AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET MARCH 2018 BUSINESSANDINDUSTRY.CO.UK WATCH BRC reveals results from annual payments survey. ONLINE
READ Are voluntary codes of conduct improving regulatory frameworks? P9
EVENT Money 20/20 Europe in
Amsterdam, 4-6TH June.
Future of Payments and Compliance UK rising to customer and transformation challenge Once a quiet corner of the world, payments is now a diverse and complex industry that is evolving at rapid speed.
D
riven by a combination of regulatory developments, competition from new entrants, technological advances and changing customer expectations, the industry not only provides the foundations for the wider economy but continues to innovate and drive changes in technology and society. Imagine a world without the ability to shop with a card, buy easily and securely online, pay bills without having to think, or even withdraw cash. Because of how convenient it is to pay, we often forget how this impacts our wider lives, but we shouldn’t overlook the difference this makes to customers, to small businesses, or to the wider economy. The UK payments industry continues to lead the way and enhance how customers and businesses interact, with major changes underway in all parts of the industry. Changes like instant payments across borders in Europe, Open Banking and even the digitalisation of cheques will all make a real difference to customers.
UK Finance leads the critical work to ensure a coordinated approach around a significant number of industry changes and to secure the best outcomes for UK customers and the market. This is being achieved by working closely with our members, the wider industry and key stakeholders – both domestically and internationally. A number of changes in the UK are world leading and we anticipate they will allow for the development of new types of products and services that will become central to how we interact with our banks and financial providers in the future. One such change is called Open Banking, which will enable appropriately regulated companies to give more accurate personal financial guidance, tailored to customers circumstances and initiate payments on the customers behalf, all delivered securely and confidentially. This matters, because it will make internet and mobile payments easier and help customers to manage their finances better. It will also allow customers to better compare deals, giving the customer the opportunity
David Song UK Finance, Principal, EU Personal Finance Policy
“The UK payments industry continues to lead the way and enhance how customers and businesses interact.”
to find the best products for them. The changes could help open up new markets and encourage new market entrants, some of whom will offer services that will assist people who are currently financially excluded. There are a whole host of opportunities that it may not be possible to fully anticipate which could hugely benefit customers. In the UK, we are already digitising cheques and have had instant payments for many years, however the industry is also making further enhancements to the payments systems which support the country on a daily basis, and setting out design and implementation approaches for the construction of a new ‘National Payments Architecture’. This is a completely new model for retail payments and how they are carried out by the UK’s payment schemes and market participants. It will be the biggest change to the way payments are processed in the UK since the 1960s, ensuring payments are safe whilst also encouraging competitive innovation and unlocking new
business opportunities in everything from smarter uses of banking and payment data, through to new transactional services. The new architecture will be delivered by the New Payment Systems Operator, which will bring together the three current payment schemes of Bacs, Faster Payments and Cheque and Credit Clearing. Meanwhile the Bank of England is also carrying out an upgrade of its Real Time Gross Settlement system at the heart of the infrastructure. The UK’s payments industry is well placed to adapt to rapidly changing customer expectations and the challenges of digital transformation. It is important that all these changes are considered alongside all other regulatory and strategic initiatives in play. Many of the requirements and changes in the evolving landscape interrelate; the end result needs to be an efficient, competitive and safe financial services market for customers and industry alike. UK Finance is uniquely placed to support the industry as it embarks on all of these changes.
2 BUSINESSANDINDUSTRY.CO.UK
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
MEDIAPLANET
INSPIRATION
The BRC Payments Survey data is a sample from 50 per cent of the entire retail industry. The 2016 Survey looks at the methods of payment UK shoppers are using when buying goods in store and online, how this differs from previous years and the average cost to the retailer for handling each method of payment.
Total UK retail sales rose by
There were
3.5 per cent in 2016 to £351 billion (2015: c.£339 billion)
retail transactions overall in 2016 (2015: c.18.2 billion)
19 billion
The average transactional values (ATV) of any given retail transaction stood at
£18.42
in 2016 (2015: £18.63) SOURCE: BRC PAYMENT SURVEY 2016
The future of payments will be bank transfers Cards have overtaken cash in payments but they will soon have a rival in the form of a direct “bank to bank” option. By Sean Hargrave
C
ards overtook cash in 2016 as the most popular form of paying for goods in shops but, soon enough, plastic is expected to face a challenge itself from direct bank transfers. While cash will take a lower slice of the payments market, it is unlikely to be replaced entirely, according to Andrew Cregan, Policy Advisor on Payments and Consumer Credit at the British Retail Consortium (BRC). Instead, cash and cards will coexist and will be joined in a couple of years by a new form of payment direct from a customer’s account. Cregan believes that this way of allowing consumers to pay a retailer direct, straight from their bank account, will be readily deployed by retailers because they have been angered by how the major card schemes, such as Visa and Mastercard, have behaved recently. “The EU has acted to cap the charge from a customer’s card issuer, often their bank, and this Follow us
has been used as justification for preventing retailers passing on card fees to customers,” he says. “The trouble is, the card schemes’ fees weren’t capped and so they’ve raised their charges outrageously over the past couple of years to a point where they’re on course to negate any of the gains made through curtailing the card issuer’s charge.”
