Issue 1 | Summer 2015
FEDERICO TOMASEVICH CEO PUENTE
100 years on and still going strong
INSTITUTIONAL TRADING UK £9.95 NL €14.00 USA $15.50 CAN $20.00 SGD 21.00 AED 57.00
As i a | Amer ic a s | Africa | Europe | Mi ddle Eas t
An inside look at Institutional Trading with Jennifer Hansen the Head of Institutional Business at Saxo Bank
THE EVOLUTION OF HEDGE FUNDS Today there are estimated to be over 11,000 active hedge funds managing in excess of $3.1 trillion.
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Over the last five years, I have enjoyed keeping you informed of the latest activity across the global financial community. It has been one of the greatest journeys in my professional life, and I am proud to have been associated with the project since its inception. Global Banking & Finance Review has grown to become one of the leading publication houses in the financial world. That definitely makes all of us here very proud, and the sense of achievement puts a smile on my face. Global Banking & Finance Review has experienced the greatest heights from being read in over 200 different countries, the news being monitored by CEO, CFO and senior decision makers within fortune 500 companies, banks, financial institutions, insurance providers and traders around the world. Receiving over 9 million page views annually we have a global ranking of around 20,000 by Alexa across millions of websites. We strive to capture the breaking news about the world’s economy, financial events, and banking game changers from prominent leaders in the industry and public viewpoints with an intention to serve a holistic outlook. We have gone that extra mile to ensure we give you the best from the world of finance. Inside our first edition, you will find engaging interviews with leaders from the financial community around the globe and insightful articles from industry experts. I hope that you enjoy reading our first edition as much as we enjoyed creating it. Have fun exploring!
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100 years on and still going strong
Working with Trade Unions
138 Trade Finance in Egypt
46 The Future of Banking in Africa
Banking in the Philippines
INTERVIEWS 13 Bringing the future of banking to the next generation
30 The National Citizen Bank (Vietnam): Be Smart, be Bright
85 The Future Looks Bright 92 Banking Innovation in Ghana 176 Challenges and Opportunities in the GCC
BANKING 9 Self-Service Banking 34 Future Banking 111 Tackling evolving banking regulation
136 Are millennials helping to spur the growth of challenger banks?
74 BUSINESS 17 The Not so Far East 58 US and UK Criminal Litigation in the Libor context
99 Acquiring Success 1 45 Product governance
TECHNOLOGY 55 Building Rome in a day: how swapping dealers for SEFs over night means increased technological risk
80 The power of data 90 IT cross charging. Are the returns
FINANCE 27 The weakest link 42 Wealth and asset managers
enough to justify the effort?
awake to the digital age
TRADING 20 The Greenback Flexes its Muscles 38 The first RMB trading center
122 IFRS9 safety in numbers Is the banking world a safer place?
173 Linking Contracts to Transactions
108 Biometrics in Banking: Making a Breakthrough?
in the Americas
64 A new oil rush is coming: are you ready?
insurance MARKETS IN ASIA
frequent earthquakes and volcanic eruptions, as they stand on what is generally described as the Pacific “Ring of Fire” – that encircle the basin of the Pacific Ocean.
Nihal Senaratne FCMI, ACII, AII, Chartered Insurance Broker and Chairman Senaratne Insurance Brokers (Pvt) Ltd. Sri Lanka
Southeast Asia, on which this presentation will largely focus, consists of countries south of China, east of India and north of Australia, and is broken up into two main regions i.e., Indo China and the Malay Archipelago, which refers to what could be described as Mainland Southeast Asia and Maritime Southeast Asia respectively. The former includes Cambodia, Laos, Burma, Thailand and Vietnam, whereas, the latter covers largely, Brunei, East Timor, Indonesia, Malaysia, Philippines and Singapore.
Flood on Phahonyothin Road, Bangkok, Thailand
This geographical area is generally subject to high seismic and volcanic activity, as it lies at the intersection of geological plates, with several volcanic Islands, particularly Indonesia and Philippines, which are prone to
Generally speaking, with reduced loss levels, reinsurance rates for Southeast Asia have displayed a reducing curve since 2003. The capacity for nonproportional business is generally available without much restriction, although the same cannot be said of proportional business as, by and large, Reinsurers are maintaining a tighter rein, with Natural Perils, being either excluded or, combined with event limits, typically varying between 7% and 20% of key zone aggregates. Minimum rates prevailing for Earthquake and Typhoon / Flood are 0.15% and 0.05% respectively, although some Treaties are known to carry a lower rate of 0.08% for a combination of both these perils. A country, where such natural hazards are a marked feature is Thailand, where, for instance, in the 10 years prior to 2010, there have been 33 recorded events of heavy flooding. These occurrences accounted for 55% of all natural disasters in Thailand resulting in damage, costing USD 4.5 Billion, as well as 2682 deaths, together with 30 Million people otherwise affected. Summer 2015
Singapore financial district
It is generally believed that, natural catastrophe coverage has a high growth potential due to extensive underinsurance and/ or non-insurance, in emerging markets, particularly so in Southeast Asia
The city state of Singapore, maintains its momentum as a reinsurance hub for Asia, with many Lloyds syndicates actively participating. It could be said that, the major capacity by far of that available in Singapore is A-rated, and it is therefore not surprising that, Singapore provides most of the capacity in Southeast Asia. In Indonesia and the Philippines, there is a marked reliance on national reinsurers that provide significant proportional treaty capacity to the majority of the smaller companies. Larger companies are inclined to rely on global capacity. It is of interest to add that, London and Bermuda continue to be small players in the region, due to the relatively small size of the non-proportional programs and their unwillingness to provide proportional capacity. In Sri Lanka, it is compulsory for 30% of all proposed overseas reinsurance cessions to be offered, in the first instance, to the Government owned National Insurance Trust Fund. The issue
of concern here is of course, the high risk exposure of this Fund, particularly to natural disasters. Apart from the widespread loss of life and extensive damages sustained, following the Tsunami experienced in December 2004, Sri Lanka has not generally been prone to natural catastrophes, but this is no reason for complacency particularly as, Sri Lanka is now known to be Earthquake prone, unlike the previous belief that, the country was outside the seismic zone. It is generally believed that, natural catastrophe coverage has a high growth potential due to extensive underinsurance and/or non-insurance, in emerging markets, particularly so in Southeast Asia. The increased catastrophe losses in the Asia/Pacific region has understandably led more to reliance on catastrophe models. Such losses had led cedents and reinsurers to better define and control not only the perils but the types of policies being issued. Continued investment and attention to modeling is evident throughout the region.
ASIA INSURANCE Early in 2010, Guy Carpenter released an Asian model, focusing on one of the main flood areas i.e., Thailand’s Chao Phraya region and, provides clients with the information necessary to improve flood exposure management. The flood model, which allows for analysis from five-year to 1,000-year return periods, provides an opportunity for clients to better estimate their PMLs at different return periods based on their commercial and industrial exposures. Commerce and Industry in Asia is experiencing what could be best described as a rapid and continuing growth, which is naturally enhancing substantially global reinsurance cessions. However, it must be borne in mind that, the growth in General Insurance business is driven largely by lines such as Motor Insurance, which of course, is less intensive, when it comes to reinsurance.
A classic example in this respect is Sri Lanka, where in 2014
of non-life GWP related to Motor Insurance.
Price competition, of course, remains a key factor influencing reinsurance rates in emerging markets, as clearly, the capacity available exceeds demand for reinsurance. As stated by Mr. T Prakash Rao, Chief Executive and Managing Director for Singapore based JB Boda, at a seminar titled “The Road Ahead on Reinsurance in Asia’s Emerging Markets “held in July 2010, “there is surplus capital in the market and it has resulted in capacity for almost all classes of business.
“Although foreign insurers outnumbered domestic players, this has barely displaced China Re’s market share in China, particularly in the life sector,” said Sharon Khor, partner and head of insurance for Greater China at Accenture, an international consultant.
Property facultative business is getting absorbed locally and a few risks are being shown to overseas reinsurers due to competitive pricing, Speciality classes such as terrorism, financial and liability risks look attractive in terms of demand in the short to medium term.
“China has its lure for foreign players as the largest and fastest growing reinsurance market, but the challenge is to grow market share by leveraging their global experience and knowledge to raise sophistication and risk management discipline in China”, said Khor, who went on to say that, “overseas reinsurers should focus more on areas where local players have relatively less experience, such as Health, Engineering and Catastrophe lines”.
Local capacities have grown, especially in the case of direct players, who are now better equipped and more keen to write inward reinsurance business. This is not really helping the pricing, especially the deductibles being offered. Markets are growing and reinsurance capacity is growing even faster and competition more than ever.” Clarence Wong, Chief Economist at Swiss Re described emerging Asia’s Reinsurance markets as “highly competitive” with National Regional and International Reinsurance, as well as, Lloyds and some International and Regional direct Insurers seeking opportunities in these markets. Since opening up the reinsurance market in 2003, China has attracted foreign reinsurers, six in all, i.e., in addition to China Re, which has two subsidiaries, China Property and Casualty Reinsurance Co. Ltd. and China Life Reinsurance Co. Ltd. The six foreign reinsurers include Beijing-based Swiss Re, Munich Re and Scor Re, and Shanghai-based General Re, Hannover Re and Lloyd’s Reinsurance Co. (China). It could be said that, most specialized risks in China are covered by foreign players.
China Re captures about 80% market share of life business.
Value-added services such as disaster management, product development, pricing and more importantly, risk management open windows of opportunity for overseas based players in China. Reinsurance arrangements vary substantially among emerging markets. In Southeast Asia, lack of capacity or proper underwriting experience leads to high cessions in the non-life sector. Here again, a classic example is Sri Lanka, where a little under 80% of the Property GWP is ceded to Reinsurers largely overseas, thus acquiring profitability (if at all!) merely on reinsurance commissions in a comfort zone of a minimal risk environment. Of course, in the case of China and India, the retention rates are higher, but clearly, the absence of adequate diversification of high value risks, particularly, the natural catastrophe risks, should be properly addressed by these two countries, with a view to encouraging higher cessions to international markets. Summer 2015
Self-Service Banking Driving customer engagement and loyalty in an era of self-serve banking
Will Jones Managing Director, Europe and Asia Pacific Monitise With the switch to mobile banking, consumers are newly empowered to bank on their own terms. Gone are the days of rigid opening hours, branch visits and lunchtime queues. Instead the customer can choose when, where and how they prefer to bank. But this new freedom and self-serve model has inevitably led to some distancing from the bank, with whom they previously shared a face-to-face relationship. The bank has moved towards a role of facilitator over advisor, and user experience has taken over from customer service as the most important element of the consumer relationship. While it’s true that banks benefited from the in-branch opportunity to talk directly to their customers, this was periodic and more often than not, out of necessity. Digital, and specifically mobile – thanks to its ever-present nature – actually opens a door to even more personal communication with consumers; and with it, a chance to increase engagement and build brand loyalty.
So how can banks leverage this reliance on mobile to deepen their connection with customers? Summer 2015
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Here are five tips on how to win back the customer connection:
Allow customers to communicate in the way that suits them best
Next-generation banking is about customer-centricity and any communications strategy should take this into account. The consumer should be able to choose their preferred medium; whether it’s in branch, via email, phone, or for the digital natives: social media or in-app. The challenge for banks is to enable them to configure and manage these preferences themselves, while ensuring that each channel is accessible and easy to use.
Optimise the customer experience by channel
Each channel should be optimised to help customers get the most out of it, and ease of use, of course, comes down to an effective user experience. To design for an optimum experience, usage patterns should be analysed to understand the most popular functions, while the user interface should be designed to make them easy to get to. Like having a single set of login credentials across all touchpoints, so that customers don’t have to remember multiple PINs, usernames and passwords.
Use smart communication services to provide peace of mind
As customers are empowered to bank in the way that suits them best, they should also have the opportunity to converse on their terms – which in the age of mobile typically means by text. Next-generation alerting services are moving mobile communications from ‘information’ to ‘dialogue’ by enabling two-way conversation between the customer and the bank. The customer receives a text alert, and depending on how they respond, is served with additional intelligent questions and replies. Take as an example, card blocking abroad. If a simple text is sent to establish a customer’s whereabouts, rather than relying on them calling the bank from wherever they are to unblock their card, the process suddenly becomes simple and hassle-free and even an added consumer benefit, resulting in an increase in customer trust and brand loyalty.
Let customers to converse on their terms
The key is relevance – and the better alerting platforms allow customers to text back to set preferences for the type of messages they value the most. These preferences can then be leveraged to serve the most useful information and promotions, and deepen the customer’s reliance on the bank. Relevancy is also extremely important. With the multitude of banking channels, it would be easy for banks to bombard the customer with communications from all angles. But just as services are delivered in the most appropriate ways for each channel, so too should messages and alerts be tailored according to their urgency and the most suitable method for customers to respond. These can be broken down into urgent alerts, service messages, promotions, or customer service issues.
Offer a truly helpful service
Using the data provided by customers’ account histories and preferences it’s now possible to tailor banking services and messages to the individual. Consider for example, ‘safe spending’ alerts during the last few days before payday, or an ISA offer if a large amount is deposited. The customer feels closer to the bank that ‘knows them’, while the bank is able to promote products and services at the most useful time. By basing offers on intelligence about the customer, marketing quickly moves from selling to service, and becomes an added consumer benefit. By segmenting messages and keeping person-to-person contact to a smaller number of customer service issues and bigger-ticket transactions like mortgages, banks can quicken delivery of their most urgent communications, while significantly reducing the cost of call-centre and in-branch servicing.
As you can see, the removal of personal contact does not have to result in the demise of the customer relationship. Far from it, in fact.
When embarking on a customer engagement programme, banks would do well to consider how the newest messaging technologies are re-opening dialogue with customers, and personalised, actionable alerts around the issues that matter most are reducing churn by deepening the banking relationship, enhancing and improving service levels and creating a greater reliance on the bank. And because they’re delivered via the messaging channels that individual customers are using the most to chat – in the workplace, with family or their networks, it becomes a natural way to communicate by putting the customer in the driving seat and empowering them to take action in a way that suits them best. The self-serve banking era should be seen as an opportunity, rather than as a threat.
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FUTURE BRINGING THE
OF BANKING TO THE NEXT GENERATION Mr. Nguyen Vu Anh, Director of Strategy and Corporate Development at Techcombank, spoke with our Editor, Wanda Rich about the competitive banking sector in Vietnam and the impact the global financial crisis had. The banking industry in Vietnam is very competitive. When asked about the opportunities and challenges facing the Vietnam banking industry Mr. Nguyen Vu Anh explained that the Vietnam banking sector had the following opportunities: Vietnam maintains GDP growth at a high level against regional countries. In particular, GDP in the first quarter of 2015 grew by 6.03% that is the highest in comparison with the same period of 7 most recent years. With only 20% of Vietnam population are using banking products and services there is also tremendous growth potential for banks in retail banking. Especially when well over 50% of total population is under 30 years old, a â€˜youngâ€™ population means a high demand and purchasing power. Summer 2015
However, there are still considerable challenges for Vietnamese banks in the near future. That Vietnam signs commercial contracts will make a favourable condition for foreign banks to improve their visibility and expand their operation in Vietnam. Banks will also have to face up to issues relating to bad debt. NPLs have a negative impact on the amount of bank credit provided in recent years, and credit growth remains constrained by uncertainties over NPLs. Moreover, the transparency of NPLs and the solution to bring NPLs down are still a big threat to Vietnam banking sector. In comparison to foreign banks, are cash management & trade finance services of Vietnamese banks competitive to them? Cash management and trade finance services are a recent concern to many banks, especially when banks have a strategy to raise income from commission and fee. In our opinion, foreign banks own a bigger advantage in these kind of service than Vietnamese banks, in terms of international experiences. Standard Charter Vietnam and HSBC Vietnam are two typical banks that have outstanding performance in cash management and trade finance. Therefore, Vietnamese banks have to enter a fierce competition with these international banks to steadily gain market share in this service. 14
What has Techcombank been doing to reach the international standards in banking and finance sector? Techcombank has made much effort to become a strong bank with regards to the bank’s core business based on high-quality human resources and modern technology following international standards as follows: Firstly, we actively search foreign professionals for leader positions, so that the whole bank can quickly access to international standards. Upgrade in technology systems is one of our most important investments because we prefer to incorporate advanced technology into all of our products and services in order to achieve the highest performance. How did the global financial crisis that started in the United States impact the banking sector in Vietnam? The global financial crisis had a strong influence on Vietnam economy in general and in the Vietnam banking system in particular: The Vietnam economy heavily depends on exports, direct as well as indirect investment flows. The crisis slowed export, reduced FDI and FII, which leads to higher NPLs in real estate.
ASIA INTERVIEW What should business customers expect? Regarding Wholesale segment, Techcombank will focus on tailoring financial solutions to meet each customer’s specific demand as follows: Establish dedicated functions in the Division’s organisational structure to serve various customer segments, allowing optimal customer value propositions Develop Transaction banking solutions such as Cash Management, Supply chain finance, and International payment/Finance on modern platforms Effectively incorporate the solutions of Treasury & Financial Markets Division and Investment banking to develop effective financial solutions for customers Cross-sell with other business divisions As for Investment banking segment, Techcombank will continue to develop and distribute investment products and investment banking services to meet the ever increasing demand of customer as follows: Launch new online securities product known as Online TCInvest. This investment tool is targeted at professional securities investors adopting international standards and advanced technology platform which has been invested and developed by Techcom Securities since early 2014. Strengthen origination and advisory capabilities and promote structured products for individual customers through its two subsidiaries – Techcom Securities and Techcom Capital.
Due to rapid lending growth through 2008, NPLs multiplied, followed by a credit squeeze in 2011, leading to a sharp decline in real estate prices (by approximately 60% against 2009–2010). Subsequently, NPLs have had a negative impact on the amount of bank credit provided in following years. Techcombank has continuously reinvented itself to provide the best financial solutions for retail and wholesale customers. What is your strategy for continued success and growth in personal financial services and investment banking segment? PFS is one of the three most important segments in the strategic development of Techcombank. We will continue to implement many strategic initiatives to provide the best financial solutions to individual customers as follows: Continue to promote investment in technology infrastructure to support customers in conducting transactions with banks without directly going to the bank Actively develop modern and innovative products to meet high demand of all customers, especially products linked to deposits and investment
Techcombank continues toupgrade and invest in technology infrastructure. What advantage does this provide shareholders and customers? As mentioned above, continuing to upgrade and invest in technology is the long-term orientation of Techcombank. Through these initiatives, customers can actively conduct transactions via electronic devices such as mobile phones, tablets and computers instead of having to go directly to transaction points of Techcombank. As a result, this will allow us to fulfil our commitment to enhancing customer convenience and building long-term customer relationships as well as customer loyalty. What are your plans for continued investment in infrastructure and further strengthening the foundations of the bank? Techcombank will be committed to strong and continuous investment in Technology as Techcombank’s competitive edge in the market. We will continue to launch a series of innovative solutions for individual customers such as Mobile Wallet, JCB Card & Mobile POS... For corporate customers, Techcombank have developed Supply chain financing platform to provide advanced payable and receivable financing products and help enterprises to better manage their working capital and daily cash flow requirements. And many other initiatives to modernize and strengthen the foundation. Summer 2015
Hong Kong, China, the Chanel Boutique in Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong.
The Not so Far East Asia, the Next E-Commerce Frontier
Ralf Ohlhausen Chief Strategy Officer PPRO Group
With retailers around the globe concentrating their attention on Asia as the next frontier, many make the mistake of focusing too heavily on China. Whilst China is undoubtedly Asia’s golden child, Asia comprises the largest and most populous continent with a combined population of approximately 4.4 billion; as such it presents a huge opportunity for the e-commerce industry. In fact, Asia contributed a whopping 35 per cent of the world’s e-commerce turnover in 20141 and is continuing to grow. There are numerous elements at play when considering the growth in this market aside from the vast population mentioned above. In fact, research shows three distinct trends fuelling the rise in the Asian market. Alongside the continued desire for Western products, which is only increasing with the growing accessibility of global goods, the opportunities for online retailers are endless. Summer 2015
ASIA BUSINESS With barriers such as differing currencies, cultures and languages, let alone technology adoption and payment infrastructures, it’s important to approach each country, and often audiences within each country, with a specifically tailored retail offering. The barriers that currently exist need to be broken down and there are several things to take into consideration.
The three trends fuelling growth in Asia
McKinsey and Company identified2 three powerful trends fuelling this rise – rapid economic growth, urbanisation and the adoption of technology (notably Internet penetration and mobile technologies). Together these are transforming the region, its people and its economies, with e-commerce leading the way.
Outside of China, Nielsen predicts3 Southeast Asia will have a cash-rich middle class of
400 688 million by 2020, hold
million mobile devices and boast a GDP over US$2.4 trillion.
Tokyo, Japan: People on Main street of High end Ginza district of Tokyo with the official Apple store.
The desire for Western products Asia’s continued desire for luxury Western brands such as Dior, Burberry and Chanel appears unbounded, with Japan now the second luxury market in the world. Burberry5, for example, sold US$870 million in Asia last year, an 18 per cent growth on the previous 12 months and a total that now makes up some 39 per cent of its global revenue. Whilst 37 per cent of Dior’s6 global €30.9 billion revenue now comes from Asia. Apple has also seen particular growth across Asia in the past 12 months. Recent research7 showed that Apple’s latest iPhone 6 and iPhone 6 Plus handsets have led to significant gains in Japan, China and South Korea. In the latter, it now enjoys a 33 per cent market share, overtaking LG to be the second most popular phone manufacturer behind local success story Samsung. In Japan, it enjoys an overwhelming 51 per cent of the smartphone market. Whilst in China, Apple’s iPhone sales have soared, increasing its revenue in the country by 71 per cent to US$16.8 billion (£11.03 billion), help Source: 1 www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-byGrowth-Emerging-Markets/1010575
The growth of e-commerce is rapid, with Frost and Sullivan projecting4 the compound annual growth rate (CAGR) of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam at 37.6 per cent from 2013 to 2018, growing from US$7 billion to US$34.5 billion.
2 www.mckinsey.com/Insights/Financial_Services/The_digital_battle_that_banks_must_ win?cid=DigitalEdge-eml-alt-mip-mck-oth-1408
3 www.nielsen.com/content/dam/nielsenglobal/apac/docs/reports/2014/Nielsen-ASEAN2015.pdf 4 www.frost.com/prod/servlet/press-release.pag?docid=291335203 5 www.burberryplc.com/about_burberry/group-overview 6 www.dior-finance.com/en-US/Documentation/InformationsReglementees/01,02_ RapportsFinanciers.aspx/
The Greenback Flexes its Muscles Elizaveta Belugina, the leading analyst at FBS Markets, spoke with Wanda Rich, Editor of Global Banking and Finance Review to discuss the dollars recovery and other trends in the foreign exchange market The foreign exchange market is affected by many factors. Which are the most important for traders and investors to watch? There are plenty of fundamental factors which have an impact on currencies. The effect of these factors is reflected in the nation’s current account balance, so it’s worth watching and analysing. When we speak about forecasting the future values of currencies, it’s necessary to watch the central banks’ policy in the first place. Central banks make decisions which set trends at the foreign exchange markets. These institutions have far more information about the economic state and developments. So, following central banks pretty much comprises information about other factors. 20
Let me give you some examples. When the Bank of Japan announced in late 2012 that it was taking course on the massive monetary easing, the Japanese yen started declining versus the dollar. The dollar/yen exchange rate rose from levels below 80 yen per dollar to 120 yen in 2014 and, as the policy divergence between the Japanese regulator and the US Federal Reserve remains, it’s natural to expect that the move up isn’t over yet. We now see just a pause caused by the uncertainty about the exact timing of the Fed’s rate hike. Moreover, the Bank of Japan has failed to reach its inflation target in time and may now be forced to increase the volume of stimulus. Such an outcome will be bearish for the yen. Other examples of big trends include the decline of the euro against the dollar in the second half of 2014 as the European Central Bank was cutting rates and preparing to launch quantitative easing (QE), while US central bank was tapering QE and getting ready to tighten policy.
ASIA TRADING The US dollar has significantly strengthened since the middle of 2014. Will this trend continue in 2015? I think that the US dollar will end 2015 with gains. The reason is that the Fed will still be the first major central bank to start raising interest rates. Even despite the weak economic data for the first quarter, the US is in better shape than the euro area or Japan. It’s quite common for the US economy to show weaker dynamics in the first months of the year followed by stronger growth in later months. Of course, the greenback has already significantly strengthened, and strong dollar isn’t overly good for the US exporters. The fact that the Fed is delaying monetary tightening may provide room for correction in the coming months. Thus, the US dollar will let off some steam by the middle of the year and then will be able to show solid bullish momentum in the third and second quarters. Is the euro area a sustainable currency union? Now, when Tsypras has agreed to conduct economic reforms needed for the third bailout, is the threat of Grexit completely eliminated? In the absence of fiscal transfers between the member countries, the currency union can’t function as a single economy. As a result, there are a lot of imbalances between the core and the periphery nations of the euro area. Until the European countries become more strongly integrated, the system won’t be stable. So, some fundamental changes in the architecture of the euro zone are desperately needed. Yet, during a time like this when governments find themselves on the opposing sides like Greece and Germany, it’s very difficult to achieve closer integration. The threat of Greece or some other problem economy leaving the currency union in future remains quite real. The nation has solvency issues which won’t be fixed with one more bailout. Greece desperately needs to leave the vicious circle of more debt in return for austerity measures and reforms which curb its economic growth. For now all actions to save the country were aimed at buying it some more time and putting off the real problems. However, the further we go, the clearer it becomes that Greece is desperate for space to promote economic growth without constant worrying about debt. But, as Europe is unwilling to grant the nation such a benefit, the possibility of default will permanently stay on the agenda. Moreover, the risk of Greece-style scenario will remain for other nations to fall into.
