iNFRont Magazine - Technology Edition

Technology Edition

CLIMATE RISK CONSUMER DUTY CRYPTO FRAUD FINTECH

CeFPro® magazine for non-financial risk professionals

TALKING TECH The digital transformations shaking up financial services

INSIDE THIS ISSUE Fintech Leaders 2023

FCA Consumer Duty

Improving customer experience

Fighting fraud through the private sector

We reveal this year’s changemakers

Are microservices the answer?

What does your firm need to know?

What next for crypto?

Views from industry experts

Risk Americas 2023

Join us for our flagship in-person event

By UK Ambassador, World Association of Detectives

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FOREWORD

CeFPro® magazine for non-financial risk professionals

CONTENTS

Ty Lambert Senior Executive Vice President & Chief Risk Officer Cadence Bank

Technology Edition - Feb/Mar 2023

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RISK FOCUS Leveraging the private sector to fight fraud

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THE BIG CONVERSATION Improving customer experience: how microservices are shaking up traditional banking

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Q&A Managing the transition from voluntary to mandatory climate change disclosures

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Q&A Reviewing the expansion of model risk and evolution of definition of a model

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EVENT PREVIEW Vendor & Third Party Risk series

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FINTECH LEADERS EXECUTIVE SUMMARY Cybersecurity, data, and customer experience: fintech’s routes to success

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EVENT PREVIEW Risk Americas 2023

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FOREWORD Advanced innovation: Opportunity or challenge?

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ADVANCED INNOVATION: OPPORTUNITY OR CHALLENGE?

Ty Lambert, Cadence Bank

Anish Shah, BNY Mellon, Curt Queyrouze, Coastal Community Bank & Mayank Mishra, former Citi

Chris Smigielski, Arvest Bank

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INFOGRAPHIC 2023 Fintech Leaders

Roger Bescoby, Conflict International & World Association of Detectives

Christel Saab, Inter-American Development Bank

CEFPRO CONNECT By the industry, for the industry

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RISK FOCUS The FCA's Consumer Duty: What firms need to know

Alex Carrier, CeFPro

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TALKING HEADS Where do you see the future of cryptocurrency?

Catherine Levy, former HSBC

Written by the industry, for the industry The views and opinions expressed in this publication are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

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We welcome contributions.

If you or your organization are interested in featuring in our next issue, please contact infront@cefpro.com

ADVERTISING & BUSINESS DEVELOPMENT If you are interested in sponsorship and advertising opportunities, please contact: sales@cefpro.com

Welcome to the first edition of iNFRont for 2023, which looks set to be another year of advanced innovation in the financial services industry. As opportunities to leverage technological efficiencies continue to be explored, such as operational integration into cloud infrastructures and digital banking for improved customer experience, an equally important counterbalance is required to protect stakeholders.

PUBLISHER Alice Kelly alice.kelly@cefpro.com

The saying ‘opportunity makes a thief’ springs to mind when considering the modern era of conducting business. As we create opportunities to operate more efficiently and more conveniently, we also invite ever-present bad actors who seek financial gain through vulnerabilities in processes, systems, and human behavior.

EDITORIAL ASSISTANT AND OUTREACH MANAGER Ellie Dowsett ellie.dowsett@cefpro.com

We shed light on these risks in this issue of iNFRont as we examine the evolution of the cyber threat landscape and the use of technology to monitor and mitigate fraud and financial crimes. Advanced technology utilizing artificial intelligence and machine learning is becoming more and more common in the industry’s pursuit to combat financial crimes, and with the use of these tools comes the need for explainability.

We must recognize the need for directness when providing transparency, and a level of fairness and explainability is required when implementing advanced technologies.

MANAGING EDITOR Kate O’Reilly kate.oreilly@cefpro.com

In addition to industry change through innovation, regulatory change is also alive and well in 2023, not least the Securities and Exchange Commission’s (SEC) recent proposal to require certain climate-related disclosures for publicly traded companies.

Banks have increased their focus on ESG initiatives over the last several years (even longer for many non-US banks) and while the SEC’s proposal is designed to offer a level of standardization, there are inherent challenges with any such implementation that must be overcome.

HEAD OF DESIGN Natasha Marino

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We hope you enjoy this issue of iNFRont and we welcome contributions for future issues.

INDUSTRY INSIGHT Top risk factors for European firms

OUR MAGAZINE TEAM...

MAGAZINE ADVISORY BOARD Dominique Benz Head of Business Controls Mizuho

Mike Guglielmo Managing Director Darling Consulting Group

Alpa Inamdar Transformation Leader AIG

Michael Jacobs Lead Quantitative Analytics and Modeling Expert PNC

Angela Johnson de Wet Cloud Enabled Business Transformation – Head of Function Lloyds Banking Group

Ty Lambert Senior Executive Vice President & Chief Risk Officer Cadence Bank

Sabeena Liconte Chief of Compliance ICBC

Oskar Rogg MD, Head of Treasury, Americas Credit Agricole CIB

Sean Titley Director of Enterprise and Operational Risk Metro Bank

Philip White Senior Vice President – Head of Transformation Strategy & Reporting – Market, Liquidity and Non-Financial Risk Danske Bank

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Ken Wolckenhauer VP, Vendor Management Nordea Bank, New York Branch

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THE BIG CONVERSATION

IMPROVING CUSTOMER EXPERIENCE: HOW MICROSERVICES ARE SHAKING UP TRADITIONAL BANKING

Anish Shah MD, Head of Product & Digital BNY Mellon

Customer experience continues to advance within financial services as consumer demands and expectations reach new technological heights. Since the onset of the pandemic and the move to a remote environment, consumers are increasingly being exposed to digital services. As complex financial institutions navigate the evolution of customer expectations, more are adopting a collaborative approach when working with fintech and microservices. With organizations striving to advance their product offerings by tailoring unique opportunities to consumers, they are increasingly seeking to leverage the agile nature of fintech to drive customer experience.

The challenge, therefore, is not just around getting consumers in but keeping them. Underneath that, it’s about a shared data ecosystem with security and protocols that haven’t been built before. It’s both exciting and challenging!

At CeFPro’s Customer Experience & Digital Banking congress (November 2022, New York City), industry experts gathered to discuss the broad customer experience journey and the road to digital banking. One particular discussion focused on fintech and microservices and how to integrate for a seamless consumer experience. Here, we summarize our in-depth interview with three industry thought leaders…

Mayank: Business managers today have to deal with three dimensions, starting with satisfying the regulatory edicts.

The more geographies in which a firm operates, the more regulators it comes into contact with and the higher the levels of exposure to compliance. Second is the lens of competition and customer expectation, and third is managing legacy platforms – we are running out of capacity as we look towards new business models. These three areas feature in everything we do. I see microservices as an important ingredient for all three dimensions – reducing the cost of change around regulations and innovating quickly either at core or extending the legacy.

Why is banking as a microservice or embedded finance important in today’s context?

Anish: The concept has been around for a while, but consumers are now requesting a more integrated experience.

Technology is enabling us to do that but in a more modular manner. Instead of outsourcing the whole piece, we can review and decide where in the value chain we want to be based on our strengths, reviewing partnership opportunities that allow us to scale up faster. This is not a new idea but it’s becoming more viable now, offering opportunities to level the playing field for smaller scale institutions. Historically, launching a new offering, channel, or service model would require a large initial investment. Leveraging microservices has increased accessibility, allowing organizations to use them to test the waters; if the project is then successful, firms can continue to leverage those partnerships at scale, or in-source the capability.

Curt: As a smaller institution, we can move faster, but the key to leveraging microservices and low-code solutions is to create integrated teams. There are pieces to this that are like Lego bricks; teams should be empowered to piece things together.