Convenience balancing act There is, however, an alternative on the horizon. The EU paved the way for a new type of payment at the beginning of the year with the Payments Services Directive 2 (PSD2). By allowing companies to register as a Payment Initiation Service (PIS), a new direct channel has been created to offer customers a direct way to pay.” This could represent a far more convenient means for customers to pay for their goods, which aligns with the current trend of removing the physical presence of a card at a cash register, even if it is being used in the background. “People are moving towards
facebook.com/MediaplanetUK
Andrew Cregan Policy Advisor, Payments and Consumer Credit BRC
“People are moving towards contactless payments and mobile wallets.”
@MediaplanetUK
contactless payments and mobile wallets, which move them away from presenting the card and typing in a PIN,” says Cregan. “Of course, even if you’re using Apple Pay or Google Pay, your payment is still ultimately made by card; it’s just a more convenient way of presenting it. So, we think that, in the long-term, this trend will continue and customers will increasingly make payments without the need for a card at all.”
Easier for consumers and retailers The provision for a PIS to allow consumers to pay a retailer as easily as a friend in their online banking payee list will be a win for both customers and retailers, Cregan says. The public wants convenience, so, not having to carry cash or a card will be well-received. Retailers, on the other hand, are keen to reduce transaction fees. For this reason, it is likely the new direct payment system will be supported through retailers offering rewards and incentives.
“If this is done collaboratively then consumers could soon get used to using a new payment method that offers better incentives, is accepted everywhere, and perhaps comes with a universal brand name just as Visa and Mastercard today,” he says. “It will be powered by technology that allows direct payments, and customers will just approve a payment in the same way that they log onto their banking app – through a password or perhaps a thumbprint. It will give customers the convenience of a contactless card payment, without the need for a card, and retailers can cut out the unpopular – and rising – fees from card schemes.” This future is at least 18 months away, Cregan says, until further new rules on payment security come into play in September 2019. Until then, the card will reign supreme against cash but could soon start to find it has a more direct, card-less rival ready to take market share from the card schemes.
@MediaplanetUK
Senior Account Manager: Dominic McWilliam Junior Account Manager: Gavin Falconer email: gavin.falconer@mediaplanet.com Head of Business Development: Rebecca Nicholson Content and Production Manager: Kate Jarvis Managing Director: Alex Williams Digital Manager: Jenny Hyndman Designer: Juraj Prikopa Mediaplanet contact information: Phone: +44 (0) 203 642 0737 E-mail: info.uk@mediaplanet.com
Please recycle
4 BUSINESSANDINDUSTRY.CO.UK
Payer Country
A
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
MEDIAPLANET
Front end country A
Front end country B
Payer PSP front end elements
Payer PSP front end elements Back end
Service channel/access point Payment instrument
Payer PSP
Payee PSP
Payment instrument Underlying transaction account
Arrangements and processes
End user contracts
B
Service channel/access point
Back end providers
Underlying transaction account
Payee Country
End user contracts
PSP contracts/schemes Legaland regulatory framework(s)
SOURCE: COMMITTEE ON PAYMENTS AND MARKET INFRASTRUCTURES
Key features of the cross border retail payments market The cross border retail payments market is complex, involving many different parties, use cases and underlying arrangements. Types of cross border retail payments Payer/Payee
Person
Business
Government agency
Person
P2P (eg international remittances to family/friends)
P2B (eg payment for e-commerce purchases abroad)
P2G (eg payment of taxes and utility services for property held abroad)
Business
B2P (eg salaries and pensions to employees working abroad, judicial resolutions)
B2B (eg supply chain payments to foreign suppliers)
B2G (eg tariffs paid by exporters to authorities abroad)
Government agency
G2P (eg pension payments to retirees or childhood support for children living abroad)
G2B (eg purchases from international suppliers)
G2G (eg payments related to international aid)
Read full report on https://www.bis.org/cpmi/publ/d173.htm
E
nd users differ across payment types in terms of their needs, requirements and capabilities. It is useful when analysing retail payment demand to distinguish between different combinations of several types of end users. The general classification of payment types and associated use cases broadly applies to retail payments. However, in the context of cross-border retail payments, the following
payment types are typically considered the most important in terms of volume, value or both: ■■ Person-to-person (P2P) payments: the payer and the payee are both individuals. The most important P2P use case is the transfer of money to family members or friends abroad, without an underlying economic transaction. Such transfers are often referred to as international remittances.