What lessons can market participants learn from recent situation with the Swiss National Bank which has unexpectedly removed the Swiss franc cap? The situation with Swiss franc should be a wakeup call for both traders and brokers. It shows that the rules risk management should by no means be forgotten. As the SNB kept euro/Swiss franc floor at 1.20 since September 2011, the market players have relaxed their vigilance. Yet, this is surely the kind of thing to avoid: you always have to be aware that pegs can’t be permanent. So, it’s necessary to at least limit losses in case the peg goes away.
Brokers should also see how the clients’ positions are distributed and plan backup rescue funds if events take the negative turn. What’s the outlook for oil? So far oil price has managed to stabilize in 2015 consolidating in the $63-$48 area. The reason is that production lowered as the US rigs count declined to the lowest since 2010, while turmoil in Yemen created additional concerns about supply. American oil production will likely reach its peak this year and then start declining. It’s necessary to watch the weekly US statistics on oil production, inventories and rigs. Still, oil supply will remain high. OPEC decided in June not to cut its production volume. In addition, as the sanctions are being lifted, Iran will gradually return to the market creating bearish pressure on prices. All in all, the factors listed above are expected to more or less balance each other. Oil has probably reached an interim bottom, but we don’t expect any rapid recovery, just some gradual, very slow and uneven appreciation.
Elizaveta Belugina Leading Analyst FBS Markets Summer 2015
Banking in the Philippines PNB-Bank of the people over the years Jovencio DB. Hernandez, Executive Vice President, Head of Retail Banking Group at Philippine National Bank (PNB), spoke with us about the current trends taking place in the Philippine banking sector and the impact of technology and customer behaviour.
What are the current trends you see taking place in the Philippine banking sector? Everybody is looking to grow their consumer business in the Philippines. The economy is driven by consumption spending. The growth is fueled by the USD 25 billion remittances brought in by millions of overseas Filipino workers. Another source of growth is from the Business Process Outsourcing (BPO) sector which contributed USD 18 billion to the Philippine economy. These two major sectors greatly contribute to growing disposable income of the countryâ€™s consuming public. Banks are looking to offer these sectors with a host of financial services such as credit cards, salary loans, car loans, and home loans.
However, the biggest opportunity is the unbanked and the underbanked segment of the market. Seventy-three percent (73%) of the Philippineâ€™s working population are underserved or have no access to credit / debit cards and bank accounts. Most banks are trying their best to tap them, but PNB is slightly ahead because we have already introduced products that will address their immediate needs. Is technology impacting the way you do business? The Filipinos are known for being early adaptors of technology. As of the last quarter of 2014, Internet users are now at around 38 million, with two-thirds of that under the age of 30. In fact, our cellular phone and Facebook usage rates are one of the highest in Asia, and in the world, in spite of our low per capita income. Filipinos spend an average of four (4) hours on social media every singleÂ day, and 62% access it through their phones. This means that the general population would rather save on basic necessities but not on their social media data charges. In the next five (5) years, we will see teenagers, who have grown up with laptops, tablets, Androids and smartphones, enter the workforce. Technology will play a vital part in what we call the Gen Y and Millennial market. This generation may not require physical branches rather seek the convenience of digital banking. Electronic platforms for financial transactions are the future trend, and we are moving in that direction. We are preparing for this eventually.
How are customer behaviours and the increased movement towards cashless transactions changing banking in the Philippines? We have read so many articles regarding the development of cashless transactions. This is not yet a reality. For developed countries, the ratio is along the lines of 60% for cash and 40% for digital means. Although it is increasing at double-digit rates of 30% - 50%, the base is still very small in the Philippines. Although it is increasing at double-digit rates of 30% - 50%, the base is still very small in the Philippines. Ninety-eight percent (98%) of transactions are still in cash basis while only 2% are cashless.
98% Cash transactions
However, there are studies done by some companies, like Visa, which mention the growth of debit cards happening soon, and that currently it is growing by at least 50% or so. As mentioned, though, the base is very low. I think the key is putting either a prepaid card, or what most banks call a cash card, or a debit card (an ATM card attached to an account) into the hands of 40 million working Filipinos. I believe that in the next five (5) years, we will see a major transformation. We will continue to see cash transactions in the Philippines, particularly in the countryside, due to the nature of our business and the nature of our economy. If we move from 98% to something like 70%, it would be a significant milestone for the country. We would gain a lot of efficiency in terms of the handling and movement of cash. The key is to move technology into mobile phones, particularly domestic remittances, and person-to-person transactions. Through this initiative, customers have access to cash whenever and wherever they need it conveniently and easily. They just have to use their smartphones or swipe/tap their ATM cards in stores with point of sale (POS) machines. Summer 2015
Currently, in most wet markets or retail stores, where the general population purchases their goods, there are no POS machines.
Similarly, the non-performing assets were cut with the sale of Php 2.2 billion in foreclosed properties. Other than the improvement in the asset quality, we are moving into improved processing via a good loan origination system so we can further grow our consumer business.
This poses a problem that technology can address. Most vendors have smartphones wherein applications can be installed, allowing their phones to be used as a tool to transact business. Although this may not happen in the next five (5) years, it is something we look forward to in the next 10.
How would you describe PNB’s first quarter financial performance? Philippine National Bank (PNB) sustained its profitability in the first quarter of 2015 with consolidated net income reaching Php 1.2 billion. As reported during our Annual Stockholders’ Meeting last May, net interest income stood at Php 4.25 billion, slightly down by 4.4% from the year-ago level, which included one-time gains from the redemption of non-performing assets. Excluding these gains, the net interest income actually grew by 11.4%. This growth was fuelled by the strong performance of PNB’s core lending business.
The Philippines is also looking into creating a single electronics payment platform in the country. Dubbed as the e-Peso initiative, the project is a joint effort by the Bankers Association of the Philippines (BAP), the Banko Sentral ng Pilipinas (BSP), and the US Agency for International Development (USAID). We are looking forward to aligning our infrastructure toward this future innovation. What can customers do to help protect themselves from becoming a victim of an ATM scam? The BSP has mandated that all banks and ALL transactions using card-based technology would be Europay, MasterCard, and Visa (EMV) compliant by the first quarter of 2017. That will significantly improve and reduce the skimming that is happening. The only problem is that even in developed countries, where EMV is already in place, fraudsters continue to find ways to defraud the cardholders. While there will be a significant reduction in terms of skimming, caution should always be observed. That is why we have introduced the product called the ATMSafe. For only a few pesos a month, you can take the most precaution. While you may be able to prevent skimming, the same care will not stop miscreants from taking your ATM card. Under the threat of a gun or knife, you could be coerced and compelled to give your card and PIN. You would have lost your money even if your card was EMV compliant. As they say, it is better to be safe than sorry. With ATMSafe, you are secure. Last May, Moody’s upgraded the rating of PNB to investment grade. What does the upgrade signify and can you share with us the strategy PNB used to improve asset quality? The upgraded the rating of PNB to investment grade reflects the consistent improvement in the Bank’s credit profile. The rating upgrade also serves as validation of PNB’s efforts at fortifying its business. This recognizes PNB’s drive toward its long-term corporate goals of high profitability supported by a strong balance sheet. The Bank improved its asset quality as non-performing loan ratio (net of valuation reserves), based on the BSP guidelines, declined to 0.92% from 1.39% in the prior year.
I think what is key, as also reported in the stockholders’ meeting, is the fact that our loan portfolio, which is the main driving force of our business and part of the core income generator of the Bank, has been growing steadily and faster than others in the industry at a rate of about 20+%. This year, we have booked no less than Php 30 billion in terms of new loans. Our consumer loan business is also steadily growing. At the end of 2014, our consumer loan portfolio stood at Php 21.8 billion or 19.7% higher than the prior year’s level. Our consumer loans remain competitively priced with varied tenors, making them one of the most affordable and flexible financing products in the market. Do you have any ongoing plans for expansion ? We continue to expand in terms of branches, but the focus of expansion is for PNB Savings Bank, PNB’s consumer banking arm. We intend to expand the PNB Savings Bank franchise by about a hundred branches in the next two to three years. In 2014, PNB Savings Bank had 28 branches. For end 2015, we are aiming for 45-50. In 2016, the target will be 75-80 branches. There are also opportunities for the mother bank to increase its number of branches in the provinces, which we will do. We will probably add another five (5) PNB branches. We continue to undertake initiatives to enhance the overall customer experience by introducing innovative products and services. Some of these have already been released, such as the PNB ATMSafe and the Healthy Ka Pinoy Emergency Medical Card. We have also recently launched a product that allows customers to avail of Unit Investment Trust Funds (UITFs) through ATM channels.
Jovencio DB. Hernandez Executive Vice President, Head of Retail Banking Group Philippine National Bank (PNB) Summer 2015
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The weakest link
shoring-up supply chain vulnerabilities with FSC solutions James Binns, Managing Director, Head of Working Capital, EMEA, Deutsche Bank, explains how the benefits of financial supply chain programmes can extend throughout supply networks to the advantage of all. A chain is only as strong as its weakest link. For supply chains, this link is often the smallest, least powerful or mostsqueezed trading partner, and the most susceptible to the short-termist actions of larger trading counterparties. Previously, larger firms such as multinational corporations (MNCs) may not have overly concerned themselves with the health of trading counterparties, particularly if preoccupied with challenges closer to home. But the health of a supply chain is dependent on the strength of each link – with inefficient or suboptimal operations in one leading to higher costs and risks not only for its buyers and suppliers but also throughout the chain as a whole. In today’s risk-wary environment, corporates have come to understand the importance of supply chain health and ethical treatment of trading counterparties – but this runs alongside a potentially conflicting desire to maximise liquidity by improving working capital. Post-crisis, treasurers are driven more than ever to seek more stable sources of funding to fuel day-to-day operations and to protect against potential geographical, political,
environmental or economic shocks. Yet they must do so without deteriorating the health or relationships of their supply chain.
Looking within A corporate’s own cashflow can prove to be an ideal pool of liquidity. By optimising treasury efficiency, a corporate can find itself with additional cash generated each day from a source of liquidity not subject to the volatility, interest-rate risk and high costs of external funding, and without adding debt to the corporate balance sheet. But unlocking this internal capital necessitates shortening the cash conversion cycle by increasing Days Payable Outstanding (DPO) and/ or decreasing Days Sales Outstanding (DSO). In doing so, the potential disadvantages become clear, as these actions will have an equal and opposite (i.e. negative) effect on the DPO and DSO of the corporate’s trading counterparties. This can mean that these counterparties find their own working capital squeezed – straining the trading relationship and risking the possibility they’ll seek out different buyers/suppliers that offer preferable terms. In other words, in exchange for improved payment terms in the short-term, the corporate enforcing such terms has increased its own cost and sustainability risks in the long run. This conundrum has given rise to the flourishing of Financial Supply Chain (FSC) solutions. Summer 2015
A chain is only as strong as its weakest link. For supply chains, this link is often the smallest, least powerful or most-squeezed trading partner, and the most susceptible to the short-termist actions of larger trading counterparties.
JamesBinns Managing Director, Head of Working Capital, EMEA Deutsche Bank
Relatively unknown 15 years ago, FSC management has become increasingly popular thanks to its ability to circumvent the potential conflict between supply chain and working capital health. Instead of achieving one at the expense of the other, FSC solutions allow corporates to improve both.
Pinpointing the benefits
For example, treasurers should drill down to the value of additional cash flow generated by just one day’s worth of improved payment terms. Treasurers can convert this “one-day” measurement to reflect its “applied worth”: a value that makes sense for each corporate’s particular circumstances. A treasurer might use FSC-generated cash to replace external liquidity sources, meaning the one-day benefit would be translated into the cost of alternative funding – such as short-term debt, Revolving Credit Facilities or commercial paper – now replaced. The value of the additional cash might be the equivalent cost of alternative liquidity sources it has replaced or its worth in terms of improved returns and share prices. Once equipped with such detailed insight, a treasurer can measure and refine the benefits of their current solution, and use their calculations to benchmark their working capital improvements and efficiency rates against those of industry peers.
By implementing one or a combination of these solutions (such as Supplier Finance, Accounts Receivables Finance or Distributor Finance schemes), with the support of an expert banking provider, a treasurer can not only generate additional working capital but do so at a lower cost than alternative sources of funding by leveraging the credit rating of the strongest trading partner. By improvising both their payment terms and those of their counterparties through a bank intermediary, the corporate not only lowers its immediate operating costs (by lowering the cost of funding) but may also enjoy indirect savings via the lower operational costs enjoyed by trading counterparties. Before onboarding onto such a programme, a corporate’s trading counterparties may be borrowing with lower credit ratings and without confirmed payment, but with an FSC solution counterparties can access funding without these disadvantages, generating benefits that can be shared along the supply chain e.g. by reducing the cost of goods. FSC programmes also, by their nature, mitigate risk; the implementing corporate can guard against interest rate rises by switching to internal sources of funding (relieving external dependency), and supply chain risks are reduced by creating more attractive trading terms and thereby bolstering the financial health of counterparties. In addition, such solutions support longterm corporate growth, by ensuring a cash-strong position when potentially bidding during acquisitions or mergers and subsequently sharing the improved efficiencies and lower funding costs across the newly created group.
These advantages have seen a rise in the popularity of supply chain finance – meaning treasurers should now look to hone their application of such schemes, and use analytics to ensure they’re deriving maximum value from their FSC solutions.
Through the use of such metrics, corporates considering implementing or refining a financial supply chain solution can assess their true benefits. For those considering FSC management, such calculations will highlight the attractions (and viability) of implementation and help treasurers to ascertain whether such solutions would truly be “win-win” for them. The long-term, ethicallyresponsible and sustainability-boosting advantages of these solutions have much to offer treasurers considering their long-term strategic objectives, and the ability of such solutions to protect and nurture supply chains means FSC management will continue to gain traction in the years to come. Summer 2015
The National Citizen Bank (Vietnam): Be Smart, be Bright The National Citizen Joint Stock Commercial Bank (NCB) (Vietnam) has been nominated and awarded as Most Innovative Retail Bank Vietnam 2015 and Most Innovative Bank for Enterprise Culture Vietnam 2015 by Global Banking and Finance Review. The Bankâ€™s CEO Tran Hai Anh, shared with us the story behind their efforts and success.
Tran Hai Anh CEO The National Citizen Joint Stock Commercial Bank (Vietnam) 30
The retail banking market in Vietnam has enormous potential. However, with the purpose of effectively operating a retail bank, banks have to meet the management and technology requirements
Over the past two years, NCB has implemented a number of projects, including changing its brand identity. Can you tell us about some of the projects and what NCB has done to strengthen and improve efficiency? Ms. Tran Hai Anh: Over the past two years of the restructuring, NCB has experienced comprehensive changes including organisational structure, operational policies and mechanism, corporate identity and personnel. Aiming at becoming one of the Top 10 Commercial Banks in Vietnam, NCB has been implementing various strategic projects, including:
Developing new strategies NCB focuses on providing tailor-made products suitable inVietnam market to retail customers and small and medium - sized businesses in chosen industries. NCB’s retail ans SME centers have been established in Hanoi and Ho Chi Minh City, with a modern, professional and simplified approach to promptly, conveniently, and effectively meet customers’ requirements.
Changing the brand identity At the end of 2014, NCB focused on refreshing brand identity in order to enhance the brand strength and bring excellent services experiences to customers. NCB’s brand identity package was reviewed, improved and standardized to bring an impressive NCB with a high level of professionalism to customers.
Aiming for Service Excellence NCB has concentrated on three areas targeting at customers’ satisfaction: Planning and Improving the quality of services at the counters; Developing KPIs for NCB’s staffs and SLAs – Service Level Agreements for middle and back offices. NCB has organized thousands of training hours for NCB’ staff, developed and implemented the service quality standard system, speed up customer services, organized mystery shopping to inspect and assess services’ quality throughout the system.
Core Banking T24 T24 is one of the worldwide reputed Core Banking solutions. In Vietnam, there have been more than ten banks applied this solution. Core Banking T24 not only enhances NCB’s operation management but also elevates services, leading to faster response and better customers’ requirements.
Building the pioneering, passionate and innovative corporate culture In addition to developing the business foundation, NCB has also established the core values: Friendliness, Professionalism, Innovation, Efficiency, Integrity in order to strengthen the code of conducts and ethics for all employees. NCB creates a dynamic working environment in which employees are respected and the pride of the Bank. Furthermore, NCB has organized numerous training courses, such as Negotiation Skill, Efficient Management to improve employees’ competence. Summer 2015
Let's get together and grow together
Kanrich Finance Limited is Licensed by the Monitory Board of the Central Bank of Sri Lanka under the Finance Business Act no 42 of 2011.
What innovative products and services have been created in direct response to customers’ needs and wants? Ms. Tran Hai Anh: NCB has currently been focusing on promoting value-added products and services, such as Housing Loans, Car Loans, Household Business Loans, E-savings, Smart Savings; Smart Accounts. These tailor-made products together with high quality and friendly services have made NCB unique in the Vietnam banking industry. What is NCB doing to support homebuyers? Ms. Tran Hai Anh: As one of our practical actions, NCB has focused on developing new products and adding value to the products in order to satisfy housing loan customers’ demands. The difference has been made by concentrating on financing house developers. Linking the bank, the developers, and the customers; simplifying lending conditions and customizing to meet customers’ individual circumstances; shortening processing time; offering flexible credit limits based on collaterals and customers’ needs; offering flexible payment schemes for different income levels. By collaborating with the house developers, contractors, and suppliers, NCB is able to provide a variety of promotion programs to customers.
What are the current trends you see taking place in retail banking? Ms. Tran Hai Anh: The retail banking market in Vietnam has enormous potential. However, with the purpose of effectively operating a retail bank, banks have to meet the management and technology requirements.
While there are more and more banks targeting at retail segments, the differentiation in branding and services are key success factors NCB acknowledges that Bank 3.0 is an inevitable development trend in the banking sector, in particular, retail banking. Naturally, NCB has also followed this trend to integrate into the global competitive environment. Thank you for your sharing. We wish you and NCB success and prosperity. Summer 2015
FUTURE BANKING Re-inventing financial services for the digital economy Mike Wood, Business Development Director, Unisys explores what banks need to be doing in order to attract – and keep – today’s discerning, tech savvy customer.
Today’s digitally savvy customer doesn’t have long relationships with one particular bank, they want frictionless, efficient banking
‘European Digital Banking Forecast’ by Forrester Research suggests that technology has transformed financial services, that online and mobile banking are widespread, and will continue to grow over the next few years. Digital banking is far more comprehensive than simply automating and optimising processes – it’s a case of business transformation to shake up existing ways of operating and thinking in order to better support customer demand. Organisations across many other sectors are already doing this and being disrupted by start-ups with new business
models and innovative ways to engage with their customers. Take Uber as an example – it is simply an app company that provides a taxi service without owning its own vehicles or directly hiring drivers. Yet it is disrupting the entire taxi industry one country at a time. Banks too are starting to follow the digital path with the likes of Axis, Starling, Fidor and Atom Bank all planning to bring disruptive business models and innovation into the UK market this year, and with companies like Venmo bypassing financial services firms in the payments space.
Give customers what they want Today’s digitally savvy customer doesn’t have long relationships with one particular bank, they want frictionless, efficient banking. With the seven-day switching regulation now in force, banks need to step up to the new digital revolution or risk obsolescence. Summer 2015
NCB PROUDLY ANNOUNCES THE WINNER OF
BE SMART, BE BRIGHT
ASIA BANKING For most businesses, this has a significant impact, calling for continuous improvement and innovation to drive the digital agenda that their customers crave. This means that banks need to create greater customer value by utilising the information they have at their fingertips to offer greater intelligence and bespoke services to customers. This could include intelligent budgeting, frictionless authentication, near real-time loan applications, omni-channel customer services, simplification of complex processes such as mortgages, or even secure document storage indigital vaults.
Be digital or get left behind With evidence all pointing to the world going digital, it’s more important than ever for banks to keep up – and get ahead. As we are already starting to see, the future bank might not have cashiers. In fact there might not even be physical stores at all. Banks need to plan now to transform their business model to ensure they are better equipped for these monumental shifts when they happen. Through gradually transitioning into a digital environment through offering services via apps, providing services via tablets in branches, and interacting with customers via social media, banks will be better prepared for the future. However, if a digital first approach is poorly planned and executed, and does not provide a seamless, connected user experience across all platforms, it is highly likely that it will do more harm than good. Customers will become annoyed, unengaged and will ultimately take their business elsewhere. That is why digital really is a case of sink or swim for the banking industry.
Frictionless banking without jeopardising security Many of us are now fully accustomed to the contactless world and the joy of ‘tapping’ our bank cards on a reader to enable a simple, low value transaction. Despite these improvements to card and mobile transactions, digital banking is not keeping up.
In most cases, when trying to access your bank account from a digital device, you still need a PIN number, a password or answers that you submitted to memorable questions, such as your favourite food or your first pet’s name. These are the traditional two factors of ‘something you have’ and ‘something you know’ and from a customer experience perspective in an ever-connected world, it’s less than ideal. Multi-factor authentication – including the use of biometrics to allow customers to access and manage their accounts and engage with their bank – offers a huge opportunity to reduce the friction of modern banking, and therefore provide the smooth experience that customers increasingly expect.
The future of data-led banking is here Today’s customers will continue to become more and more discerning. We’re dealing with tech savvy individuals that have no loyalty, want choice and expect 24/7 service. In order to ready themselves for the future, banks need to think about what customers want, using the vast amounts of data they hold to turn it into actionable insights, and evolve how they operate accordingly.
Continuing to target only the traditional customer isn’t going to be enough anymore. They can’t forget about the older generation of customers, but they must adapt to ensure that their customers’ needs are met across all personas. This includes the digitally savvy generation Y who want digital interaction, and the traditional customer preferring to speak to an assistant in a physical branch environment. Let’s not forget that there are also combinations of both customer needs at different stages of the sales cycle, which demand a true omni-channel experience.
Banks have an overwhelming amount of data at their fingertips so why not use it to their advantage to address this challenge? Cross referencing data held about customer spending habits, for example, can be used to offer services such as intelligent budgeting – offering advice, tools and assistance to individuals to manage money and avoid the increasingly popular pay day loans, as well as providing benchmark comparison. Banks could look to release money to a customer on a weekly basis to ensure their spending is managed throughout an entire month. Banks should also look to simplify services for customers by using data to research typically complex items such as mortgages. Mortgages are inherently stressful, complex and a huge expense – they’re an unknown entity for many and so by providing greater visibility and document exchange through digital self-service for example, consumers will receive a much improved and less stressful experience. It is clear banks are still falling behind other industries when it comes to service and innovation, but by taking steps now to use the data they have at their fingertips, really thinking about what the digitally savvy discerning customer wants, and being brave in offering new services, banks can get ahead of the curve. The future of banking is here.
Mike Wood Business Development Director Unisys Source: 1 www.forrester.com European+Digital+Banking+Forecast +2014+To+2018/fulltext/-/E-RES115988?docid=115988
Americas AMERICAS TRADING
trading THE FIRST RMB
CENTER IN THE AMERICAS
Blake Jespersen Managing Director of Foreign Exchange BMO Capital Markets The first Renminbi trading hub in the Americas launched on March 23, 2015, with the first trades taking place at the BMO Toronto’s headquarters. Blake Jespersen, Managing Director of Foreign Exchange at BMO Capital Markets spoke with us about the significance of this first trade and the RMB trading Hub.
The skyscrapers of the Financial District of Toronto Canada.
Blake Jespersen stated that facilitating the first Chinese Renminbi (RMB) trade in honour of the Hub launch signals BMO’s long-standing commitment to Canadian companies conducting business in China. We firmly believe that broader access to the RMB will give Canadians a competitive edge on a global scale, as well as deepen ties between our country and China - a very important trade partner.
The globalization of the RMB is a trend that can’t be ignored, and we in Canada should be proud to be at the forefront of this movement. While BMO was thrilled to help kick off the new trading Hub, we are even more excited about the benefits that will be realized by Canadian businesses in the months and years to come. BMO has a long history of conducting business in Asia. You are the only Canadian bank to have an established subsidiary bank in mainland China. What advantage does this provide? BMO’s significant investment in Asia has enabled it to build an extensive infrastructure and specialized knowledge base that are proving very valuable to our clients, particularly in light of Canada’s new Hub status. Utilizing BMO’s RMB expertise, clients have been able to make RMB payments, hedge RMB exposure and navigate the complex Chinese regulatory landscape. Through our wholly- owned subsidiary, BMO China, we have succeeded in ensuring that clients’ onshore payments are made in an efficient and timely manner. Leveraging our FX trading desks in Beijing, Shanghai, Guangzhou and Hong Kong has allowed us to offer clients a tailored, 24-hour solution for trade execution. Summer 2015
隆重开业 隆重开业 (Now Open)
Canada is now a Renminbi hub. As an active supporter of this initiative, BMO is ready to help your China strategies come to life.