Firms have the opportunity to build a workflow and add components like decision engines and APIs to bring this into scope more quickly. It’s not just about leadership; it’s about equipping teams with the tools to stay agile. Separating from levels of the control structure and developing teams that can work together to execute solutions is unique for a microservice and unique for banking. It does bring a range of risks relating to compliance and data security, but these are all challenges that, once overcome, can help us deliver another level of service to customers.

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Mayank: The beauty of microservices is that they make collaboration so much more real – you can pick and choose certain topics, models, or domains. Microservices have the potential to support collaboration and bring energy into the system, allowing banks to really see transformation and growth. The challenge is that there are limitations in the skills available for microservices in the market today. To set the context requires a deep understanding of the technology and we do not currently have those skillsets at scale. In addition, microservices are great in terms of speed but it can be hard to test in isolation whether they may conflict when aligned with the customer journey.

What are your thoughts on the metaverse and the potential opportunities it offers?

Curt: Engagement is the main potential. However, banks are often not good at engagement. I’ve been thinking about the banking ecosystem for many years, and I still haven’t figured out how to do this well.

Take financial education, for instance. A lot of fintechs are working to try and improve financial health. Some of the messaging, like going into schools to teach financial education, just isn’t penetrating. So, we looked into gamification and exploring virtual worlds where students start with coins and win rewards based on engagement and learning of money practices. We have the opportunity to engage businesses and consumers, and to bring value through risk reduction, fraud reduction, value-added services, and increased engagement.

But we have to keep evolving. We can’t just repeat the same presentation and expect the same engagement levels. It’s akin to playing a game where you’ve completed all the levels – if you have to wait for the developers to release new levels, you’ll lose interest in the game.

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How is the regulatory community responding to microservices? Are there any challenges around that?

Anish: The role of the product manager will expand to understand some of the gray areas and no-fly zones that banks will impose. The sooner you can establish those boundaries, the sooner you can put microservices or business services through initial checks to triage what will work and what may not. If we are required to provide certain types of data that we have a hard line on, it’s helpful to know that upfront, rather than getting through business and commercial reviews and then learning where the line is.

Curt: The biggest issue for us is how to enter a new space and ensure we keep compliance and relationships high.

We’re taking the approach that we will go above and beyond regulation, moving to the Banking as a Service model, building a data ecosystem and protection standards that are currently unregulated. The question is, who does the data belong to?

The answer is the consumer, of course, but some partners believe the data is theirs. If they want the opportunity to

Curt Queyrouze President Coastal Community Bank

Mayank Mishra Managing Director, Platform and Data Solutions former Citi

play in this new world, then consumer ownership of data is what they will have to accept and comply with. Fortunately, there are tools that enable you to build protocols and have anonymization at your fingertips, making this much easier to do than on traditional platforms.

How can banks leverage microservices to improve the customer experience?

Anish: Firms should look at the value chain at the most basic level and review where they want to own the experience and capability. It will be essential to reinvest and maintain competitive advantage, so these are long-term decisions.

For the parts of the value chain where there are plug-in components, this represents a great opportunity for financial services firms to partner with microservices to continually benefit from their investment. We are always analyzing the build vs. buy debate and making choices that are right for us and the consumer.

Curt: Our fintech partners have raised hundreds of millions of dollars, which they have invested in technology. As a Banking as a Service provider, I am leveraging their investments. They have invested in user interfaces on phones and apps, and our bank intends to leverage these customer-facing investments to bring users to our platform. As an industry, we are going through a seismic transformation. The things that made us successful until now won’t be the things that bring success in the future. Technology and new ways of looking at business models and revenues are something we need to really commit to.

Mayank: I would agree with Curt; banking is ripe for disruption.

Fintech players like Revolut are already so close to operating as a bank. Those banks that have invested in cloud technology and microservices and partnered with fintechs are the ones which are leapfrogging their competition, by being innovative and adopting to customer-centric models. Arguably, they are the ones that will remain relevant.

To gain additional insight on the uses of fintech across financial services read the Fintech Leaders report on CeFPro Connect, visit www.cefpro.com/connect to sign up for free.

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Q&A

REVIEWING THE EXPANSION OF MODEL RISK AND EVOLUTION OF DEFINITION OF A MODEL

the model against historical data and assessing its performance on out-ofsample data, cybersecurity validation requires a more dynamic approach that considers the constantly evolving nature of cyber threats. This means that cybersecurity validation may involve more frequent testing and updating of security measures, as well as simulation of potential cyber-attacks to assess the effectiveness of the bank's defenses.

HOW CAN INSTITUTIONS MANAGE QUALITATIVE AND QUANTITATIVE MODEL RISKS?

Chris Smigielski Model Risk Director Arvest Bank

WHAT ARE THE KEY DIFFERENCES BETWEEN MODEL VS TOOL VALIDATION? For model risk management, one of the key tasks is to ensure the accuracy and reliability of the models used.

Model validation is a critical part of this process, and it is necessary to distinguish between the validation of quantitative models and non-model tools.

Quantitative models utilize statistical, mathematical, and econometric techniques to produce outputs used for credit, liquidity, financial, and management decision making.

These models often involve complex algorithms, data analytics, and statistical modeling techniques, making them a challenge to validate. The validation process for a quantitative model usually involves a rigorous assessment of the model's design, assumptions, inputs, and outputs to ensure that they are reasonable and appropriate. This process requires a thorough understanding of the model's structure and the underlying data used to build it.

On the other hand, non-model tools are more straightforward. They include spreadsheets, databases, and other software applications used by the bank to manage financial data or analyze market trends. Unlike quantitative models, non-model tools usually do not use complex mathematical algorithms or statistical approaches. Therefore, validating tools is a more straightforward process that focuses on ensuring the accuracy of the data inputs and outputs.

This may involve checking the tool's calculations against external data sources or performing manual checks to verify the tool's outputs.

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Another critical difference between the validation of quantitative models and non-model tools is the level of expertise required to perform the validation.

Validating a quantitative model typically requires qualified professionals with strong technical skills in mathematics, statistics, and programming. These individuals must possess an in-depth understanding of the model's structure, assumptions, and data inputs to assess its validity and sometimes build a challenger model for testing. In contrast, validating non-model tools may require basic technical skills in spreadsheet software, data analysis, or database management.

The validation process for quantitative models and non-model tools differ in complexity and the level of expertise required to perform the validation. As a risk professional, understanding these differences is essential to ensure that the bank's models and tools are accurate and reliable.

HOW HAS CYBERSECURITY VALIDATION REQUIREMENTS IMPACTED INSTITUTIONS? While traditional model validation focuses on assessing the accuracy and reliability of statistical and mathematical models, cybersecurity validation focuses on assessing the security and resilience of the bank's information technology systems.

The sheer number and variety of solutions deployed within cyber solutions requires a more comprehensive validation approach for cybersecurity models which would be very different than perhaps validating a credit decisioning model. A more

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comprehensive validation approach would evaluate conceptual soundness, thoroughness of first line assessment testing, and the vigorousness of the governance and controls around the model. Specific areas of interest would include input data appropriateness, evaluating the quality of model implementation including controls and report generation, and ongoing model governance by the first line which would include performance monitoring and vendor management.

One key difference between traditional model validation and cybersecurity validation is the nature of the risks being assessed. In traditional model validation, the risks are typically related to the accuracy and reliability of the model's outputs, and the potential financial impact of incorrect decisions based on those outputs. In cybersecurity validation, the risks are related to the potential for data breaches, theft of sensitive information, and disruption of critical systems. These risks can have severe financial and reputational consequences for the bank and its customers.

Cybersecurity validation requires a much broader range of expertise than traditional model validation, including knowledge of computer networks, software development, data encryption, and threat intelligence. This means that cybersecurity validation may require a larger team of specialists with a wider range of skills, as well as collaboration with external vendors and third-party experts.