■■ Person-to-business
(P2B) payments: the payer is an individual and the payee a business. Important P2B use cases include payments for purchases of retail goods and services from businesses abroad via the internet, payment of bills (eg school fees or utilities) directly to a provider abroad, and payments resulting from international tourism or business travel.
■■ Business-to-business
(B2B) payments: the payer and the payee are both businesses. Due to the broad differences among businesses, B2B use cases vary widely and can involve large payments by multinational corporations for raw materials, semi-finished goods and wholesale products, as well as smaller and less frequent payments by small and medium-sized enterprises (SMEs) or non-government organisations (NGOs).
Other payment types, such as payments between governments and individuals or businesses, can arise in certain situations (Table 1).16 However, these payment types seem to contribute less significantly to demand for cross-border retail payments than the payment types noted above. Read more on business andindustry.co.uk
MEDIAPLANET
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
BUSINESSANDINDUSTRY.CO.UK 5
PHOTO: THINKSTOCK
The future requires more than technology alone Technology is the future. A world gilded by innovation and tools making lives easier and helping us fulfil our potential. Innovation continues to drive specialisation as we address details, hurdles and gaps in existing products and interactions. This has created speciality providers, plug-ins and open source platforms to accommodate and collaborate with them. By Valli Ardalan SPONSORED
A
s we get closer to true global interconnectivity via friction-reducing solutions optimising efficiency and promoting scale, we are reminded that communication, inter-personal relationships and experience are vital. Technology cannot replace human interaction. Take, for example, social networks. While highly effective in producing new advertising channels, have they really brought us closer together or just simplified the interaction to make it easier to segment? The progress of technology brings with it a responsibility, not only for governments, but also businesses to ensure the appropriate safeguards are in place. Although there are moves to make compliance more automated and commoditised, even using artificial intelligence, the interpretation and execution of regulation relies heavily on considered judgement, expertise, interpersonal relationships and invested time.
It is undeniable that technology is changing the global economy, introducing new ways to transfer assets, such as money, more efficiently. This is needed as globalisation continues and the demand for more nimble ways to send cash across borders grows. There is no shortage of innovative technology that can address this, hence the speed of transactions has risen and costs fallen. Though, in practice, there remain significant challenges, there are hurdles that technology is not equipped to overcome at present. The complexity and inconsistency found in regulatory requirements, necessary to operate in almost every sovereign state, is not easily untangled. Time, personal relationships and a willingness to engage in traditional graft still yield optimal results. There are few shortcuts, the value proposition of this knowledge seems forgotten in the blind faith that technology will address it, but so far this has not materialised. Progression requires collaboration, both technical and personal. At Earthport, we have long adopted the mind-set to collaborate with partners to build mutually beneficial relationships and address problems holistically. Companies are now increasingly seeking strategic partnerships rather than pursuing proprietary solutions. We are seeing
Valli Ardalan Global Head of Marketing and Strategic Partnerships, Earthport Plc
“Linking up with the right partners is crucial as new technologies become ingrained.”
this across all industries in businesses looking to leverage technical and non-technical expertise to enhance their offerings, create opportunities and build scale. Linking up with the right partners is crucial as new technologies become ingrained, such as Blockchain and Distributed Ledger Technology. Cryptocurrencies and tokenisation pose exciting and real questions about the future. But in an environment driven by the reduction of friction, the sustained existence of so many touch points going into the future must be considered. Whether these technologies can benefit our businesses is increasingly becoming less of a relevant question. What shape they will take, how they will be regulated, controlled and, importantly, integrated into the legacy systems of today, seems more productive. The problems we are engaged in solving revolve around finding feasible solutions to link the technology of tomorrow with the global regulatory, technological and social environments of today. The global financial system however, will not just be about new hardware and software, it will also be about fresh thinking, greater client-centricity and the removal of barriers, both technical and non-technical. Speed, security and control – which are at the forefront
of international money transfer – can only be enhanced so far by technology as long as a complex and diverse regulatory environment exists, governing the protocols and rule sets of each cross border transfer. Tomorrow’s customers will have been schooled differently and will take for granted the tools and services of today. They will demand from financial services the experience they get from the consumer sector, hence it will be critical that providers give access to “best in class” services, either from their own armoury or through partners. As the market changes, so do the value propositions, and one’s ability to identify change and build - internally or increasingly via partnerships - the skills and technology to monetise them, will be key. So much of the future depends on people working towards a common goal, building a more efficient, transparent and predictable system with the client at the centre. This should comprise a heady mixture of state-ofthe-art technology, pragmatic innovation, effective partnerships, and above all, meaningful personal interactions. It’s not a ‘nice to have’, not idealism at all – on many counts, this is a prerequisite. Read more on earthport.com
6 BUSINESSANDINDUSTRY.CO.UK
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
MEDIAPLANET
PHOTO: THINKSTOCK
Technology is crucial to make cross border payments more efficient Making and processing cross border payments can be frustrating, but new technology is boosting efficiency and improving financial inclusion, says the Emerging Payments Association’s Director General, Tony Craddock. Why have cross border payments been perceived as slower, more expensive and more opaque than domestic payments? Imagine someone trying to send physical cash from a town in England to a village in a developing country. The money must pass through different intermediaries and banking systems. This is a complicated process because the payer and the payee are based in different countries, and the law, the payment methods and technology available often varies. The processes involved must also be robust enough to enable money to be transferred safely and securely. Cross border retail payments also involve more risks to manage, complexities to navigate and rules to comply with than domestic payments. Nevertheless, the industry is trying to reduce the amount of friction so people keep more of their money and receive it faster. Technology will drive change.