Trade-marks/registered trade-marks of Bank of Montreal.
Additionally, this “on-the-ground” presence has contributed to the development of top- tier RMB strategy and China- related economic reports. Having a Clearing Hub in Canada promises to enhance this already substantial offering. What are the key benefits to Canadian businesses and the financial sector? Increased access to the RMB through the Canadian trading Hub will eliminate the need for trade with China to be settled in US Dollars (USD) - which has historically been the only option available to many Canadian companies. Rather, Canadian businesses can complete conversions directly from Canadian Dollars (CAD) into the RMB, bypassing the USD altogether. Denominating trade with China in RMB can result in lower costs for Canadian importers, as Chinese suppliers will ideally offer material discounts in exchange for receiving payment in their local currency. Canadian exporters, on the other hand, will be exposed to a broader customer base, thanks to an ability to accept payment in RMB- a highly regarded offering for many Chinese customers. In addition
to the ability to book Spot FX trades, access to RMB hedging products will allow Canadian companies to protect themselves from fluctuations in the exchange rate. The financial sector will benefit from increased RMB liquidity during North American trading hours, resulting in improved trading conditions. Furthermore, the opportunity to invest in Mainland Chinese securities via the RMB 50-billion quota awarded to Canada through the RQFII (Renminbi Qualified Foreign Institutional Investor) program, can provide exclusive access to China’s regulated Capital Markets. Who else is likely to benefit from the new hub? Since Canada’s Hub is the first and only to be established in the Americas, US companies will also reap the benefits of a deepened RMB liquidity pool during the North American trading session. US clients dealing with Canadian banks will be able to initiate payments via the new designated clearing bank, Industrial and Commercial Bank of China (Canada), allowing them to settle transactions with Chinese business partners in RMB.
Canadian banks also stand to benefit. They will now be able to open bank accounts with ICBC Canada, allowing for efficient trade settlement through a local clearing facility. This ability to clear client trades during the North American trading session is definitely attractive from an operational perspective. What new products do you see being created in response to the hub? Now that the Canadian Hub has officially launched, the Canadian banks will be encouraged to ramp up their RMB product offerings. In that regard, it truly is up to the Canadian banks to take the Canadian Hub to the next level and realize as many benefits as possible, while Canada possesses this distinct advantage. Deposit accounts, trade finance products, and offshore investment vehicles will likely be a priority. BMO will continue to be a leader in this regard, with our ultimate vision being that all products available to clients in CAD or USD will also be available in RMB. Achieving this objective is still a ways off, but Canada’s new Hub status is one large step in the right direction. Summer 2015
Wealth and asset managers awake to the
AGE Today, the majority of transactions are available online 24/7 while just a few short years ago customers were trudging to local branches to complete these same activities. However, while banking is adapting to an increasingly digitised world, are wealth and asset managers doing enough to embrace the digital age? The short answer is that wealth and asset managers (WAMs) have been much slower to embrace digital transformation than their retail banking cousins. This may be due to the “white shoe” culture in the sector, where the relationship with the client was viewed as all-important and a “relationship business.” 42
Or perhaps the growing financial burden of complying with the waves of regulation discouraged WAMs from adopting new technology to improve aspects of their businesses. However, the sector is now experiencing a reawakening, with many of today’s wealth and asset managers finding themselves in a changed world where digital is rapidly transforming the sector. The question now is what to do about it?
The Silicon Valley problem Incumbent wealth and asset managers have much to lose by continuing to ignore the fundamental changes affecting the sector. The coming-of-age “millennial” generation expects easy and quick access to information via their smartphones. This generation is also less inclined to visit a retail branch, preferring to do the majority of their banking and investment activities from the comforts of their own homes. These same potential clients also still harbour a lot of mistrust
Adobe headquarters building in San Jose California,
of traditional financial institutions, coupled with a view that these institutions aren’t the ones driving innovation in the financial sector. Add to that the fact that many of today’s “best and brightest” would rather be working in tech firms than on Wall Street, and you have an almost perfect storm of disruption on the horizon for today’s incumbent advisors and managers. Against this backdrop is the rise of the fintechs, startup firms looking to provide alternatives to traditional business models— firms such as Betterment, Personal Capital, Wealthfront and others. They are growing in number, well-funded and attracting real talent. They are taking advantage of the current environment to lower the barriers to entry and capitalise on the recession values and mistrust of incumbents. These companies also understand the appeal of flat-fee pricing and the unbundling of advice from management and are riding a wave of capital to capture market share from large financial institutions.
The truth is that Silicon Valley is already providing technology-driven products and services at a fraction of what the incumbents are offering. According to The Economist and CB Insights, more than $12 billion in global investment was poured into fintechs in 2014, with roughly $300 million of that directly into the “robo-advisor” model alone. Though their share of the market is still small at the moment, today’s incumbent advisors are quickly realizing that they need to adapt in order to survive. It’s not just the wealth managers who need to worry. As large tech firms make strategic forays into financial services, the asset management sector will not be excluded. The likelihood is strong that tech firms will move into fund distribution soon (though unlikely they will enter the management arena). It’s not that far-fetched to imagine a Silicon Valley tech giant putting the “buy” button out there for mutual funds. Summer 2015
AMERICAS FINANCE So what’s an advisor or manager to do? Today’s wealth and asset management firms must focus efforts in three key areas to successfully synchronize with the rapidly evolving digitisation of the sector. If digital transformation refers to the application of technologies and process changes to improve aspects of the business, today’s incumbents must quickly formulate strategy and align capital investment to concentrate on these three critical areas for long-term growth and profitability:
1. Improving the client experience
Advisor tools Smart Devices Social Media
Wealth and asset management clients will increasingly demand seamless, coordinated, visually stunning, and easy digital access to their providers. WAMs need to concentrate on: Smart devices: Providing ubiquitous access to a deep array of anywhere/anytime online and mobile transactions. Clients want the same level of technology sophistication from their financial advisors that they see from technology firms. The “digital client experience” is going to be “daily bread” for advisors and managers. Interactive access: Providing enhanced, interactive access to advisors, product experts and educational tools and research. Advisor tools: Providing advisors with digitally enhanced workstations and tools to enable them to develop closer relationships with clients, and understand the health of the relationship at a glance. Data analytics: Investing in visualization to deliver enhanced real-time access to portfolio information, reporting and virtual portfolios in a fluid, visual and intuitive way via secure online channels. 44
Data analytics Social Media: Enabling exclusive, specialized access to peer groups to share investment information and other shared interests—either through proprietary platforms or existing channels such as Twitter, Facebook and LinkedIn. New investments in digital technologies can help WAMs more effectively engage digital clients at every touchpoint in the client experience lifecycle.
2. Transforming operations
Of course, financial services firms have been applying technology effectively for many years to streamline operations and reduce costs. Digital transformation is merely the current-day expression of this strategy. With the downward pressure on pricing combined with the threat from digital entrants and the crushing cost of regulatory compliance, many wealth managers are reinvigorating their operational improvement agendas.
AMERICAS FINANCE There are several focus areas: Reengineering: Wealth managers can use digitisation to re-engineer existing processes, such as deploying workflow and online portals to improve client onboarding, freeing up time for financial advisors and reducing the overall hours associated with the process. Wealth managers have made significant investments in this with great success.
the growing segment of self-directed clients. These clients are more comfortable acquiring advice but want to make the majority of their own portfolio management decisions, substantially reducing the need for human, financial advisors. Today’s traditional wealth and asset managers need to be able to balance offering both a personal and digital client experience, and to offer financial advice at a competitive price point.
Lower-cost Service Models: By leveraging online chats and video-enabled conferences, digital interaction with the client can also reap dividends in terms of freed-up advisor time. Enhancing advisor workstations can also make wealth managers more productive; using fingertip access to client information, automated alerts and other tools to help advisors at all levels more effectively manage their books of business.
Where do you start?
Compliance: Digital when applied to risk and compliance processes can dramatically counter the rise in these costs since the financial crisis, primarily by automating checks, pre-post trade compliance, concentration monitoring and intelligently using alerts that reduce the human burden of performing these tasks.
The digital age is here and the time to act is now, especially as digital is set to become one of the leading CEO agenda items each year. But while everyone seems to agree that having a coherent digital vision and strategy is essential, many WAMs just don’t know where to start, or have made investments and are struggling to achieve the benefits they seek. We believe that successful digital transformations require organizations to transform all aspects of their businesses. To achieve a clear vision, WAMs should start with the following:
3. Revamping the business model
Most profound for the industry is the potential for digital to help wealth managers fundamentally revisit the way in which their businesses are conducted. We are witnessing a tidal wave of focus on the mass affluent segment, whether by traditional private banks or new entrants. Digital is providing a potential means to successfully reach this rapidly growing segment and profitably service this low-AUM group via a lower cost-to-serve platform. We are witnessing advice go virtual with the emergence of digital-led firms and automated advice. “Robo-advisors” such as Betterment and Wealthfront in the United States and Nutmeg in the United Kingdom are increasingly disrupting the traditional marketplace. This echoes what happened to the travel industry of the 1990s when the traditional players lost ground to Expedia, Travelocity and Orbitz. WAM players should also take note of some of the movements of retail banks (particularly in Australia and the United States) to bring together digital banking and digital wealth offerings. This channel cross-subsidization is an effective way to simultaneously drive assets on the banking and credit side, as well as the financial planning and investment side. Many incumbents are worried about this digitisation trend and feel compelled to provide what clients are asking for. However, they are also worried about channel conflict and mass departures of talented financial advisors and managers. However, this risk is more than outweighed by the benefit of deploying a lower-cost, digitised channel that caters to
Identify and understand client needs/expectations Build a shared client experience vision Conduct an organizational digital maturity assessment Evaluate competitive threats Identify enabling technologies Construct a roadmap
The WAM sector is changing. Innovation and branding will be deciding factors in a gradual and then sudden disruptive shakeout. Today’s WAMs must accept that the future has arrived and that the face-to-face advisor is less relevant than ever. Those who ignore the digital trend risk losing their business altogether. Those who choose to embrace digitisation must act now to transform their firms before it’s too late.
Edward Tracy (L)
Principal, Americas Solution Leader, EY, New York
Kimberly Yurisich (M) Director, EMEIA Solution Leader, EY, London
Philip Inglis (R) Director, Asia-Pacific Solutions Leader, EY, Sydney
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
Federico Tomasevich Puerto Madero in Buenos Aires, Argentina
on and still going strong Argentinaâ€™s Puente is using its 100 years of investment banking and wealth marketing to provide the most profitable investment advice for their clients. It has formed a team of specialists with experience in the financial markets and economies in each of the countries in which it now operates. For more information on Puente success, our Editor Wanda Rich spoke with Federico Tomasevich, CEO of Puente Founded in 1915, Puente has been operating in Argentina for 100 years now. As you celebrate your 100th anniversary what can you tell us about the bank today? Our Asset Management, Sales & Trading, Investment Banking and Wealth Management businesses have become standards in the industry in Argentina, Uruguay, and Paraguay. We have expanded our regional operations in Latin America by establishing a hub in Peru that covers the Andean Corridor and another in Panama that covers Central America and the Caribbean. One month ago, we opened offices in London to cover the UK and Europe. We are fully committed to each country in which we operate, and we play a positive role in the economies and companies we work with.
WorldClass Tailored Solutions Local and International Clients Argentina | Uruguay | Peru | Paraguay | Panama | United Kingdom
0810 666 4717 | puentenet.com
PUENTE HNOS. S.A. IS A LIQUIDATION, COMPENSATION AND TRADING AGENT (ALYC INTEGRAL) REGISTERED AT THE CNV (FOR ITS ACRONYM IN SPANISH “NATIONAL SECURITIES EXCHANGE COMMISION”) UNDER NUMBER 28. NEITHER THE COMPANY NOR ITS AFFILIATES MAKE TRANSACTIONS SET FORTH IN THE FINANCIAL ENTITIES LAW NUMBER 21.526.
AMERICAS INTERVIEW What solutions does Puente offer to meet the investment needs of their clients? At Puente we have a team of more than 250 highly qualified and specialized professionals who are prepared to generate value in our clients’ businesses by offering a superior customized service based on our expertise and knowledge of both local and international markets.
This would reverse Argentina’s need to import, which would significantly ease the challenge that an energy deficit brings to fiscal resources and balance of payments. Other promising sectors include the infrastructure, agribusiness, and financial sectors; however investors are looking at opportunities in all industries. Argentina shows asset prices at significant discounts compared to those in the rest of the region.
Our business units of investment banking, wealth management, sales and trading, and asset management are leveraged by solid strategic and research areas that provide timely and forward-looking information to optimize our clients’ decision making. In recent years, our growth has spurred on large investments in technology and our new digital platform offers all of the information needed to make decisions in real time. This system also makes it possible to provide customized oversight of alternate businesses and operate at any time in the different national and international markets
Moreover, if expectations change following this recent period of volatility, there is a high potential for foreign investment. This is not only reflected in the financial markets; the local investment climate’s view of real assets has also started to change. Investors are no longer buying liquid assets from their offices abroad but are increasingly visiting the country to understand how economics and politics work, in order to make long-term investments in the real economy.
How are the financial markets responding to the upcoming elections in Argentina at the end of this year? Argentina has a reputational problem that generates a lack of credit, which is translated into bond and equity prices. There’s no solvency problem. As we get closer to the change in the administration, so long as you don’t have any negative domestic or international event, bond and equity prices are going to rise. The interest in Argentine assets will rise. We recommend positioning in Argentine bonds and equities because we think they are paying a very high premium over their real risk. There are already some investors that are getting ahead of the market and are investing in real economy and financial assets. What are the short and long term investment prospects in Argentina? What role is infrastructure playing? One of the sectors with the highest potential is the energy industry. In the past, Argentina has been one of the hemisphere’s key energy markets and a leader in regional integration efforts and development. More recently, however, Argentina has struggled with balancing economic and energy demands and has become a net importer of energy. However, today, with the world’s second largest shale gas reserves and fourth largest shale oil, the country has reignited interest in its energy sector and market fundamentals. There is a huge opportunity to develop energy deposits in a sustainable and transparent way that would benefit all Argentines, by making potentially substantial increases in foreign investment in the sector, if the proper investment conditions are in place. If the Vaca Muerta formation reaches anything close to its full potential, Argentina could also become a regional gas powerhouse, capturing a greater share of exports to Brazil and Chile or filling liquefied natural gas ships bound for Europe and Asia.
Both the public and private sectors present very low levels of leverage (current foreign debt to GDP stands at 47.8%), which will provide for high flexibility for the new administration to face these challenges, once access to international financial markets is regained. High levels of liquidity in the international markets will be looking closely at Argentina to have access to the high potential gains due to current spread differentials between Argentine assets and the rest of the region. At Puente, we saw these opportunities several years ago. We have positioned ourselves as the leading investment bank in the country and are ready to take advantage of the significant opportunities we see for Argentina in the coming years. This is a key aspect of our regional expansion plan to become the leading investment bank in the Southern Cone. What is the current capital market dynamic in Uruguay? Uruguay is an investment grade country, with a solid economy, a strong reputation, and high liquid. Nevertheless, the capital market is still underdeveloped, considering the size of its economy. Therefore, the market is overburdened when it comes to channelling institutional, corporate, government and individual needs. At Puente, we see these opportunities, and through significant investments in human capital, technology, and practices, we have positioned ourselves as the leading investment bank in the country and are ready to take advantage of the significant opportunities we see for the upcoming years. Summer 2015
To the max
Optimizing returns on mutual funds By Karen Schnatterly, Emma S. Hibbs Distinguished Professor of Management at the Robert J. Trulaske, Sr. College of Business at the University of Missouri There was good news for the mutual fund industry earlier this year when it was reported that more funds in the US are beating the market than they were a year ago – and that 2015 was turning out to be the best year for returns since 2012. Despite this, a research project I carried out recently - Independent boards and the institutional investors that prefer them: Drivers of institutional investor heterogeneity in governance preferences - suggests that fund managers could do more to make sure their customers have the best chance of maximized returns. How mutual funds invest is a hot topic globally and regulators are becoming increasingly concerned with practices in the industry. For example, so-called ‘Shadow Banking’ has been scrutinised on both sides of the Atlantic and the Securities and Exchange Board of India (SEBI) recently asked asset managers to conduct monthly stress tests on their mutual fund portfolios in order to improve risk management across the sector. There has also been attention paid to the issue of corporate boards with the common consensus that independent boards are ‘better’ than boards that have strong links to a firm’s top executives. 50
But what impact does the make-up of a corporate board have on mutual funds’ investment strategies? Stockholders, especially those in the US, believe that the board’s primary function is to monitor the CEO and to make sure that the shareholders’ best interests are represented. Therefore, the logic goes that the best way to make sure this is the case is to have a board with as few ties to the CEO as possible to balance the power of the CEO with that of the board. Surveys of portfolio managers show that institutional investors say they prefer to invest in firms that have more independent boards. But is this because it’s the best option for the people they represent – or is it something else? One explanation could be that investors prefer independent boards because they provide better monitoring of top management, which reduces agency costs - therefore improving shareholder returns. Another theory is that institutional investors prefer independent boards because it signals appropriate, or generally accepted, behaviour regardless of it being tightly linked to the operation of the firm. If the preference amongst fund managers for independent boards is driven by the desire for lower agency costs, then it would make sense that differences in institutional investors’ trading strategies would lead to differences in preferences for board independence—an investor with a buy-and-hold strategy is likely to view agency costs more seriously than an investor with a much shorter time horizon.
AMERICAS INVESTMENT However, if the preference for independent boards is based on an institutional norm, then their preference for board independence will be most greatly influenced by the institutional forces facing the investor – namely being seen to be doing the appropriate, or ‘right thing.
did everything right, we invested in wellgoverned, transparent companies with independent boards” then that’s one big stick investors won’t be able to beat them with. The inclination to be seen investing in ‘well governed’ companies is strongest when we consider what happens when a fund has a bad year.
The results from our research into this do not support the ‘agency costs’ explanation. What we do find is that mutual funds, which face stronger institutional pressures than other types of institutional investors, demonstrate a significantly stronger preference for board independence than do the other types of institutional owners, regardless of trading strategy.
The recurring theme throughout our study is that different investors react in different ways to the institutional pressures they face. For mutual funds, the chief concern seems to be making sure that what they invest in can be explained as ‘responsible’ to their investors. The problem with this is that, because there is no evidence to say that companies with independent boards perform better than those without, they are potentially not maximizing investors returns.
In short – mutual funds are so public, so visible in their activities, that they are afraid of investing in firms with nonindependent boards. Proof that mutual funds are highly visible and subject to pressure can be seen in the example of Canadian fund Vancity, which announced that they would no longer be investing in fossil fuel companies due to the fact that their ‘members had been asking for the measure to be taken for a while.’
Karen Schnatterly Emma S. Hibbs Distinguished Professor of Management Robert J. Trulaske, Sr. College of Business at the University of Missouri Source: Schnatterly, K. and Johnson, S. G. (2014), Independent boards and the institutional investors that prefer them: Drivers of institutional investor heterogeneity in governance preferences. Strat. Mgmt. J., 35: 1552–1563. doi: 10.1002/smj.2166
The increase in financial regulation and the fact that any and all financial practices – especially with regard to money invested on behalf of others – are so firmly under the microscope means that this situation is unlikely to change any time soon, and likely to get worse
But if the ultimate goal of a mutual fund is to make sure its investors get the best deal, does an investment strategy that favours companies with independent boards achieve that aim? Research already conducted has shown that there is no evidence to support the idea that independent boards provide better shareholder returns than non-independent boards. So are fund managers missing out on ultimate performance for fear of investing in companies with non-independent boards?
Further, given this preference for ‘defensible investments,’ when considering any uncertain or risky investments, mutual funds are likely to view independent boards as an important reason to invest, above and beyond the uncertain performance issues. Generalizing even further, if any specific type of institutional investor faces significant institutional pressure (ex. in other countries or regions around the world), this study suggests that this set of investors will play it safe rather than going for alpha.
The extent to which mutual funds invest in companies with independent boards certainly suggests so – but there is also logic in this tactic. Because they are so visible, the questions that arise when a fund performs poorly are a factor. If a fund manager can say, “yes, performance has been poor – but we
In order to best serve those for whom they invest, mutual funds, especially, should consider the drivers behind how they invest and perhaps pay more attention to the needs of their investors, before adopting a strategy that functions as insurance against future negative returns ahead of all else. Summer 2015
From folklore to fact Mitigating behavioural bias to improve investment performance A report published late last year by State Street’s Center for Applied Research, “The Folklore of Finance”, highlighted how investment professionals sabotage their own success through their deep-rooted, subconscious behaviours and biases.
Confirmation Bias: our subconscious actively seeks information that confirms our pre-held beliefs. In fact, according to Montier, we’re twice as likely to look for information that tells us what we want to hear.
These biases compel us to act in ways that derail long-term investment returns. This compulsion is amplified by our industry’s focus on achieving short term alpha at the expense of longer-term ambitions – indeed the report highlights the discrepancy between the huge amount of energy devoted to pushing alpha production and the relatively scant resources assigned to achieving long-term goals.
Hindsight Bias: all too often an option we considered but didn’t take up turns out to be the correct one. Our brain recognizes that we looked at and dismissed the correct choice and tricks us into thinking we knew it was right from the start. We tend to assume our earlier selves had our current understanding, despite knowing that’s impossible. If we’d known, we would have chosen differently.
Our definition of success needs to change, and with it our opinion of the powerful role our biases play in our decisionmaking processes. To start, though, we need to recognize the different biases and behaviours that influence our investment decisions. A vast body of academic research has revealed these biases over the last few decades, but it’s worth looking at a few in detail to deepen our understanding.
Disposition Effect: a common habit among professional investors is to run our losing positions for too long and cut our winning ones too soon.
Overconfidence: this is a common factor across multiple biases and one of the greatest traps professional investors face. Research by James Montier has shown that people prefer their experts to sound confident and are willing to pay more for confident (though inaccurate) advisors. While it works in marketing, overconfidence leads to setting unrealistic goals, making an already pressured environment even more stressful. 52
For professional investors, this often means focusing on the information that supports their investment case and ignoring vital points to the contrary.
Research by Terrance Odean into this phenomenon found that winners that were sold outperformed losers that were retained by an average excess return of 3.4 percent a year. Indeed, at Essentia, we find evidence of the Disposition Effect in the behaviour of many professional fund managers; mitigating it can have a significant positive impact on excess returns.
Clare Flynn Levy Founder and CEO Essentia Analytics Summer 2015
AMERICAS INVESTMENT There are, of course, a range of other biases at play in our decision-making processes – or as the State Street report calls them, “folklores”, and while the subconscious can sometimes lead us astray, it can also be the secret to our success. We have all attributed positive decisions to our instincts; all felt the hairs on the backs of our necks stand up when we spot an opportunity we can’t miss. This is our subconscious telling us to take notice, and it’s quite often right. However, with a better understanding of the role of the subconscious in our personal decision making process, we can turn it to our advantage.
Ultimately, the key is self-study. Professional investors who wish to improve performance by overcoming biases should first identify where their skills lie. Figuring out what you’re good at and doing more of that, and figuring out what you’re bad at and doing less of that seems like a logical approach. It’s a question of capturing and analysing data, identifying actionable insights about both conscious decisions and subconscious biases, and then using those insights to change behaviour.
But how can this be done? Changing behaviour means creating or adapting your investment process, and instilling discipline in following the process. Confirmation bias, for example, can be confronted by actively seeking out the opposite point of view and then being completely honest with yourself in deciding whether your analysis overrides it. Discipline means making that a formal part of your investment process. Looking at other biases, such as hindsight bias, the academic research suggests keeping an investment journal to record feelings, instincts and actions and using this information to learn from mistakes. Technology has taken this whole concept further. In addition to keeping a written investment journal (which can be done digitally), it is now possible to correlate biometric data with investment performance. The data produced through these means creates a feedback loop that enables professional investors to see quickly and accurately what the impact of their actions is so that they can maximize skill, and turn these “folklores” into opportunities to improve. Acting unconsciously upon our behavioural biases means that we’re not working towards our true goals. It’s only by understanding our biases and harnessing them effectively that we can stay on track with our long-term aims, and data plays a crucial role in helping us keep on the right path. 54
Folklore in practice: a case study Essentia Analytics regularly encounters fund managers who have fallen into ineffective and unproductive patterns. One such client approached the company recently: though successful (with $10 billion in global equity), he had failed to meet his standards for the preceding two years, and sought answers from behavioural finance to discover why. Essentia’s analytical process involved finding the answers to some key questions concerning the value of the manager’s current decision-making, areas to target for improvement, and the behavioural changes necessary to maximize his future returns. The findings demonstrated that the client had fallen victim to the aforementioned Disposition Effect. It’s common for fund managers to exit positions after a certain period of underperformance, but common habits are not always healthy ones. This proved to be the case for this client, who was hit hard in a number of areas by his sub-optimal exit timing. The software calculated that his winning positions would perform relatively consistently once he’d abandoned them, and that he continually left losing positions around the nearterm bottom. This particular client was overjoyed to receive this feedback – especially when it was demonstrated that leaving his position a fortnight sooner would increase excess returns to the tune of $50 million (0.50%), and even more so when he saw how Essentia’s software could alert him to such positions in time to realize those excess returns.