Cybersecurity validation also requires a different approach to testing and validation. While traditional model validation typically involves testing

As financial institutions continue to rely more heavily on models, both qualitative and quantitative techniques for decisionmaking, model risk has become an increasingly significant concern across the risk appetite. A model risk framework that includes both qualitative and quantitative model risk lifecycle governance is essential for effective management of these risks.

Model risk has evolved from the original guidance which looked for quantitative models or quantitative output. The expansion of modeling and analytical techniques have powered the growth behind newer qualitative and quantitative models.

Just as a traditional model governance program for quantitative models would include validation, change control, and performance monitoring, a rightsized qualitative lifecycle governance program covering data and assumption appropriateness, algorithm accuracy and output verification is appropriate for qualitative models as well.

Over the next two to three years, digital transformation along with increased adoption of AI and ML solutions will drive an evolution of model risk management from ‘model centric’ governance to include a dimension of ‘algorithmic complexity’, including how data is used and treated for these solutions across the entire bank.

WHY SHOULD INSTITUTIONS LOOK TO INCLUDE NON-FINANCIAL/ OPERATIONAL RISK MODELS? Operational risks have gained increased attention from regulators and industry practitioners as a critical aspect of risk management. Traditionally, operational risks have been assessed using models that rely on historical financial data and

assumptions about future market trends.

However, there is growing recognition that these models may not be adequate to capture the full range of operational risks that financial institutions face.

One approach to addressing this issue is to incorporate non-financial operational risk models into the risk oversight framework. Non-financial operational risk models focus on non-financial data and metrics, such as customer complaints, employee turnover, and system downtime, to identify and quantify operational risks. These models provide a complementary perspective to traditional models and can help financial institutions better understand and manage their operational risks.

A key benefit of incorporating nonfinancial operational risk models is that they can capture risks that may not be reflected in financial data. For example, financial models may not fully capture reputational risk, which can arise from a variety of sources, such as negative publicity, social media backlash, or unethical behavior by employees.

Non-financial operational risk models can provide insights into these types of risks by analyzing data on customer complaints, social media sentiment, and employee behavior.

Another advantage of non-financial operational risk models is that they can provide early warning signals for emerging risks. Financial models typically rely on historical data to make projections about future risks. However, emerging risks may not have a significant historical track record, making it difficult for models based on historical data to identify them. Non-financial operational risk models can help overcome this limitation by analyzing data on emerging trends and events that may signal the emergence of new risks. For example, an increase in customer complaints about a particular product or service may indicate that there is a problem that could lead to a more substantial operational risk event.

Additionally, non-financial operational risk models can help financial institutions better understand the root causes of operational risks. Financial models may provide information on the financial impact of a risk event but may not

provide insights into the underlying causes of the event. Alternatively, non-financial operational risk models can analyze data on operational processes, employee behavior, and other nonfinancial factors to identify the root causes of operational risks. This can help financial institutions develop more effective risk mitigation strategies and improve their overall operational performance.

Another key benefit of non-financial operational risk models is that they can enhance the overall risk oversight framework of financial institutions. By incorporating non-financial data and metrics into risk management processes, financial institutions can develop a more comprehensive and integrated approach to risk management. This can help improve risk identification, risk assessment, and risk mitigation, and ultimately lead to better decisionmaking.

Despite the potential benefits of nonfinancial operational risk models, there are also some challenges that financial institutions may face in incorporating these models into their risk oversight framework. One challenge is the availability and quality of data. Nonfinancial data may be less structured and less readily available than financial data, which can make it more difficult to analyze and integrate into risk management processes. This may require investing in new data collection and analysis tools to effectively use non-financial data in risk management processes.

Another challenge is the need for specialized skills and expertise. Nonfinancial operational risk models require expertise in areas such as data analytics, statistics, and risk management. Financial institutions may need to hire or train personnel with these skills to effectively implement non-financial operational risk models.

So, incorporating non-financial operational risk models into the risk oversight framework can provide numerous benefits, including the ability to capture non-financial risks and provide early warning signals for emerging risks, but require development skills to ensure that they are built and performing correctly.

To hear more on advanced model risk and technology trends visit www.risk-americas.com

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FINTECH LEADERS EXECUTIVE SUMMARY

According to Fintech Leaders Advisory Board members, for AI to reach its potential, training, recruitment, and technical knowledge must be key considerations for the future.

Current education offerings are seen to be lagging behind the industry’s requirements, with many academic institutions failing to offer up-to-date options and few subject matter experts available to impart knowledge.

CYBERSECURITY, DATA, AND CUSTOMER EXPERIENCE: FINTECH’S ROUTES TO SUCCESS

Following an extensive three-month research campaign comprising 2,278 responses and over 50 one-to-one interviews, the results of CeFPro’s Fintech Leaders 2023 survey are in!

Amid an already turbulent economic environment following the Covid-19 pandemic, the current geopolitical tensions and once-in-a-generation inflation levels are influencing investment decision making and affecting the prioritization of resources. Despite this, one area has emerged above all others as 2023’s number one fintech opportunity, investment priority, and barrier towards implementation:

CYBERSECURITY.

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AND THE WINNER IS… CYBERSECURITY

In total, more than 9 in 10 survey respondents viewed cybersecurity as a key consideration that requires investment. And when looking ahead to 2028, over 60% of respondents ranked it as the most significant fintech opportunity. In short, cybersecurity is here to stay as an opportunity, as an investment priority, and as an industry challenge. According to our Fintech Leaders Advisory Board members, its importance is unlikely to diminish for the foreseeable future. As this area continues to advance, with threat actors constantly evolving their approaches and tactics, the fintech industry is in a prime position to drive innovation and help the industry stay ahead of criminal entities.

What is also apparent is that many of the other key opportunities cited by respondents to this year's survey are dependent upon effective cybersecurity measures. A primary example is customer experience, which is currently

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ranked in third position as a fintech opportunity – if cybersecurity is not treated with paramount importance, customer experience will be severely impacted. Other areas which have the potential to open cyber vulnerabilities include cloud computing and mobile and digital services, further demonstrating the role of cybersecurity in accelerating other fintech opportunities. This at least partly explains its position at the top of the table for the second year in a row.

OVERCOMING HURDLES TO GREATER AI ADOPTION

By contrast, artificial intelligence (AI) continues to fall in significance as a fintech opportunity, ranking in fifth place after topping the leader board in both 2020 and 2021. If this year’s respondents’ longer-term views are to be believed, then AI could see itself climbing back into the top three by 2028; over 40% expect it to be the most significant fintech opportunity in the next five years.

ENHANCING THE CUSTOMER EXPERIENCE

There remain plenty of uses and opportunities for financial institutions around the growth of AI, machine learning, and advanced analytics, including enhanced risk management oversight, revenue generation through new products and greater digitalization, increased use of chatbots, and antipayments fraud. In general, the rise of digitalization and remote working has led to the key benefits of enhanced customer experience and greater interaction across retail banking, investment banking, and other financial services – and fintech is poised to help firms take this to the next level.

For their part, our Fintech Leaders Advisory Board members believe there is an inevitable move to CBDCs and the question is when, rather than if, they will take off. At present, their implementation is piecemeal and still in an experimental phase, lacking real drive or determination. Should national governments and central banks throw their full force behind them, CBDCs could escalate rapidly, opening up significant opportunities across many areas in financial services. This would be a game changer and represent a fundamental shift.

•

Artificial intelligence – AI climbed from fifth place as a fintech opportunity in 2023 to second place for 2028. Fintech Leaders Advisory Board members attributed this to the fact that AI has not yet lived up to its hype, potentially because resources and attention were diverted to more immediate Covid19-related challenges.