How has the mobile phone impacted cross border payments? When we talk about financial inclusion globally, the mobile phone been the most influential game-changer in cross border payments in decades. Around 40 per cent of the world’s population do not have a bank account but many of these people do now have a mobile phone. Those living in developing economies might not always have the same
smart phone as people in the West, but the devices they do have are good enough to enable cross border payments to take place. Smart devices are fuelling growth but the mobile technology must still ensure payments are trackable and secure. We must avoid money laundering and stop funds being moved around to support criminal activity such as terrorism. The sender and the recipient must always be identifiable. For payment service providers, the wider adoption of smart phones does provide huge opportunities to reach additional retail customers in new markets. What is exciting, is that retail payments from overseas will boost local economies.
What other technology is helping to grow the cross border payments sector and make it more efficient? Mobile leads the way, but various internet applications are also making things easier for users, especially in jurisdictions where access to traditional banking is low and there is a need for more financial inclusion. We are seeing wider adoption of e-wallets and e-money technology, for example, while blockchain/ distributed ledger technologies and digital currencies are growing in popularity. However, the proportion of payment service providers offering or accepting currencies such as bitcoin is still relatively low. The PayTech sector must come up with payment systems that are more modular, flexible and efficient
Tony Craddock Director General, Emerging Payments Association
“The proportion of payment service providers offering or accepting currencies such as bitcoin is still low” to maintain and develop. This will enable them to compete more effectively with the traditional banks that can struggle to adapt their own, more complex, legacy systems.
Customer expectations around using cross border payment services are rising; what impact is that having on the sector? As customers, we all want simpler and cheaper ways to pay for goods
and services around the world. The consumer has the power these days, and is used to quick and easy payments in their own country. When it comes to cross border payments they want choice and to be able to compare the cost and speed of payments from different providers in various countries. The industry is responding. We are already seeing more consistency in the type of payment technology used in different jurisdictions. There has been an increase in the use of card payment systems, but these are not always the best option in jurisdictions where cash is still king or many sellers do not accept card because of the costs involved. We are also seeing more traditional players reinventing themselves to compete in a FinTech world and meet customers’ modern-day expectations around cross border payments. BFC Bank, for example, was founded as Bahrain Financing Company in Bahrain in 1917 and has developed an online portal that is not constrained by legacy systems. The bank is helping SMEs and payment service providers with international payments.
Is the cross border payments sector becoming saturated because so many new players are entering the market? No. What is brilliant about the UK is that it is a market where competition is encouraged and where we see plenty of investment to help
entrepreneurs and start-ups disrupt the payments market and solve problems. We must also remember that the financial services industry is international and the UK is the best in the world when it comes to payments and FinTech. The playground nowadays is global rather than just the UK, and there is so much opportunity for growth because international governments want to improve financial inclusion.
What impact could the threat to correspondent banking have on the cross border payments market? Correspondent banking has been under pressure since the financial crisis because banks have looked to de-risk and are assessing the strategic agreements they have globally. However, if banks do reduce the number of partners they have around the world it could damage the cross border payments market and hold back financial inclusion globally. Many banks have an irrational fear about being fined by regulators for not being able to authenticate who is receiving the money, and this concern threatens to reduce payment services in the developing world.
Read more on businessandindustry. co.uk
MEDIAPLANET
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
BUSINESSANDINDUSTRY.CO.UK 7
PHOTO: THINKSTOCK
Cross border payments: expensive, slow and stifling businesses New payment solutions are stepping in to help businesses trade internationally, without the high cost and slow transfer times of traditional cross border payments. SPONSORED
Cross border electronic payments have seen annual growth in their overall share of the global payments flow; what are the key contributing factors to this? The growth of cross border electronic payments New regulation and increasing competition for the customer – not just among the banks but from a new generation of challengers – have had a huge impact on the international payments market. The latest regulations have opened up the market, allowing financial tech businesses to provide payment and banking services to business and consumer customers. On top of this, 75 per cent of global banks are retrenching from foreign geographies, meaning that the traditional correspondent banking model for cross border payments is no longer able to effectively serve the industry. We live in the era of a networked society where everyone is connected through different devices, and this accelerates innovation. Both
consumers and corporates need to operate effectively and efficiently in this digital world. Newcomers in the market, especially within the FinTech industry, have been able to step in and fill the gaps left by larger banks that no longer want to service this sector. New solutions are tackling the challenges of high foreign exchange (FX) charges, poor FX rates and slow transfer times. It has been reported that 52 per cent of UK millennials now prefer to do basic payment activities using FinTechs rather than banks, simply because they offer a more convenient solution; the technology is easier to use. With businesses following suit and opting for the convenience and lower cost of electronic payments, market share is growing extremely quickly.