He understood that his subconscious was wounding his portfolio. Behavioural finance provides him with the means to heal it. Clare Flynn Levy is founder and CEO of Essentia Analytics1
Source: 1 www.essentia-analytics.com/
rome BUILDING IN A DAY:
how swapping dealers for SEFs overnight means increased technological risk By forcing certain swaps trading onto SEFs, Dodd-Frank is asking the swaps market to make overnight changes that took the equities market 20 years. This means more risk from more directions, and Mark Brennan of ITRS Group argues that rigorous monitoring is essential to ensure the new empire doesn’t crumble at the start. The new swaps market structure, driven in the U.S. by Dodd-Frank, is unprecedented in its disruption to market participants, and has inspired no shortage of debates and jeremiads on its various flaws and shortcomings. That’s understandable: by regulatory fiat, almost overnight, swaps trading has had to move to an electronic market – a move that most other markets, notably cash equities, but also exchange traded derivatives, FX, and corporate credit, have been making at varying rates for years.
AMERICAS TECHNOLOGY Whilst they’ve had the luxury of adding and altering systems as and when the rules and markets change, growing organically and ironing out kinks along the way, the swaps market has been granted no such luxury. Sure, there may be some second-mover advantages – lessons learned from mistakes already made – but the swaps market is being asked to build Rome in a day, with all the difficulties that entails. The new SEF trading mandate has imposed significant regulatory hurdles for banks, and caused them to re-assess entire business models. But above all else, SEF trading imposes technological problems – across a variety of functions and workflows. Banks must connect to SEFs, get market data, apply credit checks, execute trades, connect to an SDR (if a dealer), and connect to the clearing house. Although these core technology problems are fundamental to regulatory compliance and running a rates business, another set of problems pervades: how do you understand and monitor the complex technology infrastructure needed for SEF trading?
A second-order problem brought to the fore The evolution of the cash equity markets in the late 90s and early 00s involved a steady march towards automation. More and more trading was done electronically; more servers were used to run complex trading environments, which sometimes replaced entire trading desks. As infrastructure grew, and trading volumes increased, banks saw increased instability, resulting in large-scale, firm-wide initiatives to create technology systems and teams devoted to operating and monitoring their trading infrastructure. It took a number of years for this “second-order” problem to succeed the core problem of building technology infrastructure to address client and market structure requirements. Put differently, it took several years before banks’ business interests aligned 56
in such a way that key stakeholders understood they needed to monitor their trading plant, not only for stability and capacity, but also for visibility into fault tolerance, as well as client flows. Now, however, technology was the main driver of trading. New requirements both for monitoring and for surveillance of the technology emerged. Whereas historically server failures were IT problems, now resilience and overall management of “failure domains” was front and centre a problem for the business, affecting P&L.
Eventually, even the regulators took notice, giving us Reg SCI. This shift was gradual, which afforded banks the luxury of addressing the firstorder problems (building these complex systems) before creating and in turn addressing the second-order problems of monitoring and stability. This time around, it all needs to be done at once: the difficulty of building a new swaps market structure overnight compounds the need to monitor it vigilantly.
A fragmented market The SEF market structure, like equity markets, is horizontal and fragmented, where fungible swaps trade on multiple venues. The race for SEF winners and losers is not complete, but regardless of the outcome, the buy-side and sell-side will connect to multiple SEFs. This implies the need to watch multiple venues and multiple price feeds. Ironically, in the absence of best execution regulations, banks transacting on SEFs need increased scrutiny of their flows. Additionally, SEF execution methods include both RFQ and order books; and dealers may also utilize Request for Stream (RFS) mechanisms. Though the SEF will link the RFQ to the order book, these separate mechanisms imply multiple flows that the banks will want to watch.
It may be that, in time, something like Reg NMS is introduced to mandate best execution, and that the SEF market might consolidate, reducing the number of connections required. Again though, the lack of an extended evolution means that swaps traders need to adapt immediately to how things are now, not how things might be in the future.
New entrants, new problems If the immediacy of the new market structure and complexity of its technology were not enough of an incentive to monitor flows, there is the added dynamic that banks may find themselves transacting on SEFs with some very sophisticated technology players, who have embraced the new market structure as playing to their strengths. HFT and “Chicago style” electronic trading is not new to other asset classes, but again, the issue is that elsewhere it evolved over time, and banks built out their electronic trading infrastructures concurrently with the growth of HFT. The traditional bi-lateral swaps market was a closed, invitation-only market, transacted primarily over the phone. Now, the much-touted fair (read: open) access that the CFTC demands of SEFs allows some sophisticated technology shops to automate price making, previously the purview of dealers. Those banks running a modern rates business need to understand the quality and quantity of their prices, and the speed of their contributions and responses. This implies a very rapid change in technological intermediation. The sell-side dealers are now potentially competing with automated trading shops. Now they have to ask: what are their infrastructure latencies? Are they seeing prices rapidly enough? Responses? Contributions? And unlike stock trades, the basis point spreads in interest rate swaps can translate to tens of thousands of dollars. Where such metrics were once the province of IT operations, now the trading desks themselves want this insight.
AMERICAS TECHNOLOGY Insight, not myopia What does this insight include? Monitoring system health (e.g. am I connected to the SEF?) should be a given for any modern technology infrastructure. Monitoring latency gives insight to the trading desk that the prices they are seeing, as well as making, are rational. Traders will want to know if they are falling behind – either in SEF price feeds or, for example, in responding to client RFQs. And finally, analytics of SEF price and order data can give trading desks the confidence that they are adequately navigating the new market structure. For example, some SEF order books may become “toxic”, as liquidity at certain price points evaporates. This insight is only available by monitoring these flows, and applying appropriate analytics. Rome wasn’t built in a day. Arguably, a market structure isn’t as complicated as an empire, or even a city; but there are bound to be problems when you create a whole new market landscape at a stroke. Swaps traders don’t have the luxury of figuring it out as they go, while the market evolves around them – as those in the equities (and other) worlds have. That’s not to say that the new regulatory requirements, or the speed of their implementation, are good or bad; but the sheer complexity of the task makes it all the more crucial that systems are properly monitored and stable from day one. New swaps empires may have to be built in a day, but proper technological oversight is needed to ensure they won’t crumble just as fast.
Mark Brennan ITRS Group
Insight, not myopia What does this insight include? Monitoring system health (e.g. am I connected to the SEF?) should be a given for any modern technology infrastructure. Monitoring latency gives insight to the trading desk that the prices they are seeing, as well as making, are rational. Traders will want to know if they are falling behind – either in SEF price feeds or, for example, in responding to client RFQs. And finally, analytics of SEF price and order data can give trading desks the confidence that they are adequately navigating the new market structure. For example, some SEF order books may become “toxic”, as liquidity at certain price points evaporates. This insight is only available by monitoring these flows, and applying appropriate analytics. Rome wasn’t built in a day. Arguably, a market structure isn’t as complicated as an empire, or even a city; but there are bound to be problems when you create a whole new market landscape at a stroke. Swaps traders don’t have the luxury of figuring it out as they go, while the market evolves around them – as those in the equities (and other) worlds have. That’s not to say that the new regulatory requirements, or the speed of their implementation, are good or bad; but the sheer complexity of the task makes it all the more crucial that systems are properly monitored and stable from day one. New swaps empires may have to be built in a day, but proper technological oversight is needed to ensure they won’t crumble just as fast. Summer 2015
US AND UK
IN THE LIBOR CONTEXT 58
The US operates a robust asset forfeiture regime and defendants will be keen to understand whether and to what extent they qualify for any public funding.
The global nature of the finance industry and the long reach of the law have never been more apparent in the public imagination with regulators in the United Kingdom, the United States and beyond increasingly taking action against perceived wrongdoing in the sector.
individuals and firms with offences under the United States Code Title 18, principally under Chapters 19 (conspiracy) and 63 (wire fraud, securities fraud, commodities fraud) and the Sherman Antitrust Act. The SFO is a body that typically brings prosecutions for fraud and bribery and in the context of LIBOR and has charged various individuals with conspiracy to defraud. Two criminal trials are pending this year.
It is perhaps not that surprising that many of the more recent financial scandals have originated in London, a city that has long been a financial hub. However, what is increasingly evident are the ripple effects such conduct is having across the Atlantic and beyond –with watchdogs ready to bite
On the involvement of US regulators, SFO chief David Green CB QC said, “We have mutual interest in a number of investigations, LIBOR and Forex are obvious examples. … We work closely and cooperatively… Everybody appreciates that there are plenty of foxes for the hounds to chase.”2 Despite his comments, one perceives considerable overlap between the DoJ criminal complaints and the SFO indictments.
One of the most striking examples is that of the LIBOR scandal whose regulatory response recently relieved Deutsche Bank of $2.157 billion in penalties and disgorgement courtesy of the US Department of Justice (“DoJ”) ($775m), the Commodity Futures Trading Commission (“CFTC”) ($800m), New York State’s Department of Financial Services ($600m) and the Financial Conduct Authority (“FCA”) ($344m or £227m).1
While there is considerable similarity between the two processes, the involvement of grand juries and the practice of taking depositions before trial are obvious points of difference. But arguably more compelling is the increasingly concentrated effect of negotiated settlements as opposed to contested trials.
Interesting aspects of criminal litigation in the overlapping UK and US context, especially with respect to LIBOR are the degree of commonality in targets, the scope and significance of Deferred Prosecution Agreements (DPAs) and Non Prosecution Agreements (NPAs) in the US and the increasing overlap of “criminal litigation” within the civil and regulatory sphere in both countries. Although there has been wide involvement from other international and supranational regulators with respect to the LIBOR scandal, the criminal complaints have been initiated by the DoJ and the Serious Fraud Office (“SFO”). The former, created by statue in 1870 is a US executive department whose function is the enforcement of the federal law. It has charged
The conviction rate in US courts (including guilty pleas) is high; data from the United States Attorney Annual Report indicate that that it has been above 90% from 2001 to at least 2012.3 The offences of wire fraud and bank fraud carry maximum potential penalties of 30 years imprisonment, much higher than those such individuals may face in the UK. The US operates a robust asset forfeiture regime and defendants will be keen to understand whether and to what extent they qualify for any public funding. Plea bargaining is unsurprisingly common in the United States and the relevant prosecuting authorities will often agree not to recommend an enhanced sentence to the sentencing judge in response to a guilty plea.4 Summer 2015
AMERICAS BUSINESS Two individuals charged by the DoJ (but not the SFO) have already entered guilty pleas and they will be sentenced in 2017. For those in both the regulators’ crosshairs, conviction or acquittal on the SFO conspiracy to defraud charge would act as a bar to any extradition sought by the DoJ for UK individuals.5 It is notable that several countries refuse to extradite its citizens to the US. The culture of cooperation by criminal defendants in the US often goes further. Many individuals targeted in investigations provide proffers (a summary of the key evidence they can give) to US authorities in an effort to gain immunity from prosecution in exchange for ongoing cooperation. The prevalence of negotiated NPAs and DPAs in the US is striking, and is the usual path for large corporations facing criminal action. The argument goes that such agreements for companies accused of criminal behaviour spare the collateral effects a criminal action might have on the corporate entity, and the concomitant effect on innocent employees and shareholders.
While an NPA is generally a simple contract between the corporation or individual and the DoJ, a DPA is predicated on the filing of a formal charging document by the prosecutor and is generally filed with the court.6 The major banks in the LIBOR scandal, largely British and European, have been the stationery targets the DoJ has hit using such means. A firm will typically conduct or outsource an investigation to uncover the relevant “wrongdoers” sharing much of that information with the relevant regulators in a bid to show cooperation and improvement in compliance. By way of example, Barclays Bank negotiated a comparatively favourable settlement for its “extraordinary cooperation” and was recognised for its voluntary reporting. It was fined $160 million and agreed to conditions including disclosing all non-privileged information sought by the DoJ and bringing to their attention all potential criminal conduct by the firm or its employees.7 Other banks such as Deutsche Bank AG have negotiated a DPA. In Deutsche’s case, they paid $625million fine and agreed to strict conditions of continuing cooperation. In addition, their wholly owned subsidiary paid a $150million fine and agreed to plead guilty to one charge of wire fraud.8 No criminal action was taken against any of the banks by the SFO. The imposition of DPAs in the UK is on the horizon and we can expect firms to be cognizant of this in the future but it is also worth noting that the administrative powers of the FCA 60
have already netted significant fines for breaches of Principles for Business in the UK and are already having a similar effect to DPAs. Principally, the Final Notices (generally settlements for breaches of principle which take advantage of mandated settlement discounts) contain allegations of a failure to uphold standards of market conduct with fines generally exacerbated by a failure to cooperate and in some cases, assertions of firms misleading the FCA. This may lead to an increased appetite for corporates to provide high levels of assistance to regulators, to locate and provide evidence which implicates individual employees and in many cases, to seek the maximum contractual ‘clawback’ in wages and other entitlements from those employees (this can be a mitigating factor considered in the calculation of a fine for a firm by the FCA). With respect to the administrative actions against individuals in relation to LIBOR, the FCA’s scope is thus far not fully known though there have been several Warning Notice Statements published, at least two settlements and a further prohibition order issued. While the FCA can bring criminal (and civil) proceedings against individuals for market misconduct, in the regulatory sphere, it has a lower burden of proof to satisfy and an extraordinarily wide discretion to impose financial penalties on individuals and firms. Publication of FCA actions against formerly approved persons is likely in the coming months as cases work their way through the FCA process. In the US, investigations by the Securities and Exchange Commission frequently result in criminal and civil action and agreed penalty orders against firms and individuals (and they have played a key investigative role in the LIBOR litigation) but the emergence of the CFTC, probably the first watchdog to catch a whiff of the LIBOR scent, has been significant for firms. The CFTC polices the derivatives market and investigates and prosecutes violations of the Commodity Exchange Act and regulations. It has flexed its might against firms by bringing administrative sanctions (including hefty civil monetary penalties) and assisting in the criminal investigation.
Source: 1 FBI Washington Field Office Press Release “Deutsche Bank’s London Subsidiary Agrees to Plead Guilty in Connection with Long Running Manipulation of LIBOR” 23 April 2015
2 From a speech given at the Pinsent Masons Regulatory Conference on 23 October 2014
3 4 5 6 7 8
www.sfo.gov.uk/about-us/our-views/director%27s-speeches/speeches-2014/david-green-cbqc-speech-to-the-pinsent-masons-regulatory-conference.aspx) United States Attorney’s Annual Statistical Report Fiscal Year 2012 Office of the United States Attorneys website: www.justice.gov/usao/justice-101/pleabargaining See Extradition Act 2003 section 11(1)(a) Giudice, Lauren “Regulating Corruption: Analysing Uncertainty in Current Foreign Corrupt Practices Act Enforcement, Boston University Law Review Vol 91 at page 361 (2011) U.S Department of Justice Non Prosecution Agreement www.justice.gov/iso/opa/resources/3372 01271017335469822.pdf U.S Department of Justice Release “Deutsche Bank’s London Subsidiary Agrees to Plead Guilty in Connection with Long-Running Manipulation of LIBOR” dated 23 April 2015
INSURANCE IN THE
USA Insurance Carriers Are Embracing the Digital Economy
Never before has the insurance industry seen a time of such dramatic change. For decades, the insurance industry has continued along a consistent path of underwriting, pricing, receiving and reserving, paying claims, and administering policies.Â At its core, insurance will likely always be this way; however, now insurers must respond to the demands of a changing population who expect carriers to support retail-style processing.Â
Customers expect to conduct their own research, query their personal networks and make a purchasing decision without having to engage with a third party until the very end of the buying process, if at all. For property and casualty insurers, and life and annuity companies, this will be a tectonic shift of their sales models, operational processes, and the underlying technology. Some of the most visible technologies to consumers are payment methods. As product designs trend toward simplicity and customization, carriers must think of innovative ways to provide payment options, even as their sales channels evolve. This article will provide a view of emerging trends from carriers and the key decision points influencing direction to embrace the digital economy. We will look primarily at personal insurance and life/wealth management insurance products.
Customers Expect a Seamless Experience A fundamental paradigm of the current and future customerbase is the expectation of a seamless experience, from insurance product research, to enrollment and purchase. Established as the norm by retail industries, this expectation has now flowed through to insurance. Customers expect to conduct their own research, query their personal networks and make a purchasing decision without having to engage with a third party until the very end of the buying process, if at all. For insurance, this puts the agent in a new role with new expectations. When in need of more complex or wealth management products, customers conduct their own research prior to engaging an agent for quotes and enrollment. They expect to move from research to quote and then to enrollment without indeterminate wait times or extra hurdles and hoops. As a natural extension of this seamless “retail insurance” engagement model, customers will expect payment options beyond writing a check or scheduling a monthly withdrawal from their checking account. They demand security, flexibility and choice of payment options to accompany their insurance purchase. 62
Personal & Commercial Insurance Personal insurance is probably best suited for modern payment options given the relative simplicity of the products and the underwriting process. These insurance carriers have been switching their sales models to direct-consumer in the hopes of making the purchase of auto, home, and property products faster and simpler (and also more profitable by dropping out commissions). Progressive and Geico have set the standard when it comes to direct-to-customer sale strategy. Traditional insurers have been playing catch-up.
Payment Options Personal insurers are somewhat more flexible in regard to payment collection. All carriers support traditional payment, which is the plain old paper check or automated clearing house (ACH) payments. Most accept debit or credit transactions and a few innovative companies, such as Esurance and Progressive, have ventured forward to accept PayPal. Since personal insurance options are considered “retail products,” carriers must find ways to accept digital forms of payment. The future for personal insurance payments lies in secure digital wallet transactions. Personal lines carriers will begin to add in on-the-fly or per-use insurance, which will create a more transactional environment that will need speed and security. Digital wallet transactions will become necessary. The small business segment for commercial insurance is also emerging as a formidable group of customers with demands similar to individual insurance consumers. With a diverse set of needs, but perhaps clearer internal financial processes, small businesses are looking for integration, simplicity, and security. Currently, options are mostly limited to ACH and checks.
AMERICAS INSURANCE Options such as Intuit, which integrates with internal accounting software, should be strongly considered. Other payment options that integrate with accounting packages will be attractive to small business customers.
Life and Investment Products For the more complex products like life insurance, annuities, and retirement plans, it’s more difficult for consumers to operate independently. From suitability requirements, to fund selections, these products do not easily lend themselves to online research and selection by the average person, making the direct sales approach a challenge for the carriers in this business. In other words, the need for a middleman (the agent) is still there, although we see signs of disruption emerging, with life insurance products specifically. So, what to do? Insurers are developing simplified issue insurance products and looking for ways of bundling products with life events, such as lifestyle activities. For example, John Hancock has become the first US insurer to offer discounts to its customers who wear Internet-enabled fitness trackers.
Payment Options The actual payment of policies varies, with almost all large and middle market insurers offering at least EFT (electronic fund transfer), credit, or debit card payment options. Certainly, plain old checks are still largely used. Payment dramatically changes in the life insurance industry where investment and long-term growth and protection are the primary concerns. Products like universal and whole life will likely always be sold through a party with the advice and guidance of a financial planner, but these are generally targeted to a subset of the overall customer base. The payment options for life and annuity products will likely max out at EFT, ACH and, perhaps, debit card transactions. Credit card processing fees are too prohibitive for use with higher-end life insurance or annuity products. Direct sales of simpler types of products will demand a wide range of easy payments. Insurers in these markets must accommodate a wide range of options including PayPal, peer to peer, payment sites, electronic check, credit card, debit card, and others. Since these channels tend to be less price sensitive, however, insurers can price the product to absorb the cost of these various payment options for lower premium amounts. What about the cashless society? Online wallets like PayPal, Google Checkout and Amazon Payments may have the largest potential for impact in the insurance industry, offering a level of separation from the customer’s personal accounts to the actual transaction. This form of payment option from Google and Amazon
is another aspect of worry for insurers who have been traditionally burdened with commission-based sales, high overhead and antiquated backend systems and processes. Amazon and Google have already figured it out and would be able to blend payment processing seamlessly with the more serious challenge of underwriting and enrollment approval. Other major constraints to payment innovation in the US insurance market are regulatory mandates such as anti-money laundering, securities issues, state sales practices, and ERISA for retirement products. The constraints imposed will make it a challenge for future digital currency (e.g. Bitcoin), private crowd funding, or similar innovations to take hold. For the most part, the decision to buy any form of insurance is rarely a snap decision that requires immediate purchasing satisfaction. Direct Carrier Billing or “DCB”, where you purchase items through your mobile phone carrier, carry huge finance charges (40% - 60%) passed along to the carrier. That is simply a non-starter in the insurance industry. With the exception of per-use personal insurance products in the future, the need for immediate insurance purchase and payment will remain low. Call to action: digital transformation is a must-have for insurers In closing, payment option trends will continue to “go digital,” requiring insurance companies to modernize and transform their businesses. In order to embrace digital transformation, carriers must supply their staff with intelligent “smart data” applications that maximizes insight and understanding to properly measure risk for their customers. Collection of data from wearables, property, and social media via the Internet of Things will further inform both insurance customers and carriers. User experience and processes must be adjusted to accommodate for an ever-growing digital community that expects a seamless issuance process, flexible payment options, and security.
Matthew Lee Senior VP & GM of Global Financial services Ness SES
Ernst Renner CEO and Managing Partner NEOS Holdings L.L.C.
A new oil rush is coming: are you ready? The international oil industry is currently fully focused on low crude oil prices and the layoffs and rig shutdowns that inevitably follow. As a result, too many energy traders find themselves rushing for cover and missing out on the opportunity to make some smart money. Not long ago, a downward move of 50 percent would have been disastrous for the oil and gas industry. However, a convergence of new factors this time suggests that you can seize your share of opportunities while prices are down and march into the next cycle well ahead of your competition.
Prices are falling but the need for oil isn’t In spite of lower prices and enduring dire news in the markets, the fundamentals generally point to an increased need for oil. If prices go back to the $60-$70 a barrel range in the next year and stay there for a reasonable period of time, worldwide production will have to respond.
You can literally go on holiday at the start of the process and come back to a producing well. Consequently, the need for transport to market hasn’t dropped. Oil tankers, pipelines, rail systems and the tracking technology behind these modes have grown in sophistication. As a result, there may be no better time to be a trader – and an investor - in and within the global oil transportation business.
While many wells have been closed, and headcount reduced, the infrastructure is still there to scale up at short notice. The recent volatility has created a much leaner breed of oil companies and, from a logistics standpoint, a multitude of options have emerged in the past five years – including rail, barge, and tankers, to name a few.
The abundance of supply is placing downward pressure on prices, with supply growth outside of OPEC nations rising at the fastest rate. According to the International Energy Agency, nonOPEC countries produced 1.9 million more barrels per day in 2014 than they did a year ago, with the U.S. leading the way at 1.1 million barrels.
In 2015, oil drilling and information technology have combined to create a perfect storm of capability and agility that will allow oil markets to respond with speed typically only seen in the digital realm. Five years ago it could take as long as nine months to get oil out of the ground.
So, generally speaking, production is up and, as producers become more efficient, the number of rigs required to yield the same amount of oil naturally diminishes.
Today, thanks to rapid advances in drilling and information technology, it takes about 30 days to see results.
Rig count reductions are having little to no impact on actual production. What is actually happening is that the industry is taking advantage of this opportunity to shut down underperforming rigs.
Turning a profit thanks to technology advancements Technology is accelerating the capabilities in oil field production and, as time passes, advancements in pad drilling and rig mobility will only ensure more of the same, rendering the number of rig counts as a measure of industry health obsolete. Considering advancements in the way wells are drilled today, itâ€™s not unusual for production rates at any given site to peak early and yield faster than they did in the past. The peaks are nearly three times higher than they were just five years ago, creating enhanced production rates, even during decline, due to drilling efficiencies realised by more effective horizontal drilling
David Bernal Senior Solutions Consultant Allegro Development Corporation, EMEA
A brief introduction to the history of hedge funds.
1920 The initial Jones’ model was a general partnership. In 1952, it was modified to become a limited partnership and include a 20% compensation fee based on profits, which was designed as an incentive to the investment manager.
During the bull U.S. stock market in the 1920s, there were already private investment vehicles available to the wealthy. According to Warren Buffett, during that period an investment partnership established by Benjamin Graham and Jerry Newman, the Graham-Newman Partnership, was an early hedge fund.
However, Alfred Winslow Jones is widely crediting with creating the first “hedged” fund structure back in 1949, and with coining that phrase. The name hedge fund refers to the technique of hedging, a method to decrease losses and reduce or transfer risk.
During the 1970s and 1980s, most hedge funds followed a long/ short equity model.
By 1968, there were at least 140 U.S. hedge funds, having gained popularity among high net worth individuals by significantly outperforming mutual funds.
In the early 2000s, there continued to be an increase in the number of funds and industry AUM, which declined briefly during the financial crisis of 2008.
The Evolution of Hedge Funds Today there are estimated to be over 11,000 active Hedge Funds managing in excess of $3.1 trillion, and growing each year. To find out more about this growing industry Editor Wanda Rich spoke with Hedge Fund Association President Mitch Ackles
In the 1990s, the number of these funds increases significantly and included credit arbitrage, distressed debt, fixed income, multi-strategy and quantitative strategies.
