them time to fully look in that mirror – to really see what is there and why it might be that way – and then they get to decide whether they adopt a new strategy. Powerful choices can then be made, actions will result.

Track your feedback data As with most data, the benefit of 360 data can only be properly leveraged when it is tracked. You can track and evaluate progress, acknowledge positive results and blocks, and you can analyse the correlations between specific behaviour and different sets of HR data, e.g. linking employee engagement and 360 data can show up which specific leadership actions drive engagement in your firm.

But tracking does not just allow you to understand things better, it allows

103 employees to see for themselves how they are doing so they become selfregulating. There is little point giving people a wingmirror so they can see the big lorry coming up in their blind-spot and then taking this tool away. Provide the means and encouragement for regular and frequent feedback and you will have increased the consciousness of your workforce for good and for the better.

If your people and your culture are doing exactly as you wish, then you do not need to bother investing in transformation. But if you want your people to improve or upgrade in areas such as emotional intelligence and leadership or in levels of collaboration, innovation or team relations, then 360 degree feedback is

worth considering as a diagnostic with significant transformational ‘punch’.

Integrate 360 into a talent development strategy and you will have fitted everyone with useful behavioural ‘wing mirrors’ – surely a reasonable safety measure in today’s busy markets IFM editor@ifinancemag.com

About the author Elva Ainsworth is the founder and managing director of Talent Innovations and author of new book 360 degree feedback: A Transformational Approach. In HR, she enjoyed implementing the brand-new psychometrics as well as designing culture change and personal development interventions. In 1994, she focused on her love of psychometrics by joining SHL (now CEB), the leading business psychologists, where she managed the 360-degree feedback and management development practice in both the UK and the USA

Jul - Sep 2016 International Finance Magazine

Optimum Asset Management:

Creating value at a 360° perspective

O

ptimum Asset Management S.A. is a Luxembourg-based Asset Management Company with specialisation in the Private Equity sector and a strong focus on real estate. Authorised and regulated

by Commission de Surveillance du Secteur Financier (CSSF), its registered office is in Luxembourg, with representative offices in Berlin, London, and Miami.

In line with its investors’ objectives to achieve long-lasting returns, the company offers investment opportunities characterised by specific themes and attractive risk/return ratios. Via its 157 staff, including Property and Facility

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Miami Beach, 6800 Indian Creek – Optimum Development Project

International Finance Magazine Jul - Sep 2016

COMPANY NEWS

Management, the company currently manages 13 funds with a total AuM of more than €1.3 billion.

The company’s team has been active since 2006 (initially as BMB Investment Management Partners) and was originally set up as a platform for institutional investors to invest in the German residential and commercial property markets, via a vertically integrated structure comprising Asset Management, Property Management and Facility Management.

The vertically integrated model is still one of the main principles adopted by the company today in all of the markets where it operates. Such a model allows for full control and management of the assets in all of its aspects and the allocation of resources and

management’s focus on the relevant points of the value creation chain.

The company is a trusted partner to many of the world’s top institutional investors. Through various investment vehicles, the company preserves and protects assets for public and corporate pension funds, insurance companies and other institutional investors. With a wealth of entrepreneurial ideas, its credo is to create a firm that puts clients’ needs first, that is independent and conflict free, adheres to the highest ethical standards and strives to create long-term value for its investors.

After three years of great performances achieved on the European environment, in 2012, Optimum Asset Management S.A. has seen an important opportunity in the US real estate market,

»

San Francisco, 420 Taylor Street, core asset part of Optimum US portfolio

which was experiencing signs of a sound and steady recovery after the financial crisis of 2008. Optimum was able to catch this momentum and, thanks to its network and to the expertise of the local affiliate Optimum Asset Management USA LLC, the first fund launched on the US market in 2013 raised over $180 million and invested in 11 different projects in the main gateway markets of New York, Miami, Los Angeles and San Francisco.

As expected, the US economy has rebounded strongly and GDP growth in 2015 is forecast to reach one of the strongest rates since the financial crisis. A healthier housing market, continued job creation and some initial hints of nascent wage pressures suggest a self-sustaining upturn, robust enough to weather increases in interest rates.

The US economy leads a strong North American performance, reinforced by more rapid Latin American activity this year and next.

An expanding supply of domestic and foreign capital is shifting the US transaction environment.

As reported by Jones Lang LaSalle, US cities are dominating global activity, accounting for seven of the 10 most active markets in the first half of 2015. The United States registered $232 billion of investment sales across property types year-to-date. Going forward, strong activity and an active deal pipeline are supportive of year-end growth forecasts of 20 percent.

As competition broadens,

We are delighted to receive this award — Fastest Growing Real Estate Development Company in the USA for 2015 — as a further endorsement and recognition of our successful expansion in the US market Alberto Matta, CEO Optimum Asset Management S.A.