As international trade increases, businesses can capitalise on this growing marketplace; what are they currently missing out on with traditional forms of cross border bank tranfers? The biggest barrier to cross border trade The traditional cross border payment model is too slow and too expensive. Each transfer is passed between a number of banks, with varying exchange rates and each one charging a handling fee. This makes cross border payments prohibitive for
Anders La Cour Chief Executive Officer, Banking Circle
many businesses. In fact, in a survey we carried out in 2016, we found that 39 per cent of businesses have held back from global expansion due only to concerns regarding international payments. New solutions are able to handle payments directly, which reduces the cost and cuts the time the transfer takes to arrive in the beneficiary’s account. Payments made between Banking Circle members can happen instantly, and at no cost, behaving like internal transfers.
What do you feel are the main factors stopping businesses changing the cross border payments from traditional means? Lack of time is holding business back We have spoken to many businesses
about what is stopping them from changing from traditional cross border payments methods. Generally, time and resources are the factors holding firms back from finding a better payment solution. However, some of those we surveyed were simply unaware that better solutions exist already. The fact is that often there just simply isn’t time to do the research, with lower headcount and resources stretched to capacity. Those working in finance roles simply cannot spare the time to investigate alternative payment solutions, let alone implement big changes. Many stated that even if they did find a better solution, the business would not have the resources for implementation.
What are the key benefits of becoming a member of Banking Circle? Financial utilities have the answer Banking Circle is a global scale Financial Utility providing its members with banking services including accounts, FX and payments. This allows businesses to add value to their customer proposition. Fees are low, FX rates are competitive and transfer times are fast, meaning that for the first time, payments do not stand in the way of international trading ambitions. Banking Circle offers transactions in 25+ currencies, and works within
multiple jurisdictions, removing the need for multiple banking relationships to handle international transactions. Payments are made in the company’s own name, improving payments acceptance, settlement times and reconciliation. In addition, end-to-end transparency and clear segregation of funds reduces Anti-Money-Laundering (AML) and Know-Your-Customer (KYC) risk. The ever-growing suite of solutions offered by Banking Circle, designed to revolutionise the cross border payment and banking industry, ensures businesses of all types are able to transact as cost effectively and as efficiently as possible. Banking Circle is helping FinTechs and banks to provide their customers with faster and cheaper cross border banking solutions, without the need to build their own infrastructure or correspondent banking partner network. As such, Banking Circle is empowering financial institutions to support their customers’ international trading ambitions, without the need for multiple banking relationships, whilst reducing risk and the operational cost of transactions. And that is enabling banks and FinTechs to remain competitive in a competitive payments landscape.
Read more on bankingcircle.com
8 BUSINESSANDINDUSTRY.CO.UK
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
MEDIAPLANET
Why collaboration among industry is necessary to deal with regulations How are risk managers and professionals dealing with the influx of regulations coming into play in 2018 and beyond? We are connecting. Risk professionals are recognising that we can solve these challenges better together. We are attending round tables and industry events, we are talking to firms that have already made the journey, and we are consulting our second-line peers and professional services firms. Although your firm’s specific approach can bring competitive advantage, the basic behaviours and outcomes the regulatory changes are aiming for – like transparency and better decisions – are universal and can be benchmarked across firms. Within many firms, our teams are also growing or shifting in their priorities. Keeping up with the pace of change and supporting multiple
regulatory projects is putting a strain on teams. We are looking for ways to free up skilled people and automate routine tasks. Our last event on Artificial Intelligence in Risk Management explored how AI can augment our capabilities. Risk professionals should be exploring their options to use AI to help manage new and existing regulation.
What advice would you give to these professionals? Our Special Interest Group (SIG) Advisor, Markus Krebsz, puts it eloquently. The purpose of risk management is to ensure survival with long-term, sustainable benefits. Don’t make your efforts solely about complying on the day new regulations go into effect. Seek out the benefits and positive changes you can bring to your organisation as part of your change activities. Be thinking about the continuous
Sarah Christman Senior Risk Professional, IRM’s ERM in Banking and Finance SIG
improvements that can follow to ensure the change is sustainable well into the future. Educating yourself is key to success: read the regulations, learn about the historical context that brought the changes in, study what the regulators have said in consultation papers and speeches. Talk with others in your firm and across your industry and profession and seek out diverse points of view and interpretations. The more you understand about why the changes were put in place, the better you can find the overlap between satisfying regulators and tailoring the response for your firm.
mindful that we look for the right skills. When risk and compliance professionals are at our best, we are simplifying things for our firm. We empower people to make better decisions, to find and implement the best solutions when we strip out the jargon and make things simple. But, getting to that simple view of what is needed and what options are available, often requires more complex research and analytical skills, plus nuanced interview and communication skills.