1990 One of the most famous hedge funds was formed in 1980 by Julian Robertson, Tiger Management, which was a top industry performer and grew to over $7 billion AUM by 1996.
What attracts investors to hedge funds? There are several motives for investors to allocate to hedge funds. The ability to reduce risk and increase diversification are the most cited reasons. Reducing risk is vital in any portfolio, and several academic research studies have concluded that adding hedge funds to a portfolio provides meaningful downside protection. How has the investor base changed over the years? The vast majority of investors in hedge funds in the early years were wealthy individuals. High-net worth families also formed â€œfamily officesâ€? and begin to pool their resources and became prominent allocators to hedge funds as well, and still are today. In the 1990s pension funds, endowments, foundations, and other institutional investors began to increase their allocations to hedge funds, and now represent the large majority of hedge fund investors.
$0.17 $5.98 $1.65 $1.08 $4.27 $1.08
How are hedge funds characterized? Hedge funds are a pooled investment structure designed to deliver consistent returns, enhance diversification and manage risk. Hedge funds are well known for providing professional money management, and many operate like financial institutions, with strong business infrastructures and regulatory oversight.
A common fee structure known as “two and twenty” applies to many hedge funds and refers to managers’ charging a flat 2% on total asset value as a management fee and 20% on profits earned. What are some of the key regulatory concerns? Hedge funds are in fact regulated in most countries around the world. Hedge funds domiciled in the U.S. are regulated by the Securities and Exchange Commission and/or the Commodity Futures Trading Commission (CFTC). Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 all hedge fund advisers with $100 million or more in AUM are required to register with the SEC and/or CFTC. Under Regulation D of the Securities Act of 1933, hedge funds are only allowed to raise capital in non-public offerings from “accredited investors” which are individuals with a net worth of at least $1,000,000 or a minimum income of $200,000 in each of the last two years. Corporate entities like banks, pension funds, endowments, foundations, etc. must have a minimum of $5,000,000 in total assets. Investors in large hedge funds must meet “qualified purchaser” standards under the Investment Company Act of 1940, which requires individuals to have $5,000,000 in investments and requires pension plans and companies to have $25,000,000 in investments. In addition hedge funds are prohibited from making public offerings, and are subject to the anti-fraud provisions. 68
$0.13 $11.58 $4.97 $2.93 $31.94 $2.93
($7.21) $12.54 $6.82 ($2.79) $63.08 ($2.79)
$35.02 $957.36 $21.97 $241.76 $0.22 $128.03 $1.77 $278.46 $30.90 $1,799.98 $1.77 $278.46
In 2010 the European Union (EU) approved the Alternative Investment Fund Management Directive (AIFMD), which focused on alternative investment funds and requires registration and increased reporting, disclosure, and capital requirements. Previously hedge funds and private equity funds were not subject to the same investor protection rules as those required by mutual funds. The Directive was designed to address this. The global hedge fund industry has embraced regulatory oversight, and over the past decade has made significant strides to build institutional infrastructures to address new regulations and simultaneously become more attractive to institutional investors. What are the biggest trends you see taking place right now? I believe that the hedge fund industry will continue to add value for sophisticated private and institutional investors globally, provided that they adhere carefully to regulations, facilitate greater transparency with their investors and regulators, and work together with all industry participants to build upon best practices. What does the future look like for the industry and fund managers? I believe the future of hedge funds looks bright. As more investors gain access to professional money management, more assets will be allocated to the hedge funds, and more jobs connected to the industry will be created. Hedge fund managers will also become better marketers as their legal and compliance teams become more comfortable with digital marketing, provided that it’s targeted only at those qualified to invest. In the future, I expect to see more hedge funds take advantage of advertising recently made possible thanks to the JOBS Act. This area, in particular, will expand significantly, and hedge funds will begin to hire internally or seek external experts to help them capitalize on 21st-century marketing techniques, including video and social media.
-1.65% -0.34% -0.44% -0.05% -1.66% -1.49%
3.55% 1.08% 0.58% 2.02% 5.18% 3.31%
4.01% 2.09% 2.16% 0.85% 8.35% 6.21%
-2.13% 2.37% 3.86% -3.70% 7.18% 6.16%
0.25% -0.03% -0.47% -3.74% -4.81% -0.99%
5.09% 1.96% -2.17% 6.85% 13.05% 3.00%
6.49% 0.88% -12.48% -10.41% 1.17% 40.54% 21.31% -40.77% 20.61% 7.34% 1.45% 0.03%
Estimated Assets & Investor Flows through June 2015 Investment Region
Q2 2015 H1 2015
Q2 2015 H1 2015
Emerging marketfocused fund flows were positive in June and in each month of Q2. Investors allocated an estimated $1.1 billion in June and $2.9 billion in Q2, the universeâ€™s largest quarterly inflow in a year.
Updated Hedge Fund Performance through June 2015 Regional Exposure
Mitch Ackles President Hedge Fund Association
Tables source: eVestment June/ Q2 2015 www.evestment.com
insights INTO OFFSETS
Offset deals in public international defence procurement are one of the most secretive, complex and riskiest aspects of international defence trade. Such deals often include decadelong obligations and investments that defence vendors have to fund, operate, and manage; and oblige vendors to achieve objectives in foreign, opaque and unknown markets. Offset obligations are material in value and are estimated to be worthÂ $450 billion worldwide.1 What is more, offsets are extremely resource-intensive, as they very often require defence vendors to transfer their technology and knowledge to both public and private entities of the buyer-countries. To add to that, offset deals are often covered by national security policies and are outside the scope of public scrutiny â€“ that makes them a breeding ground for potential corruption. 70
Obligations, $, bn
Table 1. Outstanding offset obligations of selected defence contractors, 2012 - 2022, USD billion. Source: IHS Janes.
Overall, most offset policies differ from market to market, and the types of offset investments are mostly selected on a discretionary basis – therefore, each offset package is unique.
Background So why do defence vendors engage in offset deals? The answer is that those deals, which are often referred to as ‘sweeteners’, are required by approximately 1302 countries worldwide. The vendors are required to engage in either direct or indirect offsets – often, offset packages include both. Direct offsets are directly related to the main contract – for example, the procuring country may oblige the vendor to produce part of the items within the main contract in the procuring country, as well as transfer related technology and to train the domestic producers how to use it. An indirect offset is unrelated to the main contract, and may include financing local businesses, setting up factories and selling part of the local production in the vendor’s home country, promoting tourism, and many other economy-boosting initiatives. Overall, most offset policies differ from market to market, and the types of offset investments are mostly selected on a discretionary basis – therefore, each offset package is unique. Traditionally, the goal of offset mandates has been to recoup some of the costs that are incurred due to sourcing expensive weapons systems from foreign entities using public funds. Recently, however, many countries have become more pragmatic – an example is the United Arab Emirates. The UAE has been deploying offset deals to reduce its economic dependence on oil-related industries by requiring defence vendors, through indirect offsets, to invest in the UAE’s domestic IT and other high-value-added sectors. Second aspect worth noting is that the unique nature of offset packages makes valuation challenging.
Most offset policies require 30% to 120% of the value of the main contract to be generated by the vendor in the domestic market of the purchaser, which is achieved by adhering to market-specific requirements; purchasing countries also use multipliers to promote activity in certain sectors, locations or socio-economic groups. For example, the UAE, among other conditions, allows vendors to claim $5 in offset credit for each $1 created by promoting exports of UAE companies to new markets; a higher multiplier can be claimed if the exporter is an SME that hires many graduates.
Recent defence market activity and the regulators With the recent turmoil in the global geopolitical arena, and increasing defence budgets of Eastern countries (Eastern Europe, the Middle-East, India, Japan), the defence market has been experiencing an increased rate of procurement, both in value and in volume of deals. What is more, the defence market is going through a phase of consolidation – the increased number of market disruptors3 has led to growing M&A activity. As many defence firms have outstanding offset obligations, most M&As will lead to one firm absorbing the offset obligations of another, as well as legacy accounting records and internal controls and procedure, which can lead potential exposure to anti-Bribery and Corruption (ABC) legislation. Therefore, it is important for the stakeholders to understand the key risks and implications, and it is a vital area to be targeted with specialist M&A due diligence. Summer 2015
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AMERICAS INVESTMENT Offset deals can create profitable projects, provide market entries into certain regions, create a supply base and allow the vendor to promote their reputation. However, due to the investment involved, offsets are often rife with corruption – in fact, a recent Transparency International study4 shows that only 3 out of the 163 companies reviewed have specific compliance programs that explicitly target risk management in offset deals – which indicates that offsets are most likely a business area that lacks the appropriate compliance and control attention.
committed, domestic partners are, for example, potentially able to channel kickbacks to public officials and engage in other corrupt practices, which expose the prime contract to various bribery risks. Further, to cope with offset performance and other local issues, third-party advisors are often brought in by vendors to manage and advise.
Due to the lack of international regulation of offsets, regulatory bodies have been using ABC statutes – the U.S.A’s Foreign Corrupt Practices Act, the UK’s Bribery Act and the obligations of the OECD’s Anti-Bribery Convention – to penalize corruption offences: bribery of a foreign official, commercial bribery, record-keeping and internal control violations, and failure of a commercial organization to prevent bribery. Each of these offences carries severe penalties. International vendors are therefore exposed to the enhanced risk of sanctions and fines, and personal liability risks.
However, they also pose high corruption and bribery risks, which may lead to the main vendor to be sanctioned in their home country for the actions of the third party (90% of the FCPA-related cases have involved third-party corruption). In addition, third parties and domestic partners are often remunerated on a success-based commission - inadequate performance reporting and other types of fraud expose the vendor to liabilities in both the buyer country and its own.
Key risks and issues The willingness of regulators to pragmatically prosecute international companies for foreign bribery is clear, as seen in FCPA enforcements against Siemens (US outcome $800 million), Alstom (US outcome $772 million) or KBR/Haliburton (US outcome $579 million), with Alstom and Siemens sanctioned in additional jurisdictions. What is more, postsettlement expenses, such as retaining a corporate monitor, can reach tens of millions of dollars.
These third-party consultants are typically local, wellconnected experts – their local knowledge allows them to complete offset obligations efficiently.
In conclusion, the offset industry is booming – which has both positive and negative effects. The positive effects of offset deals are that they promote globalisation and economic development of certain markets, as well as allowingcountries to form new trade-friendly relationships. The negative effect is that they expose defence vendors to enhanced risks, both from their own offset programs, and from those obligations that are inherited through M&A – these
Even in defence deals, where the ‘national security’ argument had traditionally been used to justify the lack of transparency, enforcement is growing, as seen in BAE Systems’ $400 million settlements in 2010. Of the key risks and issues – such as deal structuring-related due diligence of prescribed domestic partners, valuation and performance-related implications on accounting and internal books and records, protection of intellectual property rights, etc. – this article focuses more on the key risk that leaves the vendor and its board directly responsible for ABC violations – the third party risk. Offset packages by nature involve many governmentprescribed domestic partners, often through a handful of gateway intermediaries. Due to the significant resources
Derek Patterson Principal Forensic Risk Alliance
Lukas Bartusevicius Business Development Analyst Forensic Risk Alliance
Source: 1 Transparency International, presentation of the ‘Defense Companies Anti-Corruption Index 2015’, 30 April 2015, London.
2 This number is often discussed due to the lack of a widely accepted definition of offset. The
definition of offset is outside of the scope of this article, however, I go beyond the traditional view of separating countertrade and defense offset and, relying on the practice of the emerging markets with the biggest defense budgets, suggest that countertrade deals – such as barter, counterpurchase, etc. – are in spirit within the scope of indirect offset.
3 Market disruptors, in this context, are usually small to mid-sized innovative companies that disrupt the market with low-cost high-quality solutions that the larger competitors simply cannot match.
4 Transparency International, 2015, Defense Companies Anti-Corruption Index.
Africa AFRICA TRADING
OF BANKING IN AFRICA
Ms Foluke Aboderin Executive Director Ecobank Nigeria
Nigeria’s New President Muhammadu Buhari Sworn In
On April 9th of this year, Global Banking & Finance Review’s Phil Fothergill had an opportunity to discuss the future of banking in Africa with Ms Foluke Aboderin, Executive Director, Ecobank Nigeria. Ecobank aims to contribute to the economic and financial integration of Africa, and the sustainable development of the continent through the provision of innovative financial products and modern initiatives. Ecobank believes it has a responsibility to be socially relevant to the communities it serves. Africa is a changing and challenging continent, especially in Ecobank’s base, Nigeria, where the recent national election could bring about changes to the financial lifestyle of many.
Let’s find out a little more about Ecobank now if we may, and obviously let’s be topical. At the time of this interview, we’ve obviously just had a very important election in Nigeria. Muhammadu Buhari of the All Progressives Congress opposition party won Nigeria’s presidential election defeating the longruling Peoples Democratic Party and President Good luck Jonathan. How do you see that affecting the banking sector going forward? Before the election, and also because there was some delay (the election was supposed to take place on the 14th February but was delayed till March 28th. I believe a lot of the investors were worried that the election would have a problem, and would not go on very well. As a result of which, Nigeria was downgraded by the major rating agencies, and a lot of the investors that would have invested in Nigeria, more or less suspended their investment till the outcome of the election. I understand about eight billion dollars’ worth of portfolio investments actually left Nigeria on account of the elections and also on account of the falling price of oil.
Nigerian Presidential Elections
So now that the elections are over, successful, I believe a lot of the foreign direct investments would come back to Nigeria, and business will go on as usual.
Are you optimistic about the stability that hopefully the new government will bring and improve the situation for you, going forward? Oh certainly, because this is the first time in the history of Nigeria that we would have such a successful transition from one party to another, and also the fact that Nigerianâ€™s now know that their votes count. Before now there used to be a lot of election irregularities. So they say that it was a very very powerful message that was sent, and it just showed that democracy is at work in Nigeria, would hopefully have political stability. I think one of the first things the new government is going to focus on is security, especially in the northern part of Nigeria, the north-eastern part of Nigeria. I believe three states out of the 36 states in Nigeria have been affected by Boko Harem. This new government would have to spend a lot of time and also resources to ensure that security returns to that part of the country, and as such, continue to attract investment into the country.
The other area I believe this government, the new government, is going to focus on is also corruption. These are things that I believe Nigerians wanted a change, which is why we voted for a change. We would also have to look at the economy in view of the fact that oil, which is the largest revenue earner for the country has had some issues. The price of oil has fallen, and so a lot of economic reforms have had to take place so that the Nigerians would realise that indeed change has come to the country. It is obvious, isnâ€™t it, that politics affects the financial sector a great deal. What are the opportunities and challenges now facing Ecobank and indeed the corporate banking structure in Nigeria? For some time now, the corporate structure has been a challenge for us in Nigeria. Power is a major problem. Roads, bridges: major problem, ports as well. Itâ€™s estimated that Nigeria needs about ten billion dollars every year, for the next ten years, to catch up in terms of its infrastructural deficit. Now, that in itself which is a challenge poses
AFRICA BANKING opportunities of course. Opportunities for us to finance all these projects for the country. Now in doing that, we need long-term funding, especially in foreign currencies. Because a lot of these transactions would require foreign currency, typically. So the challenges represent opportunities for us as a bank, and the entire banking industry. However, we have to be able to source long-term dollar funding to finance these transactions. And of course, as a bank you are Pan-African; you are not purely based in Nigeria. What would you see are the main drivers for African trade and African growth? Ecobank indeed is a Pan-African bank. It is the bank with the largest footprint in the world. We are in 36 countries in Africa, and we also have a branch in Paris, France. Which is good, because it allows us to leverage on that network to provide banking services and development in the rest of Africa. Ecobank has been able to come out with a lot of products, regional products to facilitate trade and services within Africa. If you allow me, I can actually divide the type of trade that you have in Africa into two. First of all, you have the informal market, or informal trade, which is quite large. The informal trade I believe accounts for 40% of the trade. So you find a lot of people, goods travelling across various borders, and these things are done informally. And then you have the formal trade, where it tends to be documentary. Either these are opened, or bills analyzed. And that again, also you have the oil & the non-oil. So a country like Nigeria, that is the largest producer of oil in Africa exports oil to a number of African countries. Ecobank Nigeria is one of the banks that does a lot of the documentary trade financing for the export of oil across Africa. You also have a lot of goods, non-oil goods like detergent. UNILEVER, for example, exports from Nigeria into ECOWAS countries and vice versa.
So you see a lot of that going on within Africa. And of course, Ecobank is best suited to ensure that the trade is facilitated across Africa. What you have, you have various economic and regional blocks in Africa. You have what you call the UEMOA, WAMZ, you have EAC in East Africa, and you have SADC in Southern Africa. What essentially should happen is that all those trading blocs should actually integrate as one country. Because you see the Eastern African block trading with each other, southern African areas trade amongst themselves. But what Ecobank is doing in having affiliates in 36 countries is to ensure that we integrate the formal trade, and also bring the informal trade into the formal sector, all across Africa. I see what you mean, so you are trying to bring together the various diverse groups into a kind of cohesive operation? Correct. You also see a lot of Nigerian corporates, like Dangote, going outside Nigeria and the uniting countries, setting up cement factories and grinding plants and the like, and what Ecobank does is ensure we finance them everywhere in Africa that they’re in, so in that way it helps develop the whole of Africa. Let’s look at the requirements of your actual customers in the corporate sector. Presumably they have requirements. What kind of innovative products have you been able to introduce to actually give them the sort of services that they’ve been looking for? Ok, we’ve been able to provide regional trade financing. We analyze the bills, we’re able to link the importer and the exporter because the exporter would be the customer of Ecobank in one geography, and the importer will be the customer of Ecobank in geography, so we have been able to provide them with regional trade finance products. And because we know them in those two geographic regions, we’ve been able to facilitate them. We’ve also been able to provide our regional card, which means that any customer of the bank that is travelling
within Africa can slot in a card into an ATM and obtain local currency, as a means of facilitating small payments within these countries. Also, we have what we call the rapid transfer which enables you to receive local currency in another country, up to a maximum of $10,000. This again facilitates small time payments within Africa. Plus, for the corporate customers, we also have an electronic banking product, which is called OMNI. And with that enables you, the treasurer of a lot of the corporate customers to have an oversight of their accounts all over Africa. So for example if you are CFAO, or you are UNILEVER and there’s an original treasurer in say Côte d’Ivoir, you can see all your account balances in the various Ecobank affiliates just by using the system. It also enables the transfer of funds, subject to regulatory limits, from one country to the other.
Out of the 24 banks in Nigeria, Ecobank is number six. This is largely because we have been able to provide financing for a lot of the corporate and retail customers of the bank.
AFRICA BANKING So a lot of clever technology being used there. Iâ€™d like to ask you more now about the financing solutions for you clients, the services you provide for clients to help them with their financial challenges. Ecobank Nigeria has done very well in terms of providing long-term funding for a lot of our customers in the telecommunications, power, oil and gas, and agricultural sectors of Nigeria. So what we do is we provide local currency and foreign currency facilities to these customers, this could be in the form of product finance, it can be in the form of syndicated facilities, and it can be in the form of working capital. We have also been able to tap into certain funds which the central bank of Nigeria has in terms of concessionary funding for a lot of the manufacturers, and also the power and airline sectors of Nigeria. So our balance sheet is quite robust in Nigeria. Quite a competitive situation there, you mentioned 24 banks in Nigeria. And like everywhere telecommunications, which you mentioned a moment ago, and indeed the development of IT has become very significant. What kind of technical innovations have you been able to introduce to make your services more streamline? Telecommunications in Nigeria came in over ten years ago through the licensing of GSM companies, and it has taken off such that I believe the tele-density in Nigeria is now about 90%.
The more Nigerians with telephones, I believe there are over 130,000,000 subscribers in Nigeria, and we have fewer bank accounts. So what the central bank of Nigeria has done is that it has actually encouraged a lot of the Nigerian banks, including 78
Ecobank Nigeria, to actually start mobile banking services, such that you can bring in the unbanked into the financial sector. So that is one of the things that we are very active in terms of mobile banking within Nigeria, and we have a very robust IT platform, which is shared by the entire Ecobank group. We use flexcubeV7, and this is being upgraded very soon to Flexcube V12. We realise that telecommunications are going to be the area of play going forward. We see that a lot of the younger generation actually use telephones to make payments and to make a lot of their transactions. So we are in the forefront of ensuring that we have products and services that actually play to the young generation, theyâ€™re using the Facebook and Twitter, to ensure that we are able to catch the younger generation who will be the future of the country.
That wonderful world of social networking, of course, and how that can be integrated within the banking operation. And indeed, talking about the social situation: Socialeconomic development, what does Ecobank do to help that development within Nigeria? Ecobank group has Ecobank foundation; one percent of the profits of Ecobank group go into the Ecobank foundation to support CSR activities within Africa, not just Nigeria. As it is actually financed over 28 projects all over Africa in terms of education, in terms of health, in terms of capacity building, literacy, HIV, those sorts of things. Very recently Ecobank Nigeria partnered with a global fund, to support the principle recipients of the fund in terms of capacity building so that they know how to prepare their books. As such, it helps in terms of the Roll Back Malaria project, which the global fund has instituted into Nigeria.
POWER OF DATA The
Adding value in a new non-bank landscape
Daniel Verbruggen (L) Head of Relationship Management for Developed Markets, EMEA BNY Mellon Treasury Services’s
Dhiru Tanna (R) Sales Officer, EMEA BNY Mellon Treasury Services’s
Rapid advances in technology are causing a stir across the payments business, fuelling an influx of new non-banks entrants into the payments space such as online payments providers and social media companies like PayPal, Apple or Alibaba. These nimble competitors – riding the crest of the fintech wave – are offering solutions focused on meeting clients’ ever-growing expectations for speed and convenience. This transformation of the payments landscape not only means banks are facing a volume of competition never witnessed before – it also means they must adapt to an environment in which non-bank competitors have distinctly different means of approaching payments and innovation.
Non-banks and innovation Perhaps the most striking difference between banks and non-banks is that non-banks don’t currently need to hold a banking licence and therefore aren’t required to adhere to the same high regulatory standards as banks. These less monitored conditions can expose both non-banks and their clients to far greater levels of risk. For example, whereas banks undertake thorough KYC (“know your customer”) checks to ensure the party behind a transaction is recognised, such controls are typically lacking in the case of non-bank settlements. This puts banks at a clear advantage in terms of the level of security and reassurance they can offer their clients, particularly valuable assets when cybercrime is such a predominant threat to the industry and a key concern for corporates. Indeed, the World Economic Forum has recently predicted that cyberattacks could cost the global economy as much as US$3 trillion by 2020.1
Yet for non-banks, not being subject to the same standards of regulation as banks can also present distinct advantages. Separate from the banking industry, non-banks arenâ€™t exposed to the same cost pressures and resource absorption that banks are experiencing in order to achieve regulatory compliance. These new entrants can therefore dedicate a great deal of time and energy to the development of innovative products â€“ with their prime purpose being to design modern, technology-based propositions that meet the needs of todayâ€™s tech-savvy business leaders. And by advancing purely into the payments sphere, nonbanks have a very niche area in which to concentrate their innovation (banks, of course, have a far broader suite of financial expertise and solutions). Summer 2015
Furthermore, as newcomers to the payments sphere, non-banks don’t have existing legacy systems to consider, allowing them to innovate using a “clean slate” with the latest technology capabilities as the foundation for their systems. All these factors are enabling non-banks to create and evolve their payments solutions more swiftly than banks.
Non-banks and data The differences between banks and non-banks don’t stop there. The business model of banks and non-banks also differs significantly. While for banks it is the actual payment, and the service element of that payment, that makes up the core of their business, non-banks instead view obtaining information and data from the processing of payments as their key objective – i.e. payments are merely the enabler to non-banks’ business model. This is because often a significant portion of non-banks’ revenue derives from the selling of client information to third parties (usually for marketing purposes). Permission to pass on these details may be either advertently or inadvertently granted by users as part of the terms and conditions of subscription, in line with many social media business models (the ticking or unticking of a box, for example). Importantly, the fact that non-banks use information in this way enables them to offer payments without charge; something banks often cannot do.
The value of information As the payments space becomes evermore crowded, with non-banks vying to offer fast, convenient, complimentary products to entice technology-hungry customers, banks need to adapt their strategies and provide solutions that are relevant and attractive, allowing them to prosper in this new payments era.
With this in mind, banks must leverage the huge added-value potential that payments have to offer – both on a standalone basis and as part of the wider value chain in which they take place. This requires a reassessment of the way in which banks approach data. By using the vast library of information readily available within their systems, banks can use data mining and data analytic techniques to collect and evaluate extensive amounts of material, including metadata, in order to identify client payment patterns and preferences.