Jul - Sep 2016 International Finance Magazine

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COMPANY NEWS

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Miami Beach, Park Central Hotel on Ocean Drive – Optimum Development Project

key decisions are made quickly in response to local trends, based on the market in which the real estate assets are located.

The development team is very well seasoned to understand the nature of developing the diverse portfolio of properties, by being engaged in the forefront with a multitude of consultants ranging from designers and engineers to legal zoning experts and local city planners. The development team equally has extensive reach in the local construction industry in understanding market pricing and deliverable strategies for these

We are very proud of what we have accomplished since the end of 2013: we have been able to deploy almost $ 200 million of equity in 11 trophy assets, set up our own development team and exited from 2 investments with IRR between 16% and 50%.

Rodolfo Misitano, CEO Optimum Asset Management USA LLC

Berlin, Uhlandstrasse 173-174, part of Optimum German portfolio

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investors are becoming more flexible, diversifying across market, product and structural transaction segments, and there is a notable growing interest in higher-yielding assets in smaller and second-tier locations.

In order to meet the investors’ interests and to achieve higher yields in non-core sectors, Optimum Asset Management S.A. has created a new affiliate company, Optimum Development USA, LLC. Through this offset entity, Optimum was able to approach the re-emerging market of real estate developments and to focus on different strategies, such as repositioning existing properties in poor conditions but located in areas of value and/or high potential, change of use and ground-up developments in high quality locations.

Being well poised in the US market, Optimum Development USA has a daunting capability of developing its properties efficiently as, because of the nature of its structure within the Optimum Asset Management Group,

development projects, so true timelines may be assessed into real time objectives. The company oversees the entire process from inception to physical completion of the projects, which range from hospitality to retail, office and residential, mainly located in Miami and New York.

The property portfolio is well diversified not only from a market perspective, but also in terms of development strategy: the projects range from change of use, property’s renovation/repositioning and ground-up developments, to value add and core-plus investments, which require a lower level of involvement in terms of construction and renovation works, although they need to be carefully managed, in order to exploit the upside potential and to maintain the property at its best standards.

The main driver of each investment is the quality of the location within the submarkets.

Indeed, Optimum focuses only on prime locations

International Finance Magazine Jul - Sep 2016

COMPANY NEWS

with upside potential for asset repositioning. This strategy is confirmed by the properties that are part of the US portfolio, located in prime area such as Ocean Drive and Indian Creek in Miami Beach, Brickell in Miami, Manhattan in New York, Union Square in San Francisco and Bel Air in Los Angeles.

Miami, among the main US cities, has been chosen as the main hub for Optimum Development USA activities because of its outperforming real estate market and strategic position. Prices have been constantly growing through all the sectors (+20-30% in Q1 2015 compared to Q1 2014) and the city is also becoming one of the most

exciting and dynamic cities in the US from both an economic and cultural point of view.

Optimum Asset Management S.A. through its affiliate Optimum Development USA LLC take pride in its involvement in the Miami community, since its founders strongly believe in being responsible for the future of the society.

Through a strong presence within the main groups in Miami and Miami Beach, Optimum Development USA contribute to local campaigns, schools’ fundraisings and support local authorities sponsoring social work and events benefitting the community as a whole.

Optimum Asset

Management S.A. is also planning to increase the investment in its current markets, as well as to expand its geographic reach.

Thanks to an impressive track record in the Berlin real estate market and to an outperforming portfolio in the US market, made up of trophy assets in prestigious locations, the firm is currently raising funds for its third fund focused on the German capital and it is about to launch a second fund dedicated to the United States market.

The management is also actively monitoring possible investment opportunities arising in emerging markets, like Cuba. IFM editor@ifinancemag.com

A brief about the company Name Location

Optimum Asset Management SA (with its affiliates Optimum Asset Management USA and Optimum Development USA LLC) Luxembourg, Germany, United Kingdom, Malta and United States HQ

US HQ European HQ

Miami Beach; Luxembourg

Business

Asset Management and Real Estate Development

Products

Residential, Retail, Office, Hotel

Employees

157, including property and facility management; 10 people dedicated to Real Estate Development

On behalf of our dedicated staff both in Europe and in the USA, we are proud to receive the award ‘Fastest Growing Real Estate Development Company in the USA for 2015’.