How important is it to have a skilled workforce when it comes to dealing with financial services regulations?
There are many trends coming to light, which interact with and overlap each other. Members of the SIG have highlighted the top 10 risk exposures they see impacting financial services:.
It is important, but we must also be
What is the biggest trend you’re seeing from an industry standpoint?
• Brexit – political decisions lead to highly uncertain consequences for business models and economic environment, disrupting ability to plan and execute strategy • Market – effects on interest rates, currency fluctuations, valuation of financial instruments made more uncertain by dependency on Brexit • Regulators – failure to address the core and enduring issues in industry and markets in a sustainable manner and so failing to protect consumers, ensure market integrity or enable competition
• Cyber – well-funded or state-sponsored hacker attacks exceed our ability to defend, identify, and quickly contain/respond. The consequences are made worse by potential for worldwide GDPR fines if control failures are found • AML – well-funded or state-sponsored money launderers exceed our ability to defend, identify, and quickly contain/respond. The scale of the problem is made worse by the rise of cryptocurrencies and the unsuitability of traditional controls for new money
• Resilience – operational discipline eroded by high pace of change and transformation results in less-resilient people, processes and systems; this is worsened if organisation agility is low • Conduct – (in)action of an individual firm or industry can result in consumer detriment, negatively impacting market stability, or restricting effective competition – See Wells Fargo • Regulators – failure to explain business practices and constraints in a clear and compelling manner encourages underqualified and overzealous regulators to develop burdensome rules
• Competition – existing or emerging organisations leverage new technology and its applications more quickly or effectively, eroding market share and profitability • Complexity – business models and extended enterprises increase in complexity is accelerated by reliance on black box tech and integration of poorly understood tech, exceeding management’s ability to oversee.
TECHNICAL
HUMAN
EXTERNAL
INTERNAL
Institute of Risk Management
A company’s best asset? You. Management covers the Basel III and Solvency II regulations, giving you a broad understanding of risk management.
www.theirm.org City AM banner - July 2017.indd 1
studentqueries@theirm.org
MEDIAPLANET
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
BUSINESSANDINDUSTRY.CO.UK 9
PHOTO: THINKSTOCK
Are voluntary codes a route to enhancing conduct? Over the last 10 years, few aspects of financial services have been unaffected by regulatory change. In general, the post-crisis regulatory framework has been a force for good in improving standards of conduct and stability across the financial sector.
O
ne example is the Senior Managers’ and Certification Regime, implemented by the FCA in the UK and adopted in some form by several other regulators worldwide, marking a sea change in the regulatory approach to decision-making and accountability within banks. But, with the bulk of the new regulatory framework now in place, and industry moving into a new phase of implementation of regulation, the approach to handling new and arising conduct issues also needs to adapt. New regulation, where needed, should continue to play a role in upholding standards, but other approaches can also be effective without placing as much of a burden on both regulators and industry. In recent years, self-generated industry codes of conduct have become an increasingly popular tool for participants across a range of markets to establish best practice for themselves. The Global Foreign Exchange Committee’s Global FX
Code of Conduct, which brings together standards agreed by central banks and market participants in 16 different jurisdictions across the globe, is a good example.
Industry setting it’s own standards. There are many positive things to be said for industry setting its own standards. Principles can be applied to markets and entities that are outside the regulatory perimeter, and also drafted to a level of technical detail simply not possible with regulation. It is also much easier to update a code to keep pace with changing market practice than to overhaul a piece of regulation. Industry can also choose to exert its own pressure to comply by simply refusing to deal with market participants who won’t sign-up. But, if not devised and implemented carefully, these codes can have their limits. The fact that they are voluntary may encourage firms to sign up to them, but if they are
Will Dennis Head of Compliance, Association for Financial Markets in Europe
“Linking up with the right partners is crucial as new technologies become ingrained.”
perceived to be lacking in teeth this can limit their impact. If firms are seen to breach industry guidelines without consequences this can damage credibility with the public and with consumer groups, undermining much of the benefit of creating them in the first place. The FCA’s recent consultation, 17/37, has proposed making use of industry-written codes in its supervisory approach to unregulated markets, including publicly “recognising” them. Which suggests that, going forward, they are likely to face much greater scrutiny and play a more significant role in upholding standards - especially if regulators in other jurisdictions decide to take a similar approach.