For example, they can recognise trends relating to the type of payment flow (commercial, trade or treasury) or destination (in terms of country), as well as intraday liquidity needs. Equipped with this greater awareness and understanding of client behaviour, banks can utilise such information to improve the efficiency and effectiveness of their own operations, including the prioritising of payment flows and proactivity regarding changing client payment trends. In addition, a better understanding of the credit and market risk of different clients and sectors can be acquired. As a result, banks can enhance their levels of client service and generate real added-value to their own business and that of their clients; for example, by highlighting opportunities for individual businesses to make cost and efficiency savings through the identification of common errors in payment requests. The benefits of such data-rich insights are evident – both from a banking and corporate perspective. Certainly, clients
are aware of the spectrum of value that raw data can offer to their business and, with this in mind, banks could provide further added-value by sharing industryspecific data and trends – market intelligence that can help enable clients to maximise their own business productivity. Any material shared would, of course, be normalised to ensure all information remains protected and confidential, as client privacy is paramount. This information could include the type of goods being purchased, the cost, payment method and channel, the countries from which goods are being bought and sold (intra- and inter-regional trade flows), trade processing methods, patterns relating to when particular goods are purchased, and the quantities – indeed, the information available within banking systems is extensive. To provide a specific example, banks could analyse the data of consumer clients making car insurance premium payments, such as the age of customers taking out insurance and details regarding car maintenance; valuable intelligence for insurance companies evaluating their own strategies (in particular, the pricing of their insurance premium). The surge of non-bank competitors into the payments space, while somewhat of a disruption to banks’ continued supremacy in the payments business, is also creating opportunity; encouraging banks to explore new strategies and view payments and data in a whole new way. And by leveraging the plethora of information already to hand, banks can generate true added-value that can help both them and their clients to thrive in this transforming world of payments.
Source: 1 www.gtnews.afponline.org/Articles/2015/Treasurers_Must_ Join_the_Fight_against_Cybercrime.html
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.
Only Ecobank gives you The Network Advantage CORPORATE AND INVESTMENT BANKING
Translating our local knowledge into business opportunity. Transacting swiftly and securely across 36 countries. Transforming Africa’s economies with landmark deals. That’s what we call THE NETWORK ADVANTAGE. For a corporate and investment bank that gives you the network advantage, talk to Ecobank.
Global Banking and Finance Review’s Phil Fothergill recently met in London with Mr. Olumide Oyetan, Chief Executive of Stanbic IBTC Asset Management to discuss asset management in Nigeria. Mr. Oyetan, welcome to London, thank you so much for coming to talk to us. Perhaps you could tell us a little more about the company and the areas you are responsible for particularly, the history, and indeed some of the challenges. I’d be happy to. So, Stanbic IBTC Asset Management is the non-pension asset management side of the business for Stanbic IBTC Holdings PLC. We are the subsidiaries of the holding company; it’s one of the end-to-end financial institutions based in Nigeria. We’re responsible for managing assets for corporates, which we call institutional investors, and also retail. We’re the largest provider of mutual funds in the country. Currently, we have about eight regulated schemes by the Nigerian Securities & Exchange Commission, and what we essentially do is try to do is to offer innovative products for clients to try to meet their investment objectives. Summer 2015
AFRICA INTERVIEW It’s a pretty broad ranging operation that you run. What would be some of the challenges, and indeed opportunities in running an investment institution in Nigeria? I think that the first major challenge that comes to mind is financial literacy or investment knowledge. And so most people understand a simple bank account, but when you try to explain what a mutual fund is, or why they should actually invest their money you run into a bit of difficulty. They’re a bit suspicious about the scheme, and trying to explain the whole concepts of mutual funds, especially on the retail side. And I think that has been the major challenge, we have close to forty thousand retail clients, and the objective is to try to push that to one hundred thousand as soon as possible. So what we find is that people who work in the formal sector tend to have a bit of understanding. However, for a country that has close to 180,000,000 people, there is still a lot of room for improvement. I think the total market size based on data from the Securities and Exchange Commission is about 250,000 people. Now, the opportunity that we see from that is that there is a lot of headroom for growth. We want to see that quickly grow to 1,000,000, and then as market leaders we also want to ensure that we get a sizeable chunk of that.
Acountry that has close to
Total market size 250,000* people
= Headroom for growth of 1,000,000 *based on data from the Securities and Exchange Commission
On the institutional space, we’ve been a bit successful in that regard. However, we still think that there is still a lot more to do. As the country is growing, and more people are going to the middle-class bracket. There is a lot of opportunity to tack into the savings pool in that regard. So companies run schemes for their staff as well. What we do is try to position solutions for those schemes. But the major challenge is to get out the education, create the right type of awareness, and also give people the required level of comfort that these schemes will run actually regulated, and not as ‘Ponzi schemes’ 86
In fact, you’ve just touched upon it. You’ve mentioned being a leader within fund management in Nigeria what do you think has led to that success? First of all, we are one of the early starters of a mutual fund, and I think our first scheme was back in 1997. That was the Stanbic IBTC Nigerian Equity Fund, so that is almost twenty years. The second thing is that the brand is actually quite strong, and people trust the bank, so we’ve built a pedigree in investment banking from a time back, and also asset management. So people get the comfort that we know what we are doing, and essentially we hold ourselves to very high standards as well. We try to ensure that we deliver on our promises and that we run a very decent operation, and that is compared to global best practice. So essentially that is how we’ve operated, and that has ensured that we are at the forefront. Part of it is that we’ve been quite innovative over the course of the years, and part of it is getting our clients to be able to access their information online, and in real time. Also, part of what we’ve also done is enabling them to maybe top-up their investments online without actually having to visit us. We also ensure that they can redeem some of their investments, a portion, on line as well. So we’ve tried to push that.
Part of what we are also doing is to use mobile phones because mobile penetration rate in Nigeria is somewhere near 73%, so we have over 100,000,000 people with mobile lines. And to ensure that for every micro savings scheme to try to develop products that will enable people to do that. So I think that the most important thing is just to ensure that you continue to provide relevant service to people, while ensuring of course that you give them sensible returns on their investment, which is essentially why they entrust you with their money in the first place Absolutely. And I think you really have given us a very good outline on some of the innovations you’ve bought in, and I was going to say what other innovations perhaps are there both for individuals and for large corporate organisations /institutional organisations. Is there anything you can add to that at all? For the corporates, part of what we are looking to be able to offer is going to be tied to the maturity of the financial system. For instance, you can’t short instruments in the Nigerian markets, but when looking into short selling, the Nigerian stock exchange is about to commence operation, they have piloted the phase. So we want to be able to ensure that we use some of those techniques to enhance returns, or perhaps even hedge for clients in some cases. Also derivatives and options are soon
Aerial view of Lagos, Nigeria
to be introduced, and part of what we do is to ensure we keep abreast because we think that those solutions would be very relevant for institutional investors. For the retail investors, we try to keep it simple and show that the investments that we are offering them are not too risky and that they also understand the risk of whatever it is. And that’s broadly between equities and fixed income products, and in various combinations. So the idea is that you state the risk clearly up front. So if you’re invested in equities you must have a long term perspective, and essentially as well you should understand that it will grow volatile in the short term. But over the medium to long term, you probably would get decent returns. I think essentially for the retail investor will continue to push to ensure that one we are at the forefront of educating and improving financial literacy, investment knowledge. Moreover, some of those things we will do in conjunction with other investment management firms, and there’s a fund management association of Nigeria, and also in conjunction with the regulator the Nigerian Securities and Exchange Commission.
I was wondering about that whole general scene in Nigeria that you’ve just mentioned. It’s obviously a very competitive market for your area of business, given the size of the country and the fact that it is rapidly developing. How do you ensure, given that competitive issue, that you always provide the best kind of customer service and experience for your clients? I think what we try to do is once every year we try to take a survey from clients: what are we doing well, what are we not doing well, how can we improve service? And we got a lot of feedback from clients. And what we try to do from that feedback is that we try to implement some of the suggestions. So at first, it was that we were not connecting enough, or not communicating enough. And so what we did is that on a weekly basis we send some sort of communication, some teaser, so simple things. You can monitor your investments from your mobile phone by logging in. Simple things, if you have trouble resetting your password, so just very basic things like that. The other thing we have implemented is called the Net Promoter Scores. Summer 2015
AFRICA INTERVIEW How likely are you to recommend us to a friend, a colleague, to family members, and also we get very interesting feedback. So in terms of customer service, what we’ve done is that we ensure that we are training the people at the forefront to be attentive and sensitive to client’s requests. We also ensure that we implement that, and this feedback goes right through the board reporting, to ensure that we are actually providing the best type of customer service. And we’ll take whatever feedback, sometimes it’s good and sometimes it’s bad, but the major idea is that when you look back you ensure that you’re actually improving over time. And I think that from the feedback that we’ve been getting, and also the client uptake, I think that we are broadly on the right track.
Which is excellent. Looking at a slightly broader aspect of that now, how much does Stanbic ITBC Asset Management contribute, would you say, to the socio-economic development of Nigeria? The group has a corporate social responsibility strategy. It focuses on health, education and economic empowerment, which is also broadly in line with Standard bank, the parent company’s, corporate social responsibility. I think the idea surrounding that is that you need to be relevant in the society that you are in. So health is a crucial thing. If people are not healthy, the productivity of a country actually reduces, and if they are not healthy, they can’t create wealth. Education also is critical; people need to be educated for them to make any degree of progress in the 21st century. We also do various initiatives where there are libraries in schools, or redevelop some schools or sponsor certain critical needs in that area. Economic empowerment has been relevant to the local community, whether it’s for villages, whether it’s a community. In some places access to clean water could be an issue, so you help in that regard. Sometimes it’s safety, for instance providing crash helmets to motorcycle operators that they use to transport people around the cities, because also what we have noticed is that in the daytime in Lagos the accident rate you find from people just not using crash helmets, because they are not aware or because they can’t afford it, it’s actually quite high. The general idea is that we’ve picked those three broad areas that we think it’s relevant in the society in that we operate in, and we believe they are making an impact and we see that everybody is the better for it. And without even being cynical, it seems from what you’re saying that goodwill does eventually lead to good business as well, so it’s good in both ways? Absolutely. The evidence we’ve seen reinforces that. And looking ahead to the future, how do you see the next few months and the rest of 2015 shaping up for the business? I think we are quite excited. The political race was a big issue, leading up to March we had a smooth transition. Between January and March people were very cautious about investing, but we’ve had a smooth election, and the transition and handover will take place later this month. We think that investments will start to grow very strongly. Foreign portfolio investments and foreign direct investments will definitely be on the rise, I think. Also, as Nigeria has emerged as the largest African economy, we see a lot of opportunities in that regard as well. So we’re very confident, very excited. We think that our assets under management will likely grow quite dramatically within the course of the year into the next year as well. And we’ve seen a lot of interest, from even foreign institutions trying to tap into the potential growth in that area, so we’re very confident that the future looks bright.
IT cross charging
Are the returns enough to justify the effort? Organisations are often unaware of whatâ€™s driving the resources and costs tied up in IT, and when looking to make cost savings, they typically look to the more direct costs invested in the business. Now, times are changing, and organisations are beginning to recognise the costs associated with IT and software services, and the days of the bottomless IT budget are most definitely over. The primary driver behind software asset management (SAM) nowadays is clearly cost avoidance, through better-informed software license procurement. As well as achieving hard cash savings by better negotiation of vendor license agreements and re-harvesting software licenses rather than buying new all the time, another plus point for SAM is the ability it offers to cross charge IT services to an organisation, based on cost of ownership, number of installs and general usage levels.
SAM data forms the essential ingredient in a cross charging policy because it helps to isolate exactly how software and other IT resources are being utilised. There are a number of practical considerations to take before deciding whether to implement cross charging or not. For instance, what do you re-charge and how? Is it just an internal financial management exercise? How can the true internal cost of software applications be understood? And how can plans for the future be laid to accommodate inevitable organisational changes?
JelleÂ Wijndelts Professional Services Technical Account Manager Snow Softwareâ€‹ 90
AFRICA TECHNOLOGY Understand the psychology of software ownership One of the most difficult aspects to overcome when beginning to think about cross charging is the potential political and emotional impact on an organisation where individual business units ‘owned’ software and were formerly even responsible for purchasing their licenses. Of course ‘owned’ is a relative term because ultimately the software ownership lies with the company not the individual, nevertheless, the psychology of having to ‘give something up’ and then get ‘charged’ in the future whenever software is needed, is not always straightforward to overcome.
How can a pricing model be structured? From experience, there are several ways pricing levels within cross charging policies can be structured. These include the following:
This is based on the recovery of costs associated with the provision of services.
Before embarking on this journey, organisations must ensure internal agreement between departments is in place, clearly define what needs to happen, make sure it is possible to measure installs or usage and report on them.
Then decide what costs they are going to re-charge. Will it be the license cost plus operating cost, or license cost only?
Each department within an organisation typically has its own budget, and part of this needs to be allocated to the cost of running IT equipment, software, and licenses, etc. A SAM tool will track the software installed, and software actually being used, and with this information it is then possible to measure exactly what departments are consuming and charge users accordingly. For example, if the sales department all have access to the CRM system, they get charged for it. The system used to provide the data should be flexible enough to change at a moment’s notice, in the event of the user’s requirement changing.
Mirror cross charging with financial operations It is also important to ensure charging policies reflect both the existing organisational structure and the way financial departments work. It sounds obvious, but this is a common mistake to make because the IT landscape is completely different to the worldview that finance tends to have. In addition, charging must be linked to controllable aspects for customers (users) as they may wish to alter their behaviour (usage) of services based on any charges incurred. The last thing to consider is how a cross charging policy will respond to inevitable structural change. Whilst the current financial organisation needs to be reflected in a cross charging policy, it also needs to be flexible enough to change as the company changes.
This is essentially the cost price plus a percentage markup value
Here a charge is derived based on the way other departmental services are recharged.
This is the price that would be charged by a third party provider if the service of software provision were to be outsourced.
This is an independently agreed price, which is based on the actual use of services.
What’s the final verdict? Shall we or shan’t we? So is cross charging worth the effort? In my opinion, the answer is ‘yes’ and there are multiple benefits. These include the ability to have greater control of costs, and implement software reharvesting. However, don’t underestimate the work that needs to be done to get there and effectively implement cross charging, there is the potential emotional and political impact to consider. It is also essential to have both a SAM platform and efficient SAM processes in place to be able to track with accuracy the software installs and usage, making sure your organisational structures are easily identifiable. Ultimately, even if the final result is simply the capability to exchange ‘wooden dollars’, it serves a purpose by highlighting both the contribution made by IT to individual departments, and the extent to which they are utilising IT resources within the organisation. It is a way to justify the existence of IT as a vital support function and effectively create a ‘cost neutral’ department. It merely becomes a matter of weighing up whether the total cost of implementing cross charging will outweigh the benefits. Summer 2015
Customer behavior and demands are making banks introduce multiple channels of banking as well as innovative products to encourage the growth of cashless banking.
BANKING INNOVATION IN
Daniel Asiedu, Managing Director and Chief Executive Officer of Zenith Bank (Ghana) Limited spoke with our Editor Wanda Rich about the competitive banking industry in Ghana and the innovative solutions being created to meet customer needs. How do you view the banking landscape in Ghana? What impact are regulations having? The banking landscape in Ghana has become increasingly competitive with 29 banks in the country constantly developing new products and services to win and maintain customers. Banks are therefore under pressure to differentiate themselves in innovative ways to keep ahead of the pack as well as ensure they are optimizing their value propositions to the customersâ€™ business.
Daniel Asiedu Managing Director and Chief Executive Officer Zenith Bank (Ghana) Limited
The Regulatory framework in Ghana is not much different from those across the banking industry worldwide. As such, its impact is quite positive as it seeks to redefine and enhance the way we do our business. For instance, strict compliance and anti-money laundering regulations require banks to pay much more attention to their KYC obligations and put in place enhanced mechanisms to monitor transactions. In addition, tight fiscal policies also require banks to take a much more rigorous approach to managing risk and liquidity issues. Summer 2015
AFRICA INTERVIEW What are the biggest challenges and opportunities you see in the corporate banking sector in Ghana? In recent times, the economy has proven very challenging for our corporate customers. The energy crises, the rapidly depreciating cedi coupled with the inflationary environment have led to increased overheads and reductions in customers’ sales. Corporate organizations are now under immense pressure to restructure and re-strategize in order to cope with these challenges. On the other hand, Ghana does provide several opportunities for investors in spite of the challenges aforementioned. The country continues to be the destination of choice for investors given its stable democratic environment and favorable investment policies. The wide infrastructure gap also provides an opportunity for companies in that sector to grow their businesses substantially. The IMFs involvement in resolving the economic challenges also means that with some more fiscal discipline the economy could come back on track and opportunities would open up for businesses.
The energy crises, the rapidly depreciating cedi coupled with the inflationary environment have led to increased overheads and reductions in customers’ sales
In what ways does your corporate banking division assist clients in managing their risk and enhance their revenue? Some of the major financial risks that our corporate customers face are the interest rate, liquidity, and foreign exchange risks. Zenith Bank has a well-structured corporate banking division with highly trained and qualified professionals who offer advisory services as well as provide structured financial solutions to help mitigate these risks. Advisory services focus on cash management solutions, trade-related transactions, tailor-made credit facilities and other pertinent aspects of banking services in an effort to add value to our customers’ businesses, lower their costs and increase their revenues. The Bank also has a suite of risk and treasury management tools for customers such as automated sweeping interest bearing call accounts, competitive financing rates and derivatives such as FX Swaps and Forwards are available to reduce our customers’ Forex exposure. Furthermore, the Bank’s operating system incorporates several processes geared towards reducing the risk of fraud on our customers’ accounts. Cash transactions are closely monitored for any suspicious activity, and our e-business solutions have robust security safeguards in place to prevent any fraudulent activities. We also leverage on our relationships with other non-bank financial Institutions, such as insurance companies, to provide services for our customers at very competitive rates, thereby ensuring we add value to our customers business. How are customer behaviors and the increased movement towards cashless transactions changing banking in Ghana? Customer behavior and demands are making banks introduce multiple channels of banking as well as innovative products to encourage the growth of cashless banking. The benefits of convenience, security, reduced costs, speed, are associated with cashless banking have made banks and customers realize that this is the way to go. Therefore, banks have introduced a myriad of products such as ATMs, Point Of Sale terminals, Internet Banking, Mobile Banking, Cards, B2B services, in recent times, to suit the evolving demands of customers to meet their banking services. With technology playing such a significant role in banking, how is Zenith Bank meeting the challenges of IT development? Zenith Bank prides itself in being a leader in the provision of e-banking products and services having been at the forefront of using robust IT platform to drive banking products and services across the Ghanaian banking industry. Summer 2015
AFRICA INTERVIEW Other notable awards and achievements are:
2014 Bank of the Year Ghana The Banker Awards
2013 Best bank in customer care Ghana Banking Awards
2012 Best Bank, Corporate Banking Ghana Banking Awards Winner – Trade Finance Deal of the Year Ghana Banking Awards
2011 Most Socially Responsible Bank Ghana Banking Awards
2010 10th Ranked Company Ghana Club 100
The Zenith Group as a whole has an IT team of over 300 staff members who are constantly developing products to serve its customers better. The Bank’s strong product development, IT and e-business teams work together to deliver value-added services and products for our customers. The Bank has also invested heavily in IT infrastructure over the years and continues to do so to ensure that we can provide cutting edge solutions and keep at the forefront of the banking industry. Customer relations play a significant role in banking, and Zenith Bank has always been at the forefront in providing exceptional customer service. What recent initiatives have you incorporated to ensure customers continue to receive the best customer experience available? Zenith Bank’s culture of service excellence derives from its vision, which is “to be a reference point in the provision of prompt, flawless and innovative banking products and services in the Ghanaian banking industry.” Customer service delivery is a key tool the bank employs in an innovative way to differentiate itself from peers and also add significant value to our customers and their businesses. The Bank has over the years found innovative ways to serve its customers. For instance, it employs the use of service ambassadors in the banking hall floor to provide a personal touch, interact with customers and assist with transactions or enquiries. In addition, the Bank launched a state of the art Contact Centre and Facebook page as an expression of its commitment to service excellence through providing enhanced interactive mediums for connecting with its valued customers. Furthermore, the bank continues to leverage on its robust technological platform to provide quintessential service delivery for its customers using various e-channels as well as branch and personal banking where we employ our relationship management model, all in a bid to make banking easier, faster and better than anything our customers have ever experienced.
The Bank’s focus on excellence in customer service was recognized during the Ghana Banking Awards as it won “Best Bank in Customer Care 2013”. What are Zenith’s plans for the future? We are committed to delivering the right strategy, business mix and culture using the best people to drive continued growth and take advantage of the opportunities in the marketplace. We want to be the best in all parameters (especially, customer service delivery) in the very dynamic industry we operate in, an objective shared by our dedicated staff. The brand is living up to the meaning of its name, Zenith, and becoming stronger and stronger each year.
2008 Bank of the Year Ghana Banking Awards Best Bank Financial Performance Ghana Banking Awards
As we celebrate our tenth year of operations in Ghana this year, we look into the future with conﬁdence and a deep sense of appreciation of the tremendous opportunities ahead of us. We are proud of our successful track record of balancing the interests of our stakeholders i.e. shareholders, customers, employees and the communities in which we operate in. We have built a strong foundation of integrity, trust, and ethical behavior in our businesses. This foundation will serve as a springboard into the next decade where our operations, as well as our commitment to stakeholders, should extend far beyond taking deposits and giving out loans. Summer 2015
Thanks to you our customers FDH Bank has been awarded “The Best Retail Bank” and “The Best SME Bank” in Malawi by Global Banking and Finance Review for 2015. Be part of an Award Winning Bank!!!
Grow With Us
Acquiring Success By Colin Price, Chairman, Co Company
The first quarter of 2015 saw the highest levels of global mergers and acquisitions (M & A) activity since 2007, but is that cause for optimism in a recovering economy? We all know that most mergers destroy value – 70 per cent of them, in fact: think of RBS’s takeover of ABN Amro in 2007, which left the former with cash reserves so low that it forced a Governmental bail-out. Only two years earlier, Kmart acquired Sears for a cool $11bn, only for share prices to drop by more than 10 percent over the following five years; in the same year, eBay bought Skype for $2.6bn – but couldn’t sell it off quickly enough for just $1.9bn a scant four years later.
So if you’re considering a merger for your own company, how can you ensure you’re in the minority of successful examples? Of those that fail, nearly a third do so because the entire exercise was a bad idea to begin with, supported by little to no industrial logic. The classic example of that has to remain AOLTime Warner, but more recently HP’s acquisition of Autonomy made a run for the crown. Such failed attempts are often motivated by a fruitless search for scale or, worse, a leader who let ambition outstrip common sense. That’s a whole set of challenges in its own right, but for the purposes of this article, let’s concentrate on the more immediately fixable two-thirds plus: a good idea that was put into practice poorly. Summer 2015
AFRICA BUSINESS A 70 per cent failure rate is daunting, but actually surprisingly common in other areas. It’s roughly the same for new products and innovations, and for new market entries. M&A’s tend to get a lot more scrutiny and attract greater criticism when they go wrong because of the higher stakes involved.
So, when poor realization of the acquisition was the culprit for failure, where does implementation fall down? Typically it’s one (or more) of three issues: 1. Unresolved power struggles at the top, for example that between Juergen Schrempp of Daimler and Robert Eaton of Chrysler, which two years later resulted in the latter’s ousting and the former’s declaration that the ‘merger of equals’ was in point of fact a takeover by stealth. 2. The acquirer ends up destroying the very values that made the target attractive in the first place. Consider France Telecom’s acquisition of Orange: it was unable to capitalise on the attractive brand qualities of its target. 3. The moment the acquisition is announced, the best people in both the acquiring company and the target company head for the door. This is exemplified by P&G’s purchase of Gillette 10 years ago, where seismic changes to the target’s remuneration scheme, entry level-only recruitment practices coupled with explicitly stated slower career growth opportunities, and too much overlap in responsibilities at similar job levels resulted in the loss of a good deal of talent.
These factors certainly pose significant challenges, but they are not insurmountable. There are a number of practical steps that can be taken to mitigate the risks to your own post-acquisition implementation. Start by building the team at the top.
The importance of preparing well for the close of the deal cannot be overstated: what you do at the beginning sets the template for everything that will follow, so no matter how great the temptation to put this off and cope with ‘more’ urgent concerns, it must be resisted.
And the new entity’s top team is the ultimate template. It is the first impression the outside world will have of the new company and its future prospects, which means it must embody every aspect of what that company’s success will look like. Its members need to trust each other, and need to work well together; if they don’t sooner or later the acquisition will fall victim to ego clashes and internal politics. This possibility needs to be eliminated before the deal closes. Next, you can aim to both start and finish the integration as early as possible. Of course, the legal and regulatory processes surrounding activity are limiting by dictating that you cannot act as a single business until you are a single business, but that’s not the same as doing nothing. You can still set to work on designing the new joint company’s culture, agree the process for selecting future leaders, efficiently organise the exchanging of publicly available data in ways that optimise their analysis and actioning. You should also look to identify and set goals for the team that will head up post-close integration, together with key milestones and timelines. The point is that pre-close doesn’t mean you can only concentrate on the financial process without contravening due process! Finishing early means moving fast: you need to get a strong integration management office in place with rigorous processes underpinning and supporting it. While all that’s going on, it’s important to explain things – in detail – to all your stakeholders, from customers to employees to shareholders (of both companies).It’s not enough to ‘keep communication lines open’.Indeed, it’s not enough to ‘over communicate’: the acquisition story needs to become part of the overall corporate story of the acquiring company, and it needs to be told not just in words, but in actions, on an ongoing basis. Making the who and why of an acquisition clear to all should be basic housekeeping and it’s unforgivable if it’s not. Keep those messages loud and clear, and layer on top of them the messages of what will happen next and how the merger will affect each stakeholder group. If you think that sounds like the ‘soft stuff’, think again: if only a small percentage of your customers leave because they don’t understand how they’ll benefit, the synergies will evaporate. Another thing it’s critical to keep on top of during the process is the core business. Only rarely do the synergies of acquisition amount to more than 20 per cent of the profits of the merged entity, which means 80 per cent still comes from the ‘old’ business: it deserves your attention (though the good news is that you should already be an expert at that if you’re in a position to be acquiring somebody else). Summer 2015
Zenith Bank Ghana Limited
Colin Price, Chairman of Co Company, a strategic consultancy that helps businesses to create and sustain performance over the long term through a focus on organisational health. Finally, you might have noticed I’ve used the word ‘acquisition’ almost exclusively thus far, dropping the ‘merger’ part of M&A; don’t merge: it’s a fallacy. There can be no such thing as a ‘merger of equals’, no matter whom it pleases to say there is. Take the best available processes, people and products from each entity and move forward with these. Ultimately, what you’re shooting for is a ‘healthy’ acquisition, i.e. one that not only achieves the predicted synergies but also goes beyond that to create a much stronger underlying business, where the acquisition itself is a trigger for transformation and improvement.