THE ROAD TO 2028: ONES TO WATCH

Cybersecurity’s position at the top of the table is clear, but as the industry moves further away from post-pandemic hesitancy towards a stronger appetite for growth, other areas are poised to climb their way up the leader board. Some of the areas aside from cybersecurity that are set to become key fintech opportunities by 2028 include: •

AI and machine learning also offer great cost-saving opportunities for front and middle office divisions – for example, leveraging algorithms to smooth the customer identification and authentication process, further deepening and personalizing customerbank relationships.

THE CRYPTO EFFECT

Somewhat surprisingly, cryptocurrencies, both private and national backed, ranked extremely low with this year’s survey respondents as an area for fintech opportunity. Given the number of developed countries building foundations for their own central backed digital currencies (CBDCs), CBDCs look set to launch – yet only 12% of respondents rated them the most significant fintech opportunity by 2028 and 29% ranked them as not important.

increasing volumes of data makes this area ripe for continued growth and development.

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Quantum computing – Ranking low in 13th place for the second year running, quantum computing currently remains out of reach for many organizations as a result of the high implementation costs involved.

However, there is an expectation of growth over the coming halfdecade, with the percentage of respondents ranking this as the most significant area for future fintech opportunity tripling from 6% in 2023 to 18% in 2028 Advanced data & analytics – Ranking second as an opportunity in 2023, 70% of respondents rated it as either very important or most significant, with this figure rising to nearly 80% for 2028. As the industry continues to advance, data requirements are only increasing, and analytical capabilities are becoming more deeply engrained in business processes. The need for

REPORT CONCLUSIONS

The perception of fintech is evolving. Many now see it as an underutilized area with the potential to assist in a range of tasks, from automation and AI to operational risks (including cybersecurity, anti-fraud, and AML) and customer experience. Fintech is also increasingly being leveraged not only as a back-office tool to enhance systems, but more so as a front-office development aid to further advance product offerings.

The industry has proven itself to be dynamic and resilient in the face of multiple global crises, from the Covid-19 pandemic through to economic and geopolitical volatility. Encouragingly, 57% of this year’s respondents have confidence in fintech’s resilience and growth, with an additional 13% demonstrating extreme confidence.

To read the full results of CeFPro’s Fintech Leaders 2023 research, download the full report at www.fintech-leaders.com. If you missed last year’s, log in to www.cefpro.com/connect to read all previous results and benchmark your progress with the industry.

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INFOGRAPHIC

2023 FINTECH LEADERS

Is a national backed digital currency inevitability:

View of the general status of the fintech industry as a whole...

4%

9%

27% 28%

Reviewing the key Fintech trends and opportunities as voted for by the industry

32%

CeFPro collated 2,278 industry responses, interviewed 50+ Fintech Leaders Advisory Board members and consolidated the views to form the 2023 Fintech Leaders report. Fintech Leaders outlines the key opportunities, investment priorities and obstacles within fintech over the next year and beyond. The rankings highlight the key players across a range of sectors. Below are some key findings of the survey.

The top 5 most important fintech opportunities for financial services firm, in 2023 were rated as:

1 Cybersecurity

2 Advanced data & analytics

Key fintech investment areas for 2023 Cybersecurity

1%

Anti-fraud

3%

Regulatory & compliance (Regtech)

2%

AI

3%

AML

5%

Financial sustainability/ sustainability benchmarking Payments/ transactions (retail)

10%

11%

7%

Overhyped

31%

58%

26%

48%

32%

31%

37%

39%

43%

17%

27%

41%

37%

41%

Understated

Yes

No

Too soon to say

3 Improvement of customer service

4 Cloud computing

5

Important

Overview of the most practical and applicable areas for AI within financial services

Advanced Cybersecurity KYC data and Customer analytics experience

17%

13%

9%

Process automation Predictive analytics

Most significant

Algo trading

This research provides valuable insight in the market adaptation and implementation of Fintech solutions by corporates and financial institutions and to get a better understanding of the agenda for the coming years.

This study will help us to get an understanding of the needs of our clients and their expectations for the future. Next to this, it also will show how our peers collaborate with Fintech solution and what their experiences have been.

Tibor Bartels, ING

Artificial intelligence

10

Very important

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Underestimated

Uncertain

Blockchain

Not important

Just right

23%

49%

39%

Overstated

Payments Concentration risk

Due diligence

Transaction monitoring

Fraud Market sentiment

AML Digital banking Contract review

Cloud

Augmented intelligence

Supply chain

Efficiency Operational risk

Audit

Personalized banking Compliance Big data

Emerging risks

Language processing

Profiling

ESG

Credit decisioning Model risk

NLP

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Fintech Leaders report is a powerful tool to gather information about not only what’s happening in the fintech sector, but also where it is heading. The report collects its survey responses anonymously to encourage responders’ involvement and reliability. The report utilizes a large population which increases its reliability and robustness as well. In the report, you will find out how investment priorities and key opportunities in fintech have shifted recently.

The report will also help you better understand about most important obstacles in the industry and how service users benefit from fintech products.

Hakan Danis, Union Bank

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INDUSTRY INSIGHT challenges, not only because of concerns around data reliability but also because of the limited historical ESG data available.

Another high priority challenge reported by risk managers is third-party risk management, specifically supply chain and cyber risk. In large part due to the current geopolitical situation, firms are facing a heighted cybersecurity risk amid concerns around how best to protect themselves from cyberattacks and security breaches. This risk also extends to a firm’s third, fourth, and nth parties – if your supply chain is susceptible to these risks, then so is your organization. In addition, firms are having to ensure that ESG is incorporated into their risk questionnaires when vetting third, fourth, and nth parties. The challenge is how to execute this successfully without overburdening the already extensive questionnaires.

TOP RISK FACTORS FOR EUROPEAN FIRMS Alex Carrier Risk EMEA Program Manager CeFPro

Ahead of our flagship European event, Risk EMEA 2023 (June 13-14, London), CeFPro’s research team conducted a series of interviews with leading industry figures to understand the key challenges facing European financial services institutions over the next 12 months.

The research areas mirrored the three streams that will feature at Risk EMEA, namely: financial risk, non-financial risk, and model risk/technology trends. Here, we take a deep dive into the industry’s risk priorities for Europe over the coming year…

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EUROPEAN RISK #1: FINANCIAL RISK: INFLATION AND CLIMATE

The increase in inflationary pressure and interest rates from central banks over the past six months has created both medium- and long-term implications for financial institutions. A key ongoing challenge will be managing the recessionary environment created by high inflation. One way that firms can mitigate against any further risk is by hedging inflation exposure moving forward. In addition, firms will have to forecast and reposition for any future interest rate changes and their potential impacts.

From a macroeconomic perspective, it is critical that institutions review, measure, and understand the ripple effects caused by high inflation. Firms have had to re-strategize to accommodate the current high inflationary environment, but there is still potential risk for continued volatility in the foreseeable future.

Separate to the macroeconomic challenges, ESG and climate risk are now becoming key areas of concern in the financial risk arena, as opposed to just non-financial risk. One of the main issues reported to our research team was the difficulties around integrating ESG and climate risk into financial risk frameworks, such as investment, credit, and capital. There has also been increased demand for firms to incorporate ESG and climate risk into their ICAP and IMAP stress testing programs.

EUROPEAN RISK #2: NON-FINANCIAL RISK: ESG AND THIRD PARTY

As the industry emerged into a post-pandemic world, ESG cemented itself as one of the most prominent topics for risk professionals and its significance has only increased over the past 12 months. From considering climate risk as solely an environmental risk, firms are now prioritizing other factors, including nature and biodiversity, and focusing on effective ways to build all aspects of climate risk into their day-to-day operations.