Revision of older codes. This higher level of scrutiny means that it will become increasingly important that careful consideration is given to how such codes are drafted, that they have buy-in from a wide range of industry participants and that compliance with them can
be and is fully monitored. This does potentially mark a shift in approach, as in the past such codes perhaps didn’t face the same level of exposure as they do now. And, in some cases, it might be sensible to take a fresh look at older examples to ensure they are still up to scratch. AFME has identified over 30 codes covering the financial services industry, not including a similar number written by the likes of IOSCO and FSB and aimed at regulators, so this isn’t a trivial task. AFME has always welcomed initiatives that contribute to better market conduct. For voluntary industry codes to be as effective as possible, the aim should be to create standards that are the result of rigorous drafting and consultation, open to scrutiny, maintained up to date, and that industry is committed to upholding.
Read more on businessandindustry. co.uk
10 BUSINESSANDINDUSTRY.CO.UK
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
SPONSORED BY
Paul Jones Global Head of Risk Utilities, IHS Markit
Dynamic capital impact assessments are helping banks navigate FRTB uncertainty
By Sean Hargrave
Banks need a dynamic capital assessment solution to test out different scenarios and ensure they adopt the most appropriate FRTB compliance strategy.
Ensuring a smooth transition to a new market risk regime in the EU
Q: What does the Fundamental Review of the Trading Book (FRTB) mean for banks? A: In the wake of the financial crisis, the BCBS rushed out a patch to the capital rules, known as Basel 2.5, which they hoped would make banks’ trading book risk models more comprehensive. With the benefit of hindsight, regulators realised that the resulting patchwork needed a fundamental rethink. They went back to the drawing board and devised the FRTB guidelines. They are focused on ensuring banks are capitalised more consistently and better able to quantify more illiquid risks. For many banks, this radical redesign of the capital rules is also leading them to rethink their internal risk systems.
Q: When do banks need to be ready? A: The rules stipulate 2022, which doesn’t actually give the industry much time. For banks to run daily FRTB capital in 2022, they need one year of implementation and testing in 2019, one year of model approval process in 2020, and one year of back-testing data in 2021, which means final design decisions need to be made by the end of 2018.
Q: What are the complexities keeping banks awake at night? A: There are many challenges facing banks. One of the most complex is the management of non-modellable risk factors (NMRFs). Under the FRTB text, a risk factor is only modellable if “real” prices for representative transactions are observed at least 24 times per year and with a maximum gap between observations of less than a month. Access to a rich and diversified source of transaction and pricing data will be critical to mitigate these NMRF capital charges.
Q: How are banks tackling this complexity brought about by FRTB? A: We’re already seeing great interest from clients in deploying “parallel run” infrastructure, where they calculate capital under FRTB alongside their existing capital rules. This allows them to experiment with different scenarios for FRTB compliance in order to find the most appropriate approach. This could involve choosing different trading desk structures, or modelling approaches and testing risk factor proxying techniques. This agile approach provides the flexibility needed to navigate the significant regulatory uncertainty that remains and gives banks the option of revisiting these decisions if necessary. Read more on ihsmarkit.com/frtb-solutions
With the publication of the Fundamental Review of the Trading Book (FRTB), in January 2016, by the Basel Committee, the global reforms aiming at improving the level of capital set aside for market risk in banks reached a turning point.
T
hese reforms were long overdue, as weaknesses in the existing market risk framework during the financial crisis had rightly led to questions about whether the framework was still fit for purpose. The move from the so-called value-at-risk models, developed in the 90s, to expected shortfall measures, will ensure that extreme tail events, which appear to have become increasingly common phenomena in market movements, are better captured in banks’ capital requirements. In the European Union (EU), the legislative process of implementing the FRTB was officially initiated with the publication of a proposal, on 23 November 2016, by the European Commission. At the same time,
Stephane Boivin Policy Expert, Regulation - Market Risk, European Banking Authority
it is clear that further clarification is still needed with respect to certain specific issues, as underlined by the Basel Committee in December 2017. Nonetheless, given the operational challenges in the implementation of a completely new framework, most jurisdictions, as well as banks, are now gearing up for the big overhaul in market risk measurement rules. The European Banking Authority (EBA) will be at the forefront of the implementation in the EU of the revised framework and will focus on the operational challenges faced by both EU supervisors and banks in implementing the new framework. Consequently, with a view to paving the way for a smooth implementation of the FRTB in the EU, the EBA published, on December 18th 2017, a discussion paper on the implementation in the EU of the revised market
AN INDEPENDENT SUPPLEMENT BY MEDIAPLANET
MEDIAPLANET 11
SPONSORED BY
Achieving FRTB readiness: the ECB/PRA timelines Planning for the demanding IMA application timeline across workstreams Expected timelines in Europe 2017
Regulators
Banks
Methodology definition & implementation
2019
2018
Preparation phase
Ql 2019 (T) CRR2 enters into force T+6m to 2y Deadlines for EBA RTS
Assessment of FRTB IMA (TBC)
PRA
ECB
Quarterly meetings with banks expected (TBC) (Progressively covering all FRTB topics: PLA, NMRF, DRC, ES)
Preparation Phase "Pre-application"/ Bilateral workshops
FRTB IMA Assessment Onsite investigations to prepare for approval
Impact Analysis / Internal Approval
John Jannes Director, Trading Analytics, IHS Markit
How RTS 28 can enhance execution strategies and deliver a competitive advantage
By Sean Hargrave
John Jannes, Director of Trading Analytics at IHS Markit explains how RTS 28 can help firms drive revenue – but the time to act is now.