Why is a ‘healthy’ merger important? Think about the financial sector today: many banks have grown to their current size through a series of acquisitions. Now, they’re downsizing as they ‘enjoy’ the contradictory position of being simultaneously too big to fail and too big to lead – witness Lloyds, Barclays and Credit Suisse, all of which are currently reducing their investment banking arms. These are archetypal examples of acquisitions that delivered short-term synergies and impressive results only to become long-term liabilities.
Of course showing short-term visibility of the achievement of project goals is vital in maintaining investor confidence and building momentum towards value creation. But concentrating on the short term to the exclusion of longer-term organizational health is like jettisoning your food for a burst of speed on the first day of a round-the-world race. A healthy merger will see improvements in multiple dimensions, such as operating and financial performance, business and technical capabilities, the strength of stakeholder relationships, corporate culture, the pace and focus of learning, and the ability of the company to renew and enhance its strategy. So, yes, the fact that global deal-making is off to a fast start this year is a promising development, but it’s not yet time to break out the bubbly: absolute numbers of M&As are not as important as the numbers of successful ones, and where that number ends up still leaves everything to play for. There’s a lot to balance in order to get it right, but it is possible for the majority of acquisitions to be successful (look at WPP and GE for inspiration).Do that, and you’ll have an acquisition that stands up to the harshest scrutiny years after the event, with a corporate and professional legacy to match. Summer 2015
Jennifer Hansen Head of Institutional Business Saxo Bank Saxo Bank provides institutional clients and their end customers with instant access to the global financial markets. Jennifer Hansen, Head of Institutional Business at Saxo Bank explains how it all began and what the future looks like for institutional trading. How did the institutional business come about in the early 00’s? Saxo’s Institutional traction began in 2000, following the initial launch of the SaxoTrader platform two years prior. There were early attempts in the stock market where you could see it made sense to bring trading online, but at that time foreign exchange was an opaque business where there wasn’t really any clear accessible pricing. That meant it was pretty difficult to trade foreign exchange unless you had a strong feel for where the market was. The two founders, Kim Fournais and Lars Seier Christensen thought that was detrimental and sought to democratise the market and spread it further to private investors by having a
more transparent online service that could handle smaller trades and give better pricing for customers. Retail made up a tiny proportion of the foreign exchange market when Saxo first launched and no-one really thought much about that sector. A handful of large financial institutions approached Saxo two years after the original SaxoTrader was launched. They were interested in both Saxo’s trading technology and the services built around it. These banks and brokers were developing their strategies for online trading, recognized the challenges, and Saxo became the natural partner for upgrading their trading technology. This was the start of one pillar of Saxo’s Institutional business – White Labeling - where full service Banks, Brokers and Private Banks use Saxo’s technology and services for part or all of their online trading needs. The key to growth in the White Label business is Saxo’s ‘one bank one platform’ strategy – where all technology development occurs through a single unified team and over half the employees are engaged in improving the technology itself. Summer 2015
We have also introduced an enhanced service model for Institutional clients – from three centers of excellence - London, Copenhagen and Singapore.
Corporate Headquarters for Saxo Bank, Copenhagen
This a core tenant of Saxo Bank, and a different business model than many large financial institutions. The second pillar of the Institutional business is working directly with institutional counterparties – our Direct Institutional Business - including fund managers, financial advisors and professional traders. Clients within this segment have very specific needs and higher requirements in terms of product breadth (market access), depth and liquidity. Here, the core tenant of Saxo is specialisation – where Saxo has dedicated product teams aligned to clients seeking platform trading, FX PB, and API solutions. 106
Can you provide status on Saxo’s institutional business? Saxo’s Institutional business now represents 40% of the firm’s total, with growth in both segments. Client demand for White Label solutions has grown in recent years – as ‘build vs. buy’ has taken new strategic urgency. Banks, brokers and private banks are increasingly choosing the latter in order to upgrade legacy technologies in an increasingly complex trading environment. As a result, Saxo has been making a number of strategic investments to enhance our white label offering – including new instruments and mobile applications.
These developments allow financial institutions to effectively service their clients by using Saxo’s trading platforms, trading infrastructure and broad suite of back-office services. Client demand from Direct institutional clients has also increased, due to shifts within the financial services industry. Global banks and brokers are increasingly focusing on the largest of clients – making the economics and complexity for newer fund managers more difficult. Saxo is a natural counterparty to these new entrants – who are seeking efficient trading, FX prime brokerage, risk management and client reporting.
EUROPE TRADING Within Saxo, we are strengthening our Global Sales team and reach across jurisdictions, installing specialists by client segment and asset class. We have also introduced an enhanced service model for Institutional clients – from three centers of excellence - London, Copenhagen and Singapore. In these locations, we offer clients access to a dedicated Prime Services team for post sales account management and Global Sales Trading for product excellence. How has the institutional business grown in the last year? The industry trends and strategy I just outlined above is translating well across financial metrics. The number of trading clients improved 19% over 2013. Asset under Management from Institutional clients increased 45 per cent, and trade volume was up 110 per cent. How do you expect Saxo’s institutional strategy to evolve over the coming year? We spent significant effort in 2014 to align product development and our client facing organization to the industry trends; I highlighted above. This year is all about our Clients – specifically delivering the best product and service for our Institutional clients. I believe we are at the tipping point on White Label solutions. It is very clear that cost pressure and the complexity of trading technology means that banks will continue to look beyond in-house solutions to companies like Saxo to outsource their trading technology. That Saxo has worked together with over 100 banks and brokers in this capacity for over a decade makes us a very unique provider in this space. For Direct institutional counterparties, we need to ensure that the entire organisation is continually raising standards Institutional clients expect – which is all about specialisation and depth. Our strategic pillars remain innovation, multi-asset market access, liquidity provision, risk management and high quality service for all of our clients.
How are industry and regulatory drivers impacting Saxo’s institutional business? There are three drivers in financial services impacting Saxo’s institutional business.
1 2 3
The first one is the regulatory, specifically the cost and complexity of the overall business. All players in the financial services industry are more clearly defining what is core and non-core in their overall model – translating to increased outsourcing.
The second driver is the overall decline in profitability, which has partly to do with regulation, and partly to do with market efficiency – translating to scale and speed of technology development.
The third and most important driver, however, is the shift to the next generation of customers who are more technologically savvy, have more choice and better access to information than ever before – which again translates to technology at the core.
Why has the market seen a trend of white labelling trading technology? If you look back ten years or more, the technology ‘build vs. buy’ decision was clearly biased to the former across the financial services industry. External providers were seen as costly – either in direct cost, time to market or integration complexity. The overwhelming response was to build internally. Today, we see the reverse. Banks, brokers and private banks are outsourcing to providers that can maintain and enhance specialized technology, ultimately at a fraction of the price to constantly upgrade and maintain their network of proprietary platforms. In the case of Saxo, we provide a turnkey trading solution, allowing our partners to focus resources on their core businesses. As we were very early to focus on white labelling, we have significant experience facilitating this transition for clients, and hundreds of case studies of what works and what doesn’t. Clients engage Saxo to gain from those learnings.
What does the future of trading look like? Trading, like all technology driven businesses is about innovation and execution versus peers. If you look at successful tech businesses, such as Apple, their competitive edge has been creating new products and services that customers didn’t even know they needed. In the financial services industry, this issue is particularly acute where the next generation of traders has quite different demands than the generation prior. Data, devices, real-time reporting that were one nice-to-have are considered must-have. Each element is complex individually and certainly as an integrated solution. The fact that Saxo started and remains committed to: ‘one bank, one platform’ – makes all of us at Saxo optimistic that our relevance within the financial services industry is only set to increase. Thank you. Summer 2015
Biometrics in Banking: Making a Breakthrough? Tony Virdi VP of Banking and Financial Services in the UK & Ireland Cognizant
Since Apple launched the iPhone 5, interest in biometrics as security has surged as consumers have become more and more accustomed to using the technology. With biometric technology in passports now commonplace and already being used on devices such as laptops, for several years, it is understandable why it is becoming more acceptable in our day-to-day lives. According to a survey by Deloittei, 72 percent of smartphone users support the use of biometric identification, such as fingerprints or eye scans, to enable a mobile device for financial transactions. This level of acceptance is encouraging financial services to incorporate biometrics into their security policies relative to customer experience journeys more than ever before. Today, UK banks like Barclays, RBS and NatWest are already offering customers biometric authentication for access to mobile banking services, while the technology is also used around the world for ATMs, internet banking via laptops or desktops and in branches to boost security, provide faster in-branch banking, and improved customer service. Barclays has become the first UK bank to launch scanners that identify customers by their fingers’ unique vein patternsii to secure their internet banking. Biometric finger vein readers will be offered to corporate clients in 2015 followed by retail clients, enabling them to access their online bank accounts and authorise payments quickly without the need for a PIN number or password. 108
Biometric authentication is also seen as an important new feature in ATMs, allowing customers to access their account and withdraw cash without using a card. In the long term, widespread adoption of this technology could eliminate the need for ATM cards, creating huge cost savings for banks. In Japan, there are currently more than 80,000 biometricsenabled ATMs with over 15 million customers using them. Additionally, Turkish Işbank rolled out the largest biometric ATM network in EMEA, implementing 3,500 biometric ATMs equipped with finger vein scanners. What’s more, Chip and Pin card authentication services are on the decline, which will also impact multiple industries and business processes. It is clear that the potential to improve the customer experience as well as provide an additional method to address problems of identity theft and fraud is huge. Recent projectionsiii indicate that the implementation of new biometric technologies in the banking industry have the potential to cut a financial institution’s operational risk by at least 20% over the next 10 years as the technology becomes more pervasive. Cost savings will follow. That is quite an incentive for banks to get on board, and according to the Biometrics Research Groupiv, revenue for the use of biometrics in the global banking sector will increase from US$900 million in 2012 to US$1.8 billion by the end of 2015. However, it is not just biometrics using fingerprints or veins that are experiencing more adoption: by incorporating voice and speech recognition tools, as well as GPS technology, banks can also enhance the speed, accuracy and quality of identifying customers and location-based services that they offer. Some banks are even exploring how to use a person’s heartbeat as another unique identification metric. Beyond customer-facing technology, financial institutions, along with many other types of businesses, are looking at how deploying biometric technologies can control access to secure buildings or, for example, key areas such as data centres, which could be the source of potential attack.
001001 100010 10 0010 111000 001 100 01010101 010010100 10 0101 11 00001 01000 110101 100001010 01000 00 110 01010 0010 00 0 1010 000 0100 000001001001001 101 01001 001 00110 101 0001 00001010000010 0 The ability for organisations to register their employees or members on a biometric system offers increased security and reduces administrative issues and costs related to creating staff key cards. It also increases efficiencies as users no longer need to carry additional passes or remember a series of passwords. Crucially, with biometrics able to identify an individual, the risk of fraud and password sharing is eliminated.
For example, with the launch of Apple’s iPhone 6, the company suggested that it is not worth stealing the phones, given the biometric identification and relative impossibility to break into a stolen device. As the technology evolves in the years ahead, it is crucial that these newer automated systems are developed carefully, so that we can build confidence in them and set a path to a more secure, more efficient future. Most businesses will not blindly commit to biometric identification solutions. But with greater adoption the potential benefits – a simpler, safer customer experience that can also bring cost savings and efficiency gains – make a very good case for financial institutions to explore the possibilities. Biometric technology looks certain to be an important component of how the banking sector addresses both customer service and security. Source: i www.biometricupdate.com/201405/deloitte-survey-finds-biometrics-welcomed-for mobile-consumer-banking-apps#_blank
www.scribd.com/fullscreen/249699706?access_key=key- ktcPSYK1EqY4gRQKGjZU & allow_share=true&escape=false&showrecommendations=false&view_mode=scroll#_blank
Tackling evolving banking regulation If Salvador Dali painted a picture depicting current banking regulatory landscape, it would probably be of an endless, multilane motorway with each lane at different stages of construction. Yet unlike in real-life, there will be cars, or the banks, along the motorway â€“ whether the lane has been physically built or not. In other words, while regulatory reform has clearly moved from design to implementation, not all the details are in place. The banks are at different stages of implementation and business model change.
Regulatory change â€“ regional divergences
2015 2014 2013 2012
43 North America
19 28 29 30 31 ASPAC
32 33 LATAM
The flow of new regulatory initiatives at times seems both undiminished and overwhelming. In most areas however, there is at least now a clear direction of travel, and in many areas sufficient details, to enable banks to up the pace of their own journeys to a viable and sustainable future. The past years have been a difficult and troubled time for many banks as they struggle with regulatory and economic pressures. The regulatory pressures are too long a list to repeat here, with capital, leverage, liquidity, recovery and resolution planning, capital markets, retail and wholesale conduct, governance, board and senior management responsibilities, and data quality all high up on the list. Overall, regulatory pressures have risen again this year. In some areas this reflects the challenge in implementing regulatory reforms as detailed the detailed consequences emerge and often turn out to be more complicated than anticipated. Note: 1 The regional numbers are the sum of the scores in each region across the ten individual areas of regulatory pressure. 2 Mexico is included in the Latin America data. From 2011 to 2013 the global pressure index is the unweighted average of the indices 3 for North America, EMA and ASPAC. In 2014 and 2015 the global pressure index is a weighted average of North America (one-third), EMA (one-third), ASPAC (one-sixth) and LATA M (one-sixth). 4 Data for LATA M is only available for 2014 and 2015 Source: KPMG Internal Survey, 2015.
Low Regulatory Pressure
5 High Regulatory Pressure
Mapping regulatory pressures We recently benchmarked the different regulatory pressures facing banks in each region and the regional divergences make particularly interesting reading. Across the regions, the steady increase in regulatory pressure on banks in the Asia-Pacific region has continued, particularly in liquidity and retail and wholesale conduct. However, pressures remain highest in North America and Europe, with the most severe pressures in the areas of capital, systemic risk, conduct and culture, and the intensity of supervision. The highest regulatory pressure in Latin America is in the areas of financial crime and tax.
The global pressure continues to grow 2011
EUROPE BANKING 2015 2014 2013 2012 2011
There are a number of key issues within the individual areas of regulation:
US & Canada
Capital – even as the core Basel III standards are being implemented, the shift towards ‘Basel IV’ continues, with the calibration of the leverage ratio either set higher than 3 per cent (as in Switzerland and the US, and proposed in the UK) or yet to be determined, and new pressures on banks emerging from stress testing and from wide-ranging revisions to risk weighted assets. Liquidity – further revisions to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) calculations have, on balance, reduced the pressures here, in particular in Europe through the more generous treatment of covered bonds as a source of high quality liquid assets. However, as with capital requirements, the overlay of stress testing (already underway for the largest US banks), Pillar II and macro-prudential requirements for liquidity may increase the regulatory pressures on banks significantly. Systemic risk – increasing pressures, in particular in Europe, are building from the designation and regulatory treatment of D-SIBs, minimum requirements for banks to issue long-term bail-in liabilities, and the increasing use of macroprudential instruments. Culture and conduct – a series of misconduct episodes in retail and wholesale markets has left banks and regulators seeking to improve conduct and culture. Regulation and supervision are becoming increasingly intensive and intrusive in this area. Supervision – in addition to the generally tougher supervision that has emerged in all regions since the financial crisis, making the European Central Bank the single banking supervisor in the Banking Union area has already led to a more demanding supervisory approach for many banks subject to direct supervision by the ECB.
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ACCOUNTING AND DISCLOSURE
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CULTURE AND CONDUCT
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US & Canada
FINANCIAL CRIME AND TAX Summer 2015
EUROPE BANKING Reinforcing business models For too many banks, the journey to date has focused almost entirely on meeting new and tougher capital, leverage and liquidity requirements through some combination of deleveraging, retrenchment, earnings retention, and where and when possible raising new equity. This may have enabled these banks to meet immediate regulatory requirements. But following this path does not represent a strategy for a viable and sustainable future. This has been evidenced by the fact that many banks continue to have low return on equity and are not recovering their cost of capital. In the UK, our bank benchmarking report, which analysed the annual results of the top-five UK-based banks, revealed that none of the banks achieved a return on equity higher than 8 per cent. In the Eurozone the position on profitability is more difficult. Banks must look beyond simply meeting regulatory requirements if they are to achieve satisfactory returns. This requires a strategic focus on their customers, business model and risk appetite, legal and operational structure, funding structure, IT systems and data management. Without this, banks will come under increasing pressures from shareholders and other stakeholders. We are beginning to see early signs of supervisory pressures here, as supervisors combine their growing interest in business model analysis with concerns about the impact of unviable banks on the profitability of the rest of the sector. Banks therefore need to take more wide-ranging and more radical actions than managing down and de-risking their balance sheets. One key action is reducing costs as income continues to fall as a result of banks pursing less risky activities. It is remarkable that the cost to income ratio has risen across banks in Europe in recent years while falling in banks in other developed economies. Another is re-pricing, to restore or boost margins and returns on assets. A third is investment in IT â€“ to enhance front end business capabilities, to improve risk management, to enable more effective data management and to drive medium term cost efficiencies, while seeking ever more sophisticated ways to guard against cyber security risks.
Capital Markets Union Finally, European banks also need to respond positively to the jobs and growth agendas of both the G20 and the European Union (EU). Some politicians and commentators seem over-eager to exclude banks from these important agendas, confusing the long-term potential of initiatives such as capital markets union across Europe, designed to bring some of the vibrancy of US capital markets to Europe, with the short-term substitution of bank financing. 114
Some banks see the union as a threat to their future. We disagree. Banks are ideally placed to act as intermediaries given the breadth and extent of Europeâ€™s banking network. Banks could also provide non-capital intermediation services such as peer-to-peer lending and crowdfunding. There is also the potential for simple securitisations and technological and digital advances to support financing to SMEs if barriers are identified and removed.
Reopening the securitisation market would also benefit banks as it would free up balance sheet capacity There is no doubt that the regulatory pressure on the banks is increasing. However the key to long-term success is to not just treat the various regulations as tick-boxing exercises, but to use this opportunity to achieve genuine business model and cultural change.
Giles Williams Regulatory Partner KPMG
From boring banking to limitless opportunity
City of London skyscrapers
In many ways, London’s ascendance as the FinTech capital of the world isn’t surprising – to find a financial capital booming alongside an ambitious start-up scene is a rare piece of good luck for both communities. ‘Luck’, because through FinTech they’ve both learned how to mutually benefit one another. UK banks in particular are ahead of the curve in realising the cause-and-effect link between investing in FinTech and re-igniting consumer lending and spending. Where the FinTech community now benefits from investment funds, accelerators and organisations like Innovate Finance, banks are reaping the rewards of providing their customers with digital services. This is one illustration of how in the UK the race to define the future of digital banking is on in earnest. Listen to any bank CEO talk about the future and 116
you’ll likely hear about digital and mobile within seconds. There are few who have yet to realise that retail banking will soon live or die by its capacity to serve customers through digital channels. So this leaves us at an interesting point in time. Our UK banks by and large have their digital houses in order – in the sense of the run-of-the-mill, here’s-your-balanceoff-you-go-then boring mobile and web services that have been tough to implement but ‘will do for now’. Or, here is your bank statement, but on your phone. So we’re still seeing a largely level playing field, but maybe for the last time – because what happens next is where things get exciting. This is the bridge between ‘boring banking’ and a future that’s rich with content, commerce and personalisation. There’s a wealth of opportunity to transform how banks serve their customers, and develop whole new streams of revenue.
The possibilities are limitless, but this is where the paved road runs out and you have to start making your own way – and success and survival will depend on banks having creativity and boldness. It depends, more than anything, on having a ‘human first’ mindset that has been largely absent from traditional banking vocabulary. And there are already some interesting innovations out there that have started to fit the bill nicely. One example is Santander UK’s SmartBank, an initiative that we collaborated with the bank on and that launched towards the end of last year. Santander wanted to give the ability to customers to manage their money better. They wanted to specifically target a student audience and enable their customers to have more insight into their spending patterns. Right from the very beginning, in terms of the starting brand syntax, all the way through to the final product in the store, it was more than just a vanity app.
SmartBank was about seeing money from the consumer perspective – where banks see just a long list of incomings and outgoings, users see they’re spending four times what they thought they were at Topshop
Alistair Crane Chief Sales Officer Monitise
It was about providing a tool that allows you to manage your money in more detail, understand where your cash is going on a daily basis. We deliberately chose a design that was far more intuitive than a bank statement.
in order to help them make the most out of their money. The UK provides an ideal environment for this opportunity to evolve as a market, which fosters what is arguably the perfect balance between regulation and innovation.
SmartBank was about seeing money from the consumer perspective – where banks see just a long list of incomings and outgoings, users see they’re spending four times what they thought they were at Topshop. And in seeing that upfront, they can fix it, if they want to. By receiving individualised information about their spending, consumers become empowered to make better decisions, or understand what disposable income they had at the end of the week or the end of the month based on their pay cycle. One Twitter user realised the frequency of her trips to McDonald’s – although we can’t be sure whether she cut back on the Big Macs.
And the banks remain best positioned to be taking advantage of this emerging opportunity, as the trusted guardians of people’s money – the place where we want our salaries to be stored safely each month. Key will be ensuring that offers are relevant: personalised, timely and ideally location aware, and thinking about the consumer. Offers should be based on your profile information, age, sex and so on. You should be able to make bookings, reservations, and be served discounts from the retailers around you, and share them with your networks. If a new service isn’t more useful and ultimately better for the end customer, then go back to the drawing board and don’t do it at all.
With initiatives like SmartBank laying the ground for future innovation, you can easily consider where developments in personal finance management could go in the near future. It’s not too much of a stretch of the imagination to think about the opportunities for content or commerce if the user has a better understanding of what disposable cash they have at the end of their pay cycle,
The financial services game itself is changing, and we’ve started a journey where everyone needs to forge his or her own path. Whoever wins or loses, we can be sure that FinTech is making the banking landscape – in the UK and around the world – a much more exciting place.
Further Amendments to Bank of Russia’s Basel III Requirements The introduction by the Russian Central Bank (the “CBR”) in 2013 of the Basel III principles, governing the capital adequacy calculations of Russian banks, was aimed at improving the financial standing of Russian lending institutions and bringing Russian banking regulation closer to international standards.
The Entrance to Russia’s Central Bank
EUROPE BANKING However, the events that have taken place over the past year, such as the imposition of EU and US sanctions and the downgrade of Russia’s sovereign credit rating have, if not closed international capital markets completely for Russian banks, made access to these markets extremely difficult. In particular this is true for banking institutions attempting to raise subordinated funding for their regulatory capital. With more and more Russian banks facing the risk of having a low capital adequacy ratio, it has been actively debated in the market whether Russia’s existing Basel III regulations should be amended to provide more flexibility to the banks in order to allow them to fund their regulatory capital. As a result, the following legislative changes have been recently made to that effect.
New Sources of Funding of Subordinated Debt
These loans may have a maturity of 50 years and will still qualify for Tier 1 capital purposes. Outside of the bank’s shareholders, these changes are likely to result in Tier 1 subordinated debt being less attractive to third party investors, which, however, has always been the case when compared to Tier 2 instruments.
Mandatory Conversion of Subordinated Debt into Equity Amended regulations have clarified the so-called “write-down events,” at which point subordinated debt must be either converted into equity of the bank or written off.
The following write-down events are currently provided for in the regulations:
New regulations have opened new sources of funding capital by Russian banks through subordinated instruments.
Firstly, subordinated loans may now be received (and repaid) not only with cash but also with Russian federal government bonds, subject to the approval of the CBR. Secondly, non-state pension funds are now allowed to invest savings into Russian banks’ subordinated debt (for purposes of the Tier 2 capital of such banks) provided that the relevant Russian bank has a credit rating not more than two levels lower than Russia’s sovereign credit rating. Given the fact that these amendments were actively lobbied by the Russian banking community, some appetite to the subordinated bonds or loans from Russian non-state pension funds should indeed be expected.
Tightening Requirements for Tier 1 Subordinated Debt At the same time, the CBR has tightened the requirements for subordinated debt, which can be counted within a bank’s Tier 1 capital. Firstly, in order for a subordinated loan to be eligible for inclusion into a bank’s Tier 1 capital, the subordinated loan agreement must include the right of the borrower to unilaterally stop payment of interest under the loan without any reason or any negative consequences for the borrower. Secondly, for the purposes of qualifying for Tier 1 capital, subordinated debt needs to be “perpetual”, i.e., without a definitive repayment term. Russian laws have therefore been amended to allow such “perpetual” loans. Some exceptions have been provided with respect to subordinated loans extended before July 1, 2015 and with respect to subordinated loans provided to Russian state-owned banks within the program for support of the Russian financial system.