Some other, more continuous, challenges around ESG include data and regulation. The limited regulatory requirement makes it difficult for firms to effectively manage and integrate their ESG risk, not least because they must first understand the sources behind the vast volumes of data required. This can bring challenges as different data providers have different ways of measuring metrics. There are also extensive modeling

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Regarding fraud and financial crime, the industry experts we spoke to highlighted the need for firms to assess this risk holistically. In order to do this, holistic control frameworks must be put in place. Some of the challenges when assessing financial crime holistically concern regulatory tension; one way to overcome this would be to leverage AI and automated technologies.

EUROPEAN RISK #3: MODEL RISK/ TECHNOLOGY TRENDS: AI AND DIGITAL TRANSFORMATION

It is essential for firms to develop infrastructure to streamline their processes and leverage technology. One of the challenges with this is the pace at which technology is changing. Institutions must also balance a strategic migration to new technology platforms that could pose huge challenges for the operation of a business if not carried out correctly.

Digital transformation has therefore risen to the top of the priority list for many of the industry experts we spoke to during our research campaign, in order to meet increased customer demand and gain a competitive edge. One of the biggest challenges for an institution, however, is balancing digital transformation with security, with risks coming both internally and externally.

Regarding model risk, a key challenge for many firms centers on the evolving definition of models and the expansion of scope, in particular ensuring the correct frameworks are in place to manage a firm’s full suite of models. This creates a demand for broader model governance processes and an integrated model risk structure.

As technology continues to evolve, so does the use of AI and machine learning to assist and automate tasks. But what happens when AI takes unfavorable decisions and its processes are difficult to understand? It is essential for firms to have a clear grasp of governance surrounding their use of AI to effectively manage this risk, and to put in place appropriate controls. This responsibility also extends to regulators in providing guidance on best practice for the implementation of future models.

RISK EMEA 2023

12TH ANNUAL | 13-14 JUNE, 2023 | LONDON CeFPro’s flagship European Conference, now in its 12th year taking place in London on June 13-14, Risk EMEA is the place to be to connect with established subject matter experts and likeminded professionals looking to advance their professional development and add value to their department.

3 INDIVIDUAL WORKSTREAMS FINANCIAL RISK

NON-FINANCIAL RISK

MODEL RISK & TECHNOLOGY TRENDS

Market Volatility Interest Rate Risk Inflation Central Bank Changes Macro Economic Risk Liquidity Basel 4 Credit Risk

Third Party Risk Supply Chain Risk ESG Climate Risk Cyber Security Financial Crime Resilience People Risk Risk Culture

Digital Transformation Data Digital Assets Systemic Design AI & Machine Learning AI & Model Risk Model Risk Model Volatility

JOIN MORE THAN 60 CROS, HEADS OF RISK, & SENIOR RISK EXECUTIVES INCLUDING Cecilia Gejke Chief Risk Officer Private Banking Institution

Jeff Simmons Chief Risk Officer MUFG Securities (Europe) N.V

Hanna Sarraf Chief Risk Officer Starling International

Imtiaz Hussain Sophie Dupre-Echeverria Managing Director and Chief Risk and Deputy Chief Auditor Compliance Officer BNY Mellon GIB Asset

Haitian Li Managing Director, Global Head of Liquidity and Funding Treasury Risk Control UBS

Ben Davis Managing Director, Operational Risk Barclays

Carlos Martin Executive Director – CIB Markets Operational Risk Management JPMorgan Chase & Co.

Maya Goethals Director, Compliance and Risk Management Bank of America Merill Lynch

Dirk Effenberger Head of Investment Risk, UBS Chief Investment Office UBS AG

www.risk-emea.com

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13

RISK FOCUS

THE FCA’S CONSUMER DUTY: WHAT FIRMS NEED TO KNOW Catherine Levy former Group Head of Risk Framework, Compliance HSBC

The Consumer Duty is a new Financial Conduct Authority (FCA) Consumer Principle that requires firms to act to deliver good outcomes for UK retail customers. The timeline for its implementation is as follows: • April 30, 2023 – Product manufacturers to complete all reviews to meet new outcome rules for their open products and services, to share with their distributors.

• July 31, 2023 – Implementation deadline for new and existing products or services that are open to sale and renewal.

• July 31, 2024 – Implementation deadline for closed products and services.

6.77% for a standard variable rate with average two-year fixed rates at 5.62% (LTV) 1. After rising in the first half of 2022, the Halifax house price index showed a last quarter fall of 2.5%.

The number of mortgage approvals2 fell by just over 20% towards the end of the year and new buyer enquiries3 were in a negative net balance for the seventh month at -38%. For each 0.5% rise in interest rates, monthly repayments for a £200,000 tracker mortgage would increase by £56 per month or £672 per year.

The new Principle, along with rules and guidance, will sit within the high-level standards Principles (PRIN) sourcebook.

The Consumer Principle will become Principle 12, and Principles 6 and 7 (Customer’s Interests and Communications with Clients) will be disapplied for retail business.

Household energy prices fueled inflation with steep rises: 129% for domestic gas and 65% for domestic electricity prices. The Consumer Price Index4 was 10.7% higher at the end of 2022 from the previous year. The pressure on household finances is therefore enormous. Savers are not fairing any better with many banks being slow to pass on base rate rises5. Even the best rate for an easy access account of 2.86% 6 is far below the inflation rate of 10.7%.

Increasing clarity

Recognizing consumer pressures

Cross-cutting rules will provide greater clarity on the FCA’s expectations across all areas of a firm’s conduct in relation to the new Principle and should help firms to interpret the four related outcomes.

The three cross-cutting rules are: • Act in good faith toward retail customers.

• Avoid foreseeable harm to retail customers.

• Enable and support retail customers to pursue their financial objectives.

The four outcomes require firms to: • Provide retail customers with products and services that meet their needs and offer fair value.

• Offer a fair price and value.

• Provide consumers with communications that they can understand.

• Provide consumers with any support they need.

Firms must also make their communications with their clients as easy to understand as possible and be confident that customers have read them. Amid rising levels of vulnerable customers, firms may need to prioritize ongoing investment of resources and training for staff.

Mitigating against consumer bias

A challenging backdrop

The current environment with rising interest rates, inflation, and cost of living crisis presents a number of challenges for firms in adhering to the new Consumer Duty requirements.

In the space of 13 months, the Bank of England base rate has risen from 0.1% to 3.5%. Average mortgage rates stand at

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Amidst extreme pressures on household budgets, mortgage and loan defaults become more likely. Financial services firms will need to keep pace with the ongoing struggles of their customers whilst implementing the new Consumer Duty requirements. They will need to demonstrate they are acting in good faith to retail customers when passing on changes in Bank of England base rates. With mortgage payments increasing, firms need to understand how affordability of lending to customers is impacted by rising costs within household budgets in other areas. They will need to demonstrate fair price and value, and that their products and services are meeting their customers’ needs.

Like all of us, consumers are subject to pre-conceptions and beliefs that impact the way they behave. Behavioral finance looks at what these types of behaviors may be and how they impact consumers' actions. This is an area of increased importance for the FCA since the FSA published its first paper on the subject in 2008.

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Heuristics are mental shortcuts that the human brain uses to simplify problems and avoid overload to allow for quick decision making for complex problems, commonly described as ‘rules of thumb’. Heuristics can be very helpful but in instances where the individual has not taken account of all the available information, they can lead to biased decisions and may result in a poor customer outcome.

Consumers will undoubtedly use heuristics in their decision making for financial products and firms need to consider at what point in the process they may arise. For example, with ‘framing’, consumers are influenced by the ‘frame’ in which decisions for future outcomes are presented to them, particularly if one option is presented more positively than another.