Our team’s core values, local expertise and thorough understanding of markets we invest in, play a significant role in our success. We view this prestigious award as a clear testimony of our efforts and focus, to be a leading real estate player in major US cities Ricardo Tabet, CEO Optimum Development USA LLC

Branches/Global 5 countries between US and Europe footprint Owner/CEO Alberto Matta (CEO of Optimum Asset Management S.A.); Rodolfo Misitano (CEO of Optimum Asset Management USA); Ricardo Tabet (CEO of Optimum Development USA LLC)

Jul - Sep 2016 International Finance Magazine

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COMPANY NEWS

Optimum Asset Management fact sheet (31-12-2015) Assets Under Management (2015)

INVESTORs breakdown (2015) 22.8%

86.3%

11.1% 56.7% 13.7%

6.5% 2.9%

Total Real Estate AuM

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Total Other Asset AuM

re breakdown by asset class (2015)

Pension Funds

Banks & Insurances

Family Offices & Privates

Other Institutions

Sovereign Wealth Funds

re breakdown by geography (2015)

26.5% 16.7%

28.3%

37.3%

20.3%

58.0%

4.5% 8.0%

Residential

Office

Retail

Others

0.5%

Germany USA Italy France

Hungary

Data as of 31 December 2015. The data include the Companyâ&#x20AC;&#x2122;s operations in Malta carried out via its regulated Fund Futura Sicav, managed by the regulated affiliated Management Company, Futura Investment Management Ltd.

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No more hanky-panky

If the new administration has its way, Argentina will no longer be a haven for money laundering Ana Mano

International Finance Magazine Jul - Sep 2016

Country focus: Argentina

M

ariano Federici knew his job at the helm of Argentina’s Financial Information Unit (UIF) would be an uphill climb.

Yet, he would not blame it on the agency’s modest budget, which at some $8 million per annum pales in

comparison with the billions moved illegally through global financial systems.

In his David vs Goliath battle, Federici’s mandate is preventing criminals from hiding assets and financing terrorist activities out of Argentina. The first struggle involved ridding the agency from the enemies within.

A profound restructuring was set in motion by the arrival of the new incumbent. One of the first administrative actions implied the sacking of 30% of UIF’s contractors, a decision based on the threat to ‘the security of information’ that they posed, Federici said in an exclusive interview.

In plain English, certain people at the UIF were leaking sensitive information. So much so that these indiscretions led the FinCen, UIF’s peer in the United States, to suspend cooperation with Argentina last year.

The winds of change helped normalise relations with the Americans in March when a memorandum of understanding was signed between the two agencies. Collaboration was to be restored based on reassurances given by President Mauricio Macri that no such problems were to occur again.

‘Lack of probity’ – as Federici

described the actions of the old staff – is now a thing of the past.

More cultural changes are on order though. The most obvious relates to the UIF’s will to cooperate with the entities overseen by the unit, especially

banks. Federici is moving away from the ‘repressive approach’ employed under former president Cristina Fernández de Kirchner.

During the previous administration, the UIF was involved in accusing the local units of HSBC, JP Morgan, and BBVA Banco Frances of helping clients launder money.

Instead of antagonising the banks and nonfinancial entities under UIF’s supervision, Federici prefers a friendly exchange.

At the end of the day, he says it is these entities that will provide the data that UIF analyses to catch the criminals.

Inconvenient truth Some may be surprised that Argentina has been a destination favoured by criminal organisations looking for a safe harbour to hide assets. Not the former International Monetary Fund (IMF) counsel, who says the attraction lies in the fact that the country boasts the third largest economy in Latin America, possesses a developed banking industry and offers diversified choices of investment — which serves to grow licit or illicit capital.

“But the most important reason” why illegal money has been coming to the country is the level of “public corruption”, says the lawyer, who lived in Washington DC in the USA before taking on his new role in Buenos Aires in January this year. This, more than any other characteristic of Argentina’s economy, worked like a magnet to

Jul - Sep 2016 International Finance Magazine

111

Country focus: Argentina

A visible change of culture at the UIF relates to the willingness to cooperate with the entities overseen by the financial intelligence unit, especially banks

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lure criminal organisations and contributed to create what President Macri called ‘a putrid’ structure shortly after he took office.

It is an inconvenient truth, but certain government agencies have been ‘infiltrated by criminals’, posing security threats to society and risking the financial integrity of operations carried out inside Argentina, according to Federici.

For example, the UIF was accused of overlooking the alleged criminal conduct of Lázaro Báez, a local businessman who made a fortune as a contractor during the Kirchner years (2003-2015). Báez is accused of money laundering and was arrested

in April.

Suddenly in Argentina, old corruption investigations are advancing, and every day the TV will show action in the Buenos Aires court houses starring powerful empresarios and former government officials. In Orwellian Argentina, the new government is re-writing history while luminaries of the prior administration answer to justice. The common folk on the street calls this revenge but for Macri, the son of a successful entrepreneur, it is business as usual.