2020
Q: To whom does RTS 28 apply? Supervisory approvals
Final Submissions Supervisory Approvals
2021
Jan 2021 Kick off parallel run Parallel run (Backtesting)
Supervisory approvals (TBC)
Parallel-run
2022
Jan 2022 BCBS FRTB go-live Phase-in
Go Live/ Phase-in (TBC)
Phase-in
A: There has been some initial confusion. The wording in the EU’s original regulation did not reference industry names for different types of businesses, such as brokers, dealers, asset management firms and so on. The EU used the term “investment firms”, which is rather vague. It has since been clarified to include any company that receives execution orders from clients, or is given cash to invest for them. This is far more all-encompassing, yet some players like pension funds are still unsure as to whether or not they are in-scope. The FCA in the UK has ruled that they are.
Q: When is the reporting dealine? A: Although MiFID II became law in January of this year, the first reports are due by April 30th and need to cover the entire calendar year of 2017. This expectation has been made clear; businesses have had at least a year to prepare. Firms who only found, more recently, that they were in-scope for the new law have been given an extended deadline. So, regulators have been more than fair.
Q: What are your expectations of the first deadline for reports? SOURCE: IHS MARKIT
risk and counterparty credit risk frameworks. With this discussion paper, the EBA intends to provide preliminary views on how to address some of the most important implementation issues related to the FRTB and engage with stakeholders at an early stage. The paper covers six FRTB implementation issues and requests stakeholders’ views on additional issues they may have identified, and which are not included in the scope of the paper. This will hopefully initiate a collaborative effort among regulators, supervisors and banks in identifying the main operational challenges, which include the definition of actual, hypothetical and risk-theoretical P&Ls used in the context of backtesting and P&L attribution, as well as the treatment of non-modellable risk factors. At the heart of
the problem are real implementation issues that have a structural impact on processes and IT systems. More generally, the discussion paper also puts forward a roadmap of the future EBA work in this area, in the context of the proposed legislation. In this roadmap, the EBA intends to give priority to a subset of regulatory deliverables that are deemed essential for the implementation of the new framework. These include deliverables related to the new standardised approach for counterparty credit risk (SA-CCR) and key regulatory products on the new FRTB Internal Model Approaches, which are essential for banks to start implementing their internal models. The purpose of consulting on this roadmap is to ensure clarity on the EBA’s priorities and reach a broad agreement on such prioritisation.
The successful implementation of the revised market risk framework will represent an important collective challenge, over the next years, for which stakeholders’ feedback to the discussion paper will be laying the groundwork. Once the legislative proposal is adopted, and also taking into account the outcome of discussions taking place in the Basel Committee, the EBA will publish a report presenting a summary of the feedback received, as well as an updated roadmap, so that there is clarity for all the parties involved on how to ensure a successful implementation of the FRTB in the EU.
Read more on business andindustry.co.uk
A: Most people are expecting a mix of companies who became compliant early on, as well as those who are leaving it to the last minute – or who will even miss the reporting deadline. If a firm is only just thinking about compliance, there may be some challenges in the near future. We’re not really expecting the FCA to be scouring for RTS 28 reports the day after they’re required, though. We’re not expecting to see large fines being instantly levied. However, if you are in charge of compliance at your firm and you miss the deadline, the biggest impact may be your career. We’re certainly expecting some tough conversations to be had behind closed doors if executives have to tell their organisation they didn’t meet their obligations, as it will reflect on them very badly.
Q: What are the industry’s first impressions A: Some see RTS 28 as another compliance hurdle to deal with. But there seems to be widespread acknowledgement that it is the lower hurdle of recent compliance requirements. We think that, in the long-term, RTS 28 will be viewed as good news for those who embrace transparency. Execution records are going to become an important way for investors to decide which investment partners they choose, so you really don’t want to give your rivals a competitive edge. Read more on ihsmarkit.com/rts-28
Europe’s biggest FinTech event is coming to Amsterdam Use the code 18MEPA to save €200 on your pass
4th – 6th June 2018 The Rai, Amsterdam, The Netherlands CITY-AM_Ad_265x340mm.indd 1
19/03/2018 17:43