Under Consumer Duty, firms need to act in good faith and provide consumers with communications that they can understand. They must take care not to inappropriately exploit consumers’ biases to create demand for a product or service; for example, presenting information in a covering letter about the favorable cost of a product during an introductory offer period, whilst putting the full cost of the product and cancellation costs elsewhere.

Cross-sector scrutiny

In a recent webinar7, the FCA recognized that in the past, it tended to look at problems in silos, but has since understood that the drivers of harm tend to be similar across sectors.

The Consumer Duty is therefore aimed at tackling harms in whichever sector they may arise. However, the way that firms will need to apply the Consumer Duty depends on the products and services they offer and how these operate across a customer journey. In the case of insurance, customers tend to take out a policy to ‘prevent a harm’; these policies tend to be for a longer time period than perhaps a bank account and the customer may also be less likely to move providers. This may result in a customer staying with the same insurance provider and making no claims, yet seeing their premium rise every year.

Under the Consumer Duty, the benefit to the customer of retaining this policy would be questioned, eg have they kept it for peace of mind? Why haven’t they made a claim? Is it because they didn’t understand the product or that the insurer

is making it difficult for them to claim? In addition, insurance policies tend to be long, complex documents which customers may not always read in full. They may not understand exclusions or endorsements which limit cover. The FCA has stated that insurers need to be ‘presenting information in an even-handed way that properly explains the benefits and risks’. A firm may not be considered to be in breach where it ‘reasonably believed’ that the retail customer understood and accepted the potential risks involved. The key for insurers is to ensure that retail customers are made fully aware of the policy and its exclusions and limitations, to reduce the risk of claims being declined and lessen the risk of harm to the customer.

Measuring improved communications

Implementing Consumer Duty presents a number of challenges for firms, not least the tight timeline listed at the start of this article. However, outcomes 3 and 4 are likely to be the most problematic, namely: • Provide consumers with communications that they can understand.

• Provide consumers with any support they need.

There is no standard industry measure for customer understanding and support, and firms have not received clear practical guidance from the FCA on how to measure if they have met the requirement. The FCA does give some examples of what ‘poor practice’ looks like in its Finalised Guidance document FG22/58, but these are limited. Firms are expected to be able to benchmark themselves against peers and will therefore need to find suitable data sources to help them do so. One area where the FCA has given a little more clarity is that it expects to see a fall in the number of complaints to the Financial Ombudsman Service.

Sources: 1 Dashly.com; 2 Bank of England: 3 RICS; 4 House of Commons library; 5 Moneyfacts; 6 Zopa; 7 https://www.fca.org.uk/multimedia/consumer-dutywebinar-insurance-firms Insurers; 8 FCA Consumer Duty page link

Risk EMEA 2023 (taking place in London on June 13-14) features a track dedicated to non-financial risks including regulation and consumer duty. For full agenda, speaker line up and to register for the event visit www.risk-emea.com.

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RISK FOCUS

LEVERAGING THE PRIVATE SECTOR TO FIGHT FRAUD

APP FRAUD HITS RECORD HIGH

Roger Bescoby Director of Compliance and Development, Conflict International; Board Director and UK Ambassador, World Association of Detectives The scale of financial fraud is reaching unprecedented heights. Statistics from a recent report by the Victims’ Commissioner show that fraud and computer misuse yet again top the list of recorded crimes in the UK(1).

This comes at a time when the official institutions tasked with trying to stem this tide are struggling as a result of underinvestment, insufficient manpower, and the sheer volume of cases hitting law enforcement desks every single day.

Financial crime accounts for approximately 40% of all current crimes in the UK. The Victims’ Commissioner report reveals that, despite this, only 2% of policing power is currently dedicated to fighting this kind of fraud. Help is clearly needed, and engagement with the private sector is an obvious option.

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In 2022, there was a significant spike in both individuals and businesses falling victim to advanced push payment (APP) fraud – when fraudsters pose as a genuine payee to trick their victims into willingly making large, real-time bank transfers. I am in no doubt that this upward trend will continue this year.

Banks are simply not doing enough to catch the cybercriminals and, as stated above, thinly stretched resources mean that few victims who have reported their crimes to the authorities have had their cases successfully resolved.

Challenger banks have become particular targets for APP fraud, with the number of fraud complaints against neobanks such as Monzo, Revolut, and Starling recently reaching a three-year high(2). And this is before the Payment Systems Regulator’s planned mandatory reimbursement for APP fraud lands. Proving collusion between ‘victim’ and fraudster is likely to become a recurring problem. From experience, I know that the private sector already has at its disposal solutions and in-house skills to combat this.

As it stands, there is too much finger pointing between banks as to where the blame lies regarding APP fraud. Even simple tasks, such as inter-bank sharing of ‘errant’ customer data currently stands at close to zero, perhaps for fear of this being taken as an admission of security failings. But action must be taken; at the very least, mandatory industry standardization of referrals and customer onboarding would be beneficial.

A PROBLEM SHARED

My simple suggestion is to share the load, beginning with moving the most challenging fraud cases to experts in the private sector who have the time, the experience, the capacity, and the ingenuity to tackle them. The private investigation sector is awash with tech-savvy talent, many of whom are technically trained ex-law enforcement officers, and also has the freedom to mount more intrusive investigation operations, including covert surveillance.

It can take months to set up a police-led surveillance operation and by the time all the regulatory hoops have been navigated, the trail has gone cold.

Conversely, in the private sector, action can start the very same day.

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However, within the finance community, there is often a reluctance to share fraud data, whether inter-bank or to a third-party service supplier. The well-worn excuse of not being able to divulge information for data protection reasons is given regularly by organizations that should know better.

There are plenty of adequate reasons for data disclosure when referring matters to a third-party supplier and there is nothing more frustrating than being instructed on a case without being in possession of the full facts. Educating the industry on what data can be shared, particularly when processing for legitimate interest purposes is beyond dispute, would be welcomed; perhaps this is an area in which the regulator has a role to play.

INVESTIGATE THE INVESTIGATOR

"Financial crime accounts for approximately 40% of all current crimes in the UK. The Victims’ Commissioner report reveals that, despite this, only 2% of policing power is currently dedicated to fighting this kind of fraud."

With finance fraud showing no sign of receding, leveraging the experience and expertise of a high-quality private sector investigation business is a fast-track way for firms to take real action against the fraudsters.

The private investigation industry is now recognized and utilized as a highly technical and crucial element of the legal support and counter fraud fraternity – and as far removed from the old-fashioned stereotype of a private eye wearing a long overcoat and carrying a magnifying glass as you can imagine! There is no better demonstration of this than the private sector’s involvement in investigating insurance fraud – international insurance companies instruct the private sector to assist in counter fraud surveillance operations on a daily basis.

But of course, before engaging with any private sector investigator it is essential to carry out a thorough and rigorous procurement and due diligence process. Any private investigation business hoping to feature in the plans of a blue-chip insurance company or banking institution must have demonstrated its commitment to the highest of industry standards.

This will typically require the achievement and existence of the requisite ISO standards, data security, and cyber essentials accreditations. As a minimum requirement, the investigator should also belong to an industry body that has regulatory recognized Codes of Ethics. This might include the Association of British Investigators (ABI) or the World Association of Detectives (WAD).

1https://victimscommissioner.org.uk/news/who-suffers-fraud/ 2https://www.finextra.com/blogposting/23524/fraud-increases-among-neo-banks---whats-goingwrong---and-how-can-banks-mitigate-risk

CeFPro’s flagship Conventions Risk Americas (May 23-24, NYC) and Risk EMEA (June 13-14, London) feature dedicated non-financial risk streams with a focus on fraud and financial crime.

Visit www.risk-emea.com for the European flagship event, and www.risk-americas.com for the North America flagship Convention.