Terror finance There is no evidence that money hidden by wrongdoers in Argentina

International Finance Magazine Jul - Sep 2016

has directly financed a terrorist attack anywhere in the world. But that does not mean this has not happened, says Federici.

He recalls Argentina suffered two bombings in the 1990s, one of which killed 85 people at a Jewish community centre in Buenos Aires.

The events failed to make the government more conscious of the risk that this jurisdiction is used to finance terrorism. Federici says this risk has been ‘underestimated’ in recent times.

Terror finance deterrence is a priority to the UIF. The other more immediate goal is choking the criminal organisations operating in the country by tracing their

Pic: Ana Mano

The most important reason why illegal money has been coming to Argentina is the level of public corruption Mariano Federici, president, Financial Information Unit (UIF)

Country focus: Argentina

hidden assets and stripping them of the one thing that makes them so powerful – cash.

However, the speed at which Federici can achieve his goals will depend on how fast he reorganises the UIF. He encountered a unit plagued by a lack of planning and strategic vision.

Narco state?

With a mandate to regulate, sanction and be a party filing complaints in criminal proceedings, UIF is unique for its multiple roles.

Going forward, the agency’s success will be measured by its ability to track money and deprive criminals of the assets they amassed illegally. Just how much progress the UIF can make in the short term is unclear.

Argentina lacks reliable criminal statistics and its enforcement records are poor, according to Federici.

In August 2015, Transparency International

said Argentina is one the 41 OECD anti-bribery convention countries which failed to investigate or prosecute any foreign bribery cases in the prior four years. Despite that, the country was removed from ‘a gray list’ of the Financial Action Task Force (FATF) in 2014 for introducing legislation to combat corruption that meets international standards, a feat Federici commemorated.

That and the fact more prosecutors and judges are relying on the UIF’s intelligence should promote other institutional advancements. Any progress will be welcome for a country ranking 107, out of 175, in Transparency International’s corruption perception index updated in 2016.

For now, the UIF’s work is to re-commence without updated criminal statistics, which have been either ‘withdrawn’ or

‘manipulated’ by Macri’s predecessors, according to Federici. This claim implies it is virtually impossible to know — from official sources — how strong are the criminal organisations operating in the country, and just how much money has been illegally brought in, especially by drug traffickers.

But even after statistics are rebuilt, one may not be able to grasp the magnitude of Argentina’s financial integrity woes.

In this sense the country is no different from any peer in the world. Anybody trying to estimate illegally hidden assets risks releasing inaccurate information, says Federici. That is so because it is not logical for a criminal organisation to make disclosures, and all estimations derive essentially from cases that governments are able to detect.

Despite the shortcomings of the country’s justice

system, Federici refuses the notion that Argentina is becoming a narco state akin to Mexico. However, it will be difficult for the government to explain the escape of three men from a high-security prison in Buenos Aires in January.

They had been arrested in connection with an ephedrine trafficking ring.

Federici admits Argentina is taking ‘a dangerous path’ up until Macri was elected.

But he claims the new administration is ‘in time’ to reverse the trend. IFM editor@ifinancemag.com

Jul - Sep 2016 International Finance Magazine

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International Finance Magazine Jul - Sep 2016

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OUT OF OFFICE

My wife calls

me partial technology boy

Jeremy Leggett is a British green-energy entrepreneur, author and advocate who is founding director of Solarcentury, the UK’s largest independent solar electric company What do you look forward to after work and on weekends?

First, the truth — I am a workaholic, and hence boring no doubt. I am fascinated by the course of The Great Transition. I actively look forward to keeping on top of its many themes. But when that’s done: a glass of really fine wine, and a good quality box set/movie. On weekends, it is time for big family lunches.

116

Your schedule on your off day?

On a completely free off day, get up by 9 in the morning, check the news/ emails and have coffee at 10. After lunch, run 5km with my whippet or have a long country walk in the High Weald. Dinner is at one of the lovely local country pubs.

Do you buy the latest books or gadgets?

I do check the latest books, but I only dabble in gadgets. My wife calls

me ‘Partial Technology Boy’.

Which book/gadget has been your most recent purchase?

Sapiens, by Yuval Noah Harari.

It is mainly about the history of an interesting little species.

Do you travel a lot with family?

Where was you last holiday?

I travel far too much on business and tend to travel much less on holidays. We have dear friends from Australia, who we holiday with every year “half way”. Last year, ahem…

Greece.

What are your hobbies?

I love walking. I would like to play more golf. Played three times last year.

Which is your favourite dish?

My wife is Japanese, and nothing can beat fresh sushi and sashimi with Asahi super dry beer at an Onsen Ryokan (Japanese hot spring resort).

As told to Suparna Goswami Bhattacharya

International Finance Magazine Jul - Sep 2016