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Q&A

MANAGING THE TRANSITION FROM VOLUNTARY TO MANDATORY CLIMATE CHANGE DISCLOSURES

Effectively, these proposals are raising sustainability disclosures to the same level as financial disclosures.

Furthermore, regulators are incorporating more areas within the sustainability spectrum: nature capital and biodiversity, human capital, and labor conditions.

How do the ISSB and SEC proposals compare?

Both these proposals have finalized public consultations, and comments are being considered prior to approval.

While the SEC proposal focuses solely on climate change disclosures, the ISSB proposal includes sustainability and climate disclosures.

In terms of similarities, both are based on the recommendations of the TCFD, focusing on four key areas (governance, strategy, risk management, and metrics and targets), and both propose more detailed disclosures on specific aspects.

For instance, ISSB and SEC governance pillars require organizations to demonstrate the appropriate expertise to oversee strategies responding to climate change.

Christel Saab Unit Chief, Environmental and Social Risk Management Inter-American Development Bank

Why do climate change-related disclosures matter?

Disclosures make climate change impacts more visible.

Events exacerbated by climate change have significant financial, economic, social, environmental, or legal impacts, often cumulatively. Whether highlighting expenditures incurred by countries impacted by severe weather events ($165 billion by the U.S. in 2022, according to NOAA) or by companies, climate-related disclosures make climate change impacts on both the private and public sectors more transparent.

In addition, disclosures are increasingly

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used by credit rating agencies and investors to make qualified assessments and decisions that impact the cost of financing, or the level of investments companies receive. As such, it makes financial sense to disclose the material effects of climate change, whether on a voluntary or mandatory basis.

Disclosures are integral to the decarbonization of economies towards net-zero emissions.

The Paris Agreement in 2015 saw most countries commit to reducing greenhouse gas emissions to limit the global temperature increase to 2°C and pursue efforts to stay within a 1.5°C increase. To better mitigate the effects of climate change, the Intergovernmental Panel on Climate Change (IPCC) calls for immediate action to halve emissions by 2030 so that planetary temperatures do not exceed 1.5°C. Reaching this target requires a shift across society toward decarbonization, from citizens to corporations and governments.

Climate change disclosures provide a structured way to document and monitor the actions that organizations have committed to take and hold them accountable to their shareholders, investors, and employees in achieving

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their targets. In other words, climate change disclosures show whether we are walking the talk.

Disclosures elevate sustainability to the same level as financial matters.

Since economic activity relies heavily on financial, natural, and human resources, disclosures on all these variables are critical for the sustainable management of global resources. As investors, customers, and governments demand more consistent, comparable, and reliable information, frameworks and standards have emerged requiring companies to disclose not only climate-related impacts on their organization but also the organization's impact on climate, a concept known as double materiality.

As a result of the voluntary Taskforce on Climate-related Financial Disclosures (TCFD) framework, international and national regulators have now proposed mandatory climate change disclosures.

The U.S. Securities and Exchange Commission (SEC), the European Commission, and the International Sustainability Standards Board (ISSB) have all issued sustainability and climate-related disclosure proposals.

The concept of materiality represents a significant difference. The SEC proposal prescribes that organizations disclose impacts from climate changerelated events or expenditures with an absolute value of at least 1% on the line items of their consolidated financial statements. Instead of a prescriptive number, the ISSB threshold incorporates materiality based on activities conducted by organizations within a particular industry, as set out by the Sustainability Accounting Standards Board (SASB).

The reporting organization can decide what information to disclose based on its judgment regarding the materiality it represents.

Additionally, the ISSB proposal requires sustainability disclosure standards to be mandated and combined with jurisdiction-specific requirements to reduce complexity and transaction costs for organizations that report under several frameworks. However, the requirements of the SEC proposal apply to publicly traded companies in the U.S., including foreign issuers, even if they

are already required to provide climaterelated disclosures by their national regulators. Several comments received during the public consultation suggested coordination with other jurisdictions and standard setters.

What can companies and multilateral development banks (MDBs) do to prepare?

Because of their sustainability-focused missions and critical role in the provision of climate finance, primarily for emerging markets, MDBs, like the Inter-American Development Bank, are well-placed role models when it comes to disclosures.

While not regulated because of their international ownership, MDBs have voluntarily aligned to standards based on the jurisdiction of their headquarters or on methodologies developed either in-house or by a group of MDBs. Here are some examples of steps that companies and MDBs can take to prepare before regulations become effective: • Perform gap analyses comparing the organization’s current state of governance, strategy, risk management, and metrics and targets with the requirements set out in the proposed regulations.

Gap analyses will pinpoint the critical areas that require the most adjustments, as well as those which could take the longest to align with regulations. Only after the gap analyses, impact assessments of required changes, and strategic decisions have been made can organizations focus on the actual climate disclosures. This would ensure that disclosures accurately reflect an organization’s current state of maturity.

•

Conduct benchmarking studies to learn what other peers and industries are doing and understand which regulations are applicable, especially for larger organizations spanning several jurisdictions.

Considering the global and complex nature of climate change, harmonizing reporting standards and collaborating within and across industries would be most beneficial.

•

Set up a cross-functional working group to optimize expertise and accelerate decision making. Critical areas for climate disclosures include climate change, ESG, finance, risk management, legal, audit, data management, and industryspecific skills. Given the large cross-functional expertise, time, and budget needed, robust governance is vital to ensure that decisions are taken considering all relevant areas. Finally, internal coordination helps to harmonize disclosures that are spread out into different publications such as sustainability reports, TCFD, or other framework reports, and financial statements.

How can the risk management function support readiness?

The risk management function is well positioned to bring together and work closely with corporate and operational stakeholders. Risk managers can support with governance benchmarking and process control assessments; sustainability and climate change integration into risk taxonomies; climate risk assessment methodologies definition; sustainability and climate data and metrics assessments; and quality assurance of the reporting process, guaranteeing adequate systems, processes, controls, and data are in place to provide accurate climate disclosures.

Effective risk management will ensure alignment of climate-related governance, risk management, metrics, and targets with the wider business strategy.

Providing guidance to executives on strategic alignment within an enterprise risk management framework is where risk managers can have the most impact.

Establishing risk appetite statements at both board and management levels on crucial sustainability and climate topics is another area in which risk managers can make disclosures more robust.

As you consider the climate disclosures journey ahead, build upon internal data, consult widely both internally and externally, and set strategic objectives in line with the decarbonization path.

CeFPro’s upcoming ESG Europe Summit will take place in London on April 18-19, 2023. Covering a range of key issues including climate change, regulation, greenwashing and net zero progress. Register to attend the event at www.cefpro.com/esg-europe

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VENDOR & THIRD PARTY RISK USA

EVENT PREVIEW

VENDOR & THIRD PARTY RISK EUROPE 9TH EDITION | 15-16 JUNE, 2023 | LONDON

8TH ANNUAL | JUNE 7-8, 2023 | NEW YORK CITY

RISK AMERICAS 12TH ANNUAL | MAY 23-24, 2023 | NEW YORK CITY

REGISTER NOW>>

REGISTER NOW>>

Our highly anticipated Vendor series of events is back this June! Taking over NYC on June 7-8 and London on June 15-16, Vendor & Third Party Risk is the place to be if you work within or are looking to expand into the vendor and third party risk space.

America’s premier financial risk and innovation convention Risk Americas is back in NYC this upcoming May 23-24! The largest North American event of its kind, over 80 Chiefs, Global Heads, and Managing Directors will gather together across 4 targeted streams to discuss the most prevalent topics in financial risk.

KEYNOTE SESSION: GEOPOLITICAL RISK

Increased prevalence of geopolitical risk and ripple effect throughout financial services organization

COMPLIANCE

Managing a complex regulatory environment and driving risk teams beyond compliance

Each event provides opportunities to advance your professional development and gain valuable knowledge as told by industry front-runners through a variety of presentations, panel discussions, and live Q&As.

GLOBAL ECONOMY

Don’t forget about the many opportunities to network and connect with likeminded professionals and subject matter experts over refreshments and lunch, and wind down at the end of day 1 with our complimentary drink’s reception.

Managing business strategy and decision making in an environment of heightened risk

STRATEGIC RISK MANAGEMENT

KEY HIGHLIGHTS INCLUDE:

KEY HIGHLIGHTS INCLUDE:

• • • •

• • • •

CYBER SECURITY CRITICAL THIRD PARTIES CLOUD SECURITY ATTRITION RISK

Sessions will be led by established practitioners from:

REGULATION EXIT PLANNING EMERGING RISKS RESILIENCE

Hear from industry experts representing global institutions such as:

Top of mind for a CRO: A holistic view of risk

STREAMS AND KEY TOPICS: ADVANCED MODEL & RISK TRENDS

ESG & CLIMATE RISK

NON-FINANCIAL RISK

MARKET & FINANCIAL RISK TRENDS

AI & Machine learning Automation Data Digitalization Model risk scope

Regulation Disclosures Net zero Climate exposure Human rights

Human capital Culture and conduct Cyber risk Geopolitical risk Sanctions

Macro-economic environment Inflation Recession Monetary policy Credit risk

PLUS, TWO INTERACTIVE PRE-EVENT MASTERCLASSES: MACHINE LEARNING MODEL VALIDATION Introduction to conceptual soundness Inherently interpretable models Outcome analysis Model fairness

CYBERSECURITY USA

The evolution of cyber threats Vulnerability management and response tactics Increased use of cloud services Leveraging intelligence into actionable metrics

Register before March 10 to save $600 with our Spring Break special, before prices increase to $899 www.risk-americas.com 20

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21

TALKING HEADS

CeFPro Connect

A WORD FROM THE INDUSTRY...

BY THE INDUSTRY, FOR THE INDUSTRY.

WHERE DO YOU SEE THE FUTURE OF CRYPTOCURRENCY?

The crypto collapse of 2022 saw the market fall from an estimated value of $3tn to less than $1tn in just six months. In November, crypto exchange FTX, which was valued at $32bn in 2021, filed for Chapter 11 bankruptcy in the US, while in January this year, crypto lender Genesis did the same. With the IMF recently announcing recommendations to regulate the crypto market, we asked six industry leaders what they believe the future holds for cryptocurrency...

Ionela Emmett Senior Manager, Financial Crime Controls, Risks and Policy & Advisory ICBC Standard Bank

CeFPro's brand new knowledge sharing and content hub

The future of cryptocurrency and other broader markets is likely to be affected by FTX’s rapid decline and collapse. Although the court filings for the case highlight that the key issues were lack of liquidity and mismanagement of funds, the crypto market was labelled as consistently volatile.

Recently, the Bank of England has announced that crypto trading is ‘too dangerous’ to remain outside mainstream financial regulation. It’s possible that the FTX case has triggered a call for regulations around crypto trading, building links with the financial system and creating financial stability for institutional investors and banks.

JOIN FOR FREE CeFPro Connect is completely FREE to register

Have you signed up to your FREE CeFPro Connect account yet?

Our brand-new knowledge sharing and content hub curated by the industry, for the industry, features exclusive thought leadership content and timely news updated each week to keep you in the know.

With all content contributed by respected industry experts, CeFPro Connect is a direct reflection of the latest developments and critical topics the industry wants to find out more about.

Articles

Newsletter

Armel Romeo Kouassi Senior Vice President NorthernTrust Corporation

Videos & Interviews

Magazine

Reports

Farooq Gulzar UK Chief Risk Officer & Global Head of Multi-Asset Risk UBS AM

Digital assets had a challenging year in 2022. The initial blow-up of UST and Terra in May was the start of a cascade of defaults in an ecosystem that was non-regulated, over-leveraged, and utilized client assets for proprietary purposes. The first casualties were Three Arrows Capital, BlockFi and Celsius, closely followed by Voyager Digital and FTX. Regulators will closely analyze the unravelling of the digital asset space and it won’t be long before we see a global co-ordinated response from regulators to safeguard investors.

No one can predict the exact outcome of the battle royale between the crypto industry and regulators worldwide but in the wake of FTX’s collapse, regulation is about to get tougher. And it is safe to expect that clashes over crypto and blockchain regulation will culminate in 2023 since cryptocurrency has become the regulators’ top priority as it bids to prevent another exchange fiasco. However, blockchain’s financial disruption is here to stay. Increasing usage of web 3.0 blockchain technology will be fueled by e-commerce, retail, and banks, as well as its widespread adoption in smart contracts, transaction automation, digital identity, documentation, exchanges, KYC/ AML custody, and settlements.

Tibor Bartels Head of Transaction Services Americas ING

Cryptocurrencies and digital ledger technology (DLT) are creating new ways of working and opportunities for the banking sector.

The key to crypto becoming broadly accepted and implemented is regulation.

Regulators and commercial banks are caught between wanting to seize the opportunity created by cryptocurrencies and seeing it as a threat if they do not maintain security and control. The ability to monitor and control the day-to-day processing of flows will be key to success for consumers, commercial banks, and regulators.

Michael B. Glotz Chief Executive Officer Strategic Risk Associates

Banking has been forever changed with the introduction of crypto because it facilitates a faster and more efficient way to process transactions compared to traditional banking, which increases margins. In banking, a mature, robust, evidence-based Enterprise Risk Management program is table stakes before any bank enters the digital asset market. Last year’s crypto fallout proved how a solid ERM program can help mitigate risk and preserve profits. Our prediction is these types of products are not going away. As the landscape matures and gains wider acceptance, banks will increasingly offer digital-asset products to stay competitive.

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Miguel Navarro Executive Technology Leader and Patented Inventor

The recent crypto crash is a significant learning event. It educated consumers on the significant risks that come with any investment. My hope is that it has also shown to financial institutions, regulators, and other governing bodies of the need to implement more structure, education, and programs to better protect consumers and their constituents.

Fintech Leaders 2023 addresses the progress made with uses of cryptocurrency and the future of central bank digital currency.

Read on CeFPro Connect for free at www.cefpro.com/connect.

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EVENTS CALENDAR 14-15 MAR

MAR 22-23

MAR 22-23

NEW GENERATION OPERATIONAL RISK EUROPE

ADVANCED MODEL RISK USA

FRAUD & FINANCIAL CRIME USA

LONDON

NEW YORK CITY

NEW YORK CITY

MAR 28-29

18-19 APR

TREASURY & ALM USA

ESG EUROPE

NEW YORK CITY

LONDON

JUN 7-8

VENDOR & THIRD PARTY RISK USA NEW YORK CITY

SEPT TBC

13-14 JUN

RISK EMEA 2023 LONDON

SEPT TBC

MAY 23-24

RISK AMERICAS NEW YORK CITY

15-16 JUN

VENDOR & THIRD PARTY RISK EUROPE LONDON

OCT TBC

FRAUD & FINANCIAL CRIME EUROPE

CLIMATE RISK USA

NON-FINANCIAL & OPERATIONAL RISK

LONDON

NORTH AMERICA

NEW YORK CITY

OCT TBC

OCT TBC

THIRD PARTY & SUPPLY CHAIN RISK: CROSS SECTOR USA

THIRD PARTY & SUPPLY CHAIN RISK EUROPE

CUSTOMER EXPERIENCE EUROPE

NORTH AMERICA

LONDON

EUROPE

NOV TBC

For more information, including agenda, speakers, location, and registration, visit www.cefpro.com

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