The core Tier 1 capital of a bank (a borrower under subordinated debt) is less than
5.5% & 2.0%
in respect of Tier 1 subordinated debt,
in respect of Tier 2 subordinated debt,
in each case, for at least six business days within any 30 business-day period; or
b The CBR has approved a bankruptcy prevention plan that contemplates the participation of the Russian Agency for Deposit Insurance, under Russian insolvency laws. An important amendment has been made providing the CBR with the right to require the mandatory conversion of subordinated debt into equity following a write-down event. Previously, as it is not a party to subordinated debt instruments, the CBR could not require a bank to perform the conversion of debt into equity.
â€œGreat results emanate from a passion for small detailsâ€?
EUROPE BANKING The new regulations clearly provide for a maximum interest rate payable by a bank on its subordinated debt:
15% 10% for Ruble-denominated loans
for loans denominated in a foreign currency.
The regulations now address the situation with regard to a write-down / equity conversion in respect of several subordinated loans, which was not clearly regulated in the past. It is now possible to contractually agree on the priority and sequence of conversion of subordinated debt of a Russian bank upon the occurrence of a write-down event. By default, if nothing has been expressly provided in the respective agreements, all subordinated debt instruments are written off or converted into the bank’s equity pro rata. Also, the regulations now specifically require that the amount of subordinated debt being converted into equity should be an amount such that, immediately after the conversion, the bank’s capital adequacy ratio for core Tier 1 capital is not less than: (i) In respect of a conversion of Tier 1 capital subordinated debt, 5.5%. (ii) In respect of a conversion of Tier 2 capital subordinated debt, 2.00%.
Interest Rate Caps Previously it was rather difficult to determine the maximum permissible interest rate applicable to subordinated debt instruments. There was a requirement that the interest payable on subordinated debt should not significantly differ from market terms, i.e. interest rates payable under subordinated debt instruments with similar terms. In practice, however, it was difficult to find a reliable source of reference for “market terms” on subordinated debt as result of which the interest rate on each subordinated debt instrument had to be individually agreed with the CBR.
The new regulations clearly provide for a maximum interest rate payable by a bank on its subordinated debt: 15% for Ruble-denominated loans and 10% for loans denominated in a foreign currency. There is still a possibility to apply a higher interest rate if the bank is a position to assert that such higher rate is in line with market practice.
Conclusion The Russian financial sector is facing significant challenges at the present time. The recent amendments to Russia’s Basel III regulations should clearly help Russian banks to maintain a suitable level of capital adequacy in the short term. However, whether these steps will be sufficient or instead whether further measures to support Russian banks will be required from the CBR remains unclear at this stage. The outcome will largely depend upon how the overall political and economic situation in Russia develops in the coming months.
Grigory Marinichev Partner Morgan Lewis
Carter Brod Partner Company Morgan Lewis
IFRS9 IN NUMBERS Is the banking world a safer place? Criticisms levied at the current standard Damien Burke Head of Regulatory Practice 4most Europe
Itâ€™s no secret that the countdown is now on for the implementation of the new, global accounting standard, International Financial Reporting Standard 9 (IFRS9) that must be implemented and fully compliant by January 2018. Amongst other things, IFRS9 addresses how to recognise and account for credit losses (impairment) and will require serious thought, co-operation and investment from the industry, not only to meet the requirements but also to reach the end goals that is has been designed to achieve. The new standard is a distinct departure from the current International Accounting Standard 39 (IAS39) Financial Instruments: Recognition and Measurement, in that it focuses on accounting for expected credit losses as opposed to incurred losses. 122
There have of course been a number of criticisms levied at the current standard, namely: 1. It was slow to respond to recognition of credit losses, specifically only recognising lifetime expected credit losses on exposures where there was objective evidence of impairment and an additional allowance (incurred but not reported) for exposures expected to become impaired imminently. 2. That it was too reliant on backward looking information, particularly delinquency data and historical loss rates. 3. That it only considered drawn loans, not commitments to lend. As a result many credit card and current account providers were not recognising sufficient loss allowances. 4. That the information provided to users of financial statements is not transparent enough to be useful. 5. It was too complicated to implement and maintain as there were multiple approaches depending on the asset.
The move to change it was escalated as a result of the financial crisis of 2007 / 2008. The fall out we have seen in terms of banks having to be bailed out by public money and failures of countries, such as Greece for example, to repay their debt.
What the new standard IFRS9 aims to address The new standard attempts to address these issues in a number of ways: 1. AS39 was slow to respond by design. It was a response to some organisations applying balance sheet management under UK GAAP to recognise losses that would not be incurred in good times so that they could be released to prop up the P&L in bad times. IFRS9 addresses this by recognising lifetime expected credit losses for all exposures that have objective evidence of impairment, all exposures that have significantly increased in risk since initial recognition and exposures that are expected to default in the next 12 months. 2. The standard demands that forward looking information is used and losses are accounted for now on the basis of what we believe will happen in the macro – economic environment in the future and, the specific impact that has on an organisation’s different portfolios. 3. Under IFRS9, the date of recognition is the date at which the commitment to lend is made. This means that for pipeline business and revolving credit products, losses must be recognised based on the expectation of draw down over the behavioural life of the exposure. 4. The disclosure requirements are more granular, requiring split by Risk grade, LTV, drawn and undrawn. 5. There is a single impairment model for assets measured under amortised cost and those measured under Fair Value Other Comprehensive Income (FVOCI).
Could we really have prevented the global financial crisis in hindsight? So, a legitimate question is, if IFRS9 was in place in 2007 / 2008, would it have prevented the global financial crisis, and for example the distressed restructuring of Greek debt?
To answer this we need to think about the reasons for the crisis and the debt. There are various different opinions but it could be said to be a consequence of five things:
Poor fiscal management by the Greek government of public finances. Endemic tax evasion by the Greek public. Heavy investment in Greek bonds at an unsustainable rate following the fall of the US Sub-Prime Mortgage market due to perceived low risk of Eurozone government bonds. Financial institutions being slow to react to recognise losses and not allowing for them. Lack of liquidity in financial markets.
IFRS9 will not address the first three at all as the changes are focused on financial institutions and losses resulting from providing credit, not mismanagement of public funds, the level and availability of those funds or how financial institutions source funds to provide credit. Summer 2015
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IFRS9 won’t solve problems in isolation In terms of the last two, the standard can address these, but not in isolation. IFRS9 provides the principles to allow you to recognise losses early and account for them. If more money is set aside in ‘good times’ to account for future losses, there should not be as much of a squeeze when things start to go wrong, generally meaning that there is more access to credit when required and fewer issues with liquidity. There is a risk however that a poorly implemented model will lead to more volatility and a risk that credit is not available when required.
If the model you develop to do this is shown to be a good predictor of the individuals or portfolios inherent risk that is the first step. To be compliant and to allow it to be useful for internal planning you also need to be able to use that information and your view of the macroeconomic outlook to determine how that risk will change over time, based on movement in unemployment rate, changes to interest rate, changes to price indices etc.
Burden or opportunity? So how do you know if your view of the world agrees with everyone else’s? How do you know if your models are performing to the right level, given they have not previously had to predict the future? How do you know that your disclosures are on the same basis and provide the same level of transparency as your peers? It is incumbent on you to develop the right tools, based on the right methodology and present the results in the appropriate way. This will require knowledge of the industry, how the standard has been interpreted and experience of delivering solutions that work for you and meet regulatory expectations and industry approval through benchmarking. There is no panacea to preventing these crises but this is certainly another legislative backstop that will require banks ºto hold bigger provisions and capital than they have in the past. Rather than see this as a burden to be borne by the industry it could be seen as an opportunity. If it is implemented correctly it can lead to good financial planning, better pricing of assets, more transparency to investors, more stability in the industry and a safer world of banking for all. Summer 2015
Cryptocurrency compliant How UK businesses can detect money-laundering activities
Paul Stokes from Wynyard Group explains how a recent proposal by the UK Treasury to regulate digital currencies presents a huge opportunity for the UK to become a global bitcoin hub, and offers guidance on how organisations can leverage technology to adapt to this regulatory change. The UK recently released a Treasury report that marks an important milestone in the evolution of digital currencies. The report stated that anti-money laundering (AML) regulations should now be applied to digital currencies, such as bitcoin and other cryptocurrencies. Should this be implemented – something that the government says it will consult on early in the new parliament – those businesses that deal in bitcoin exchanges will need to make substantial changes. The regulations will require all digital currency exchanges to perform background checks on all their customers and the transactions that happen through them, marking a huge turning point for digital currencies that are known for their decentralisation and anonymity. 126
Digital currencies such as bitcoins have been attractive to criminals because they offer additional “layering” in the money laundering cycle, effectively camouflaging money laundering through complex transactions that are hard to trace. Criminals can exchange one digital currency for another before converting them into real-world currency. Such activity leaves little or no trail for investigators in pursuit of those money launderers. The UK’s move to regulate digital currencies is a step in the right direction in the fight against money laundering activity, but effectively detecting money laundering in cryptocurrencies can be a difficult task. To face this challenge, businesses will need to ensure they are equipped with cutting edge technology to identify illegal activity being conducted via digital currency. In October 2014, the UK National Crime Agency (NCA) assessed the nature and scale of the threat posed by digital currencies, and concluded that the predominant criminal use of such currencies was through online marketplaces for the sale and purchase of illicit goods and services. The NCA commented that digital currencies had not been widely adopted as a means of payment in the broader criminal community.
Observers, however, have pointed out that digital currencies and their associated technology are a fledgling industry and that regulations should address the marketplace for such activity now and remain flexible as the cryptocurrency field grows.
activity relating to digital currencies”. Similarly, organisations involved in the transacting of digital currencies will need to ensure they put in place adequate controls and checks so they are not held liable for criminal activity attempted through their systems.
For the most part, interested parties commenting on the proposals in the Treasury report – and the government response to those highlights and concerns – addressed where cryptocurrency should fit into current financial regulation and the burden this could place on participants in complying.
Steps that make digital currencies safer to use could, the government says, as a result of greater stability and increased transaction volumes, make those currencies more attractive to criminals as well as to legitimate users.
A considerable amount of the concern focuses on the need to ‘know your customer’ and the fear of the anonymous nature of digital currency transactions. Many banks and payment scheme companies are in favour of regulation, highlighting the need for clear guidance on the obligations under any amended AML and counter-terrorist financing rules. The government hopes to implement updated AML regulation and also to ensure that law enforcement bodies have “effective skills, tools and legislation to identify and prosecute criminal
It is therefore imperative that law enforcement capabilities are enhanced and that there is legislation to identify and prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes. Summer 2015
EUROPE BUSINESS So how easy is it for businesses to incorporate AML regulatory compliance? The nature and expected volume of digital currency activity is daunting. Technology exists, however, that can integrate AML controls into an organisation’s structure, based in a hosted environment, which takes away the need for the organisation to run the system itself. The software only needs to be configured by the end-user to suit their day-to-day needs. AML software works by allowing the user to set alerts, such as high transaction amounts, that are triggered automatically by the system and highlighted to the user for further investigation. Automating manual processes in this way frees up valuable resources, with significant efficiency gains to be made. With the fast turnaround of digital currency transactions, it would be almost impossible for organisations to watch activity in enough detail without installing an automated alert system. AML regulations require businesses to perform thorough checks on customers, both new and existing. AML software is able to build in-depth customer profiles, ensuring that false positives are reduced and directing resources to genuinely suspicious transactions. Suspicious transaction reports can be logged and accurate reporting to regulators ensured. The software can also be integrated with global watch lists to help with customer screening and ensure the most up-to-date information on sanctioned entities and politically exposed persons (PEPs). These are exciting times for new payment systems that will support the future of global trade. They are also, however, challenging times for regulators, AML officers and financial crime investigators. All must quickly become cyber-enabled to deal with a movement that is set to morph and grow rapidly as a domain for organised crime. In its report on digital currencies, the UK government said most commentators on its proposals feared the illicit use of digital currencies in not only money laundering but also terrorist financing, tax evasion and sanctions evasion, facilitated by the system’s distinctive features in contrast to traditional transactions. The UK will aim for international co-operation on the amended regulations, taking into account existing frameworks to act as efficiently as possible in the short term and also to avoid creating a bespoke regime for digital currencies that could prove costly for firms in terms of compliance activities. As to law enforcement, the UK government will look at increased training and the development of existing techniques. Several users and digital currency firms have suggested using trade bodies or other sources of expertise to improve understanding and awareness among police and intelligence agencies.
The UK says it is committed to increasing banking competition in the interests of all customers and points out that encouraging greater innovation in payments is central to this. The government intends to create a world-leading environment for the development of pioneering payments and financial technology. In its 2015 budget, the government proposed measures to address key crime and consumer protection risks associated with digital currencies. These measures are intended to create the right environment for legitimate actors to flourish, and to create a hostile environment for illicit users of digital currencies.
There will be a full consultation on the proposed regulatory approach early in the new Parliament. Finally, as part of its commitment to a healthy, regulated cryptocurrency environment, the government plans to launch a new research initiative, which will bring together the Research Councils, Alan Turing Institute and Digital Catapult (a national centre responsible for accelerating the UK’s digital economy) with industry in order to address the research opportunities and challenges for digital currency technology, increasing funding by £10m to support this. In February, the Bank of England also announced that it would undertake research on central bank-issued digital currencies as part of its new research agenda. This work covers the potential costs and benefits of doing so, as well as the economic impact, technological requirements and necessary regulations for a central bank-run system. There is much for the financial community to consider in the proposals and the changes to regulation are likely to come sooner rather than later. However, there is significant support available from the technology sector that will alleviate the pressure of compliance and help ease the new regime into part of every organisation’s regular routine.
Paul Stokes COO Wynyard Group
Paul Stokes is COO of Wynyard Group, a market leader in serious crime fighting software used globally by intelligence, investigations and information security operations in justice and law enforcement, national security, financial services and critical national infrastructure. Summer 2015
Sharpen your e-commerce edge Kevin Moran CFO Chase Paymentech Europe
Chase Paymentech Europe’s CFO Kevin Moran reviews how to eliminate payment friction and help you develop a solution to protect and optimise your business and ultimately sharpen your e-commerce edge. In today’s multi-channel retail world, the balance of power has moved swiftly and decisively away from brands into the hands of the digital consumer. Nearly every adult in the UK is now a digital shopper1 with many consumers using two or more devices to create their own unique shopping journey2. In a recent Chase Paymentech survey, convenience and security were the overriding reasons customers gave for returning to a company’s website or mobile app. An easierto-use checkout and a feeling that the payment is going to be secure contribute to a happy, satisfied customer. It is convenience that drives customer loyalty3 – and whilst m-commerce continues to grow, retailers who ignore an easyto-use mobile checkout do so at their peril.
Make it easy to pay Amongst UK online shoppers, 29.5 per cent of sales coming via tablets compared to the six and half per cent coming via smartphones4 and one third of all CPG (Consumer Packaged Goods) searches originate from smartphones5. Given this growing volume, it is surprising to note that among the UK’s top 50 retailers, only eight per cent have a site specifically optimised for tablets6. There are a number of ways to help shoppers overcome the more cumbersome aspects of using a touchscreen to make their purchase. For example, many consumers are unwilling to register before they buy on a mobile device - and would prefer to login as a guest or alternatively use their social media profile. 130
Storing payment and delivery details is becoming standard practice, with the adoption of one-click (or one-touch) checkouts and digital wallets to ease the payment process. In addition encouraging shoppers to use a mobile app instead of a mobile optimised website enables shoppers to stay constantly connected. Using payment data to identify any issues within your payment process can help to better understand your customers’ payment behaviour and allow you to continually enhance the checkout experience in response to your discerning customers’ needs.
Verify Security With fraudsters more determined and sophisticated than ever, no e-commerce business can afford to be complacent about fraud. Data security is an area of increasing concern and a breach in privacy can break even the most loyal customers’ trust. Above all else, digital consumers need to be assured that their payment is going to be secure – no matter which device they shop with. Brands should ensure that their payment pages are not only optimised to display correctly across different mobile devices, but that the branding of payment pages is consistent and seamless with the rest of the site. The use of a hosted payment page that dynamically adopts the design of your m-commerce site together with encryption tools that help secure payment data from within mobile enabled websites and native apps, can offer customers additional protection.
Tokenisation: Protecting your stored data This technology addresses cardholder data at rest by replacing the primary account number and other sensitive data with alternative identifiers (or tokens). Once completed properly, this means that valuable payment card information is rendered worthless to any fraudster outside of the payment ecosystem. The use of tokenisation can enable many systems that handle customer data to be eliminated from the scope of PCI-DSS compliance, saving time, effort and scarce resources. However, the chosen tokenisation approach must be compatible with your existing payment applications, business systems and processes, enabling the data to be accessible and beneficial to your business.
Card brands such as Visa®, MasterCard® and American Express® are committed to tokenisation as a way of stemming the rising tide of costly data breaches – while nearly half of e-tailers recently surveyed by Chase Paymentech7 recognised that tokenisation is useful in PCI-DSS compliance.
Hosted payment page: Protecting your acceptance data While tokenisation generally occurs after authorisation, it does not address issues of security and compliance at the initial acceptance stage. One effective solution at the initial acceptance process is the use of a hosted payment page that can take the form of either a separate webpage or an individual order form that is hosted on a secure site. Customers enter their confidential payment data directly into this secure environment and the transaction proceeds as usual. Because the payment data is neither received nor stored by merchants, this solution can also help address PCI-DSS compliance requirements. In our survey, 65 per cent of retailers recognised that hosted payment pages were useful to PCI-DSS compliance, yet only 39 per cent of them already use a third-party hosted payment page8.
Final thoughts… Brands are readjusting how they interact with consumers as technology continues to shape and reshape the retail landscape. Using payment data to help activate the right fraud strategy may allow retailers to boost revenues by turning
more orders into sales, increase profitability from international markets and protect brand reputation. The challenge for retailers is in how to participate in such a way that helps build loyalty without being intrusive. While retailers ultimately want to “sell”, consumers want to “engage”. To be successful, retailers have to find a way to extend their brand into the digital space based on consumerdefined behavioural frameworks that are still emerging. For an industry that once defined what consumers could buy, when, and where, this loss of control could be a huge challenge. To fully participate in an always-on world, the impetus to implement robust measures that can optimise revenue streams to fuel future growth is greater than ever.
Source: 1 www.thepaypers.com/ecommerce-facts-and-figures/UnitedKingdom/ 2 www.econsultancy.com/blog/64464-more-than-40-ofonline-adults-are-multi-device-users-stats 3 Dynamic Markets/Chase Paymentech: Online Retail Challenges: 2014 (March 2014) page 101 3.2.3 Reasons for returning to a particular website
4 ComSource, IMRG Capgemini Quarterly Benchmarking Report 5 www.thinkwithgoogle.com/articles/zmotwhy-it-matters-now-more-than-ever.html 6 IAB (Internet Advertising Bureau UK) www.iabuk.net/sites/default/files/The%20Big%20Mobile%20 Shopping%20Handbook.pdf
7 Dynamic Markets: CNP Payment Challenges in 2014 (March 2014) 8 Dynamic Markets: CNP Payment Challenges in 2014 (March 2014) Chase Paymentech Europe Limited, trading as Chase Paymentech, is a subsidiary of JPMorgan Chase Bank, N.A. (JPMC) and is regulated by the Central Bank of Ireland. The information herein does not take into account individual client circumstances, objectives or needs and is not intended as a recommendation of a particular product or strategy to particular clients and any recipient of this document shall make its own independent decision. This document and the information provided herein may not be copied, published, or used, in whole or in part, for any purpose other than expressly authorised by Chase Paymentech Europe Limited. © 2015, Chase Paymentech Europe Limited.All rights reserved.
UK Annuities providers brace for winds of change In March last year, British Chancellor George Osborne presented the 2014 budget to the Parliament and with it introduced the most fundamental reform to the UK pensions system in almost a century. As of April 2015, the tax rules on defined contribution pension savings were changed to allow people to access their savings as they wished from the point of retirement. These changes had a profound impact on pensions and annuities providers in the UK making a reassessment of business strategy of the utmost importance.
The Chancellor of the Exchequer George Osborne holds his ministerial red box up to the media as he leaves 11 Downing Street.
Impact of the changes
Pensions freedom: current options Full withdrawal 1 (@ 55% tax) or Annuity or Capped Drawdown 2011 2
25% tax free lump sum
Full withdrawal at marginal tax available for Pension pots up to £18K Flexible Drawdown available for Pension pots > 310K
Pensions freedom: options post Apr’15 Full withdrawal (@ marginal rate) or Annuity or Drawdown/other products
25% tax free lump sum
What changed? The key changes that came into effect in April are: Individuals are now able to draw down on their pension savings whenever and however they wish after the age of 55 Any amount they draw down will be treated as income, subject to the marginal tax rate rather than the current 55% Every individual with defined contribution pension savings will have the right to free, impartial and tailored guidance, provided by independent organisations The comparison between the current and future options available to individuals/retirees are summarised above:
The immediate and most obvious impact the new regulations have had is on individual annuities sales. If we look at trends in Australia and the US, where there is no requirement to take income streams, the sale of annuity is expected to take a sharp dip. This is evidenced by the fact that the share price of Partnership, one of the specialist annuity providers in the UK, dropped 63% following the announcement in March 2014 and has not since fully recovered. The latest data from the Association of British Insurers (ABI) gives good insights into evolving customer behaviour and choices. As per the data for Q3 2014, the number of annuities sold has fallen by 56% compared with the same period in 2013. In contrast, the drawdown sales have increased 123% yearon-year and are at their highest levels. The value of drawdown contracts sold by ABI members is around 50% that of the value of annuity sales, compared with 14% a year ago.
The US annuity market is evidence to the fact that given the option, people do not choose to annuitise at retirement This would also mean that the bottom lines of insurers are going to be hit as individual annuities currently account for about a half of UK life insurers’ new business value. It is also one of their most profitable lines of businesses. There is also a likelihood of defined benefit plans moving to a defined contribution pension to access their funds immediately. As the reduction in annuities sales releases some of the initial capital reserves required for allocation to new policies, this capital could be diverted for bulk annuity buyouts as the plan sponsors and trustees may be looking to cover their reduced pension obligations. The flip side to reduced annuities business is the likely increase in the number of drawdowns. As the limits on income drawdown from the pension funds have been removed altogether (subject to the marginal rates of tax), more people are likely to use the drawdowns as an alternative to a regular income, keeping their pension funds invested. Summer 2015
EUROPE FINANCE What can Insurers Do? To remain competitive and reduce business loss, annuities providers need to focus on product innovation, deeper customer engagement, gamification and operational speed.
Product Innovation Insurers need to face the fact that customers now have a real choice and they would like to spend money in alternate avenues. By utilising data analysis to gain market insight providers can hope to spot trends early, thereby anticipating what kind of products will attract customers. This may entail modifying existing annuity products and also developing new ones and providers should not be averse to this. For example, if a customer is looking for a product with higher returns or a cheaper product, can the insurer partially share the investment risk and the reward with the customer? Ingenuity in new product development will be essential. Offering products with simple structures and clear benefits is critical and must align to customer demographics, e.g. ageing populations are now looking towards products to provide for long-term care.
Engage with customers Focusing on greater customer engagement and driving brand recognition and recall is essential in a business environment where competition is drastically increased. Challenger in Australia has done a tremendous job of this and has gained an 80% share of Australia’s retail annuity market. A series of simple ads were aimed to “disrupt retiree preconceptions.” By executing a direct, cut-through campaign, with a high recall message and measurable impact the company was able to lift its annuities sales to record levels. In the six months immediately after its release, the investment management firm saw a 38% spike in retail annuity sales.
Leverage Gamification The annuities market is ripe for gamification due to the complexities associated with it, low engagement rate and tendency to not make active choices. CUNA Mutual Group in the US has revolutionised its sales procedure and tripled its annuity sales in the process with its Gamified Sales Platform. The new illustration platform applies gamification techniques that make it easier for financial advisers to choose the right annuity and explain its nuances to customers, thereby improving employee and customer satisfaction. Other examples include Sun Life Financial of Canada’s money UP, an online Gamification platform that challenges Canadians to “learn more” and “earn more” by completing levels and missions that encompass important retirement and investment planning steps. Leading Australian insurer Suncorp has also used gamification for better engagement with customers.
Operational speed The size of the annuities operations team is likely to be affected as annuity sales decline. On the other hand, the drawdowns may see higher traction and may need a bigger team to handle day-to-day operations. In response, teams need to be trained to handle this change and cope with the increased amount of inbound calls pertaining to the changes. The risk of being unsuccessful in enticing the retirees to either keep or invest their pension funds is too big to not prepare adequately for. However, modern technologies such as big data analytics and predictive technologies can help providers. The application of predictive analytics can help providers retain their existing pension customer base, providing them with tools to identify the likelihood of retirees going the open market route and even present them with an opportunity to use cross-selling techniques to market alternate wealth management products.
Neelesh Patni Managing Consultant Insurance Advisory Group
Amit Nanchahal Principal Consultant Insurance Advisory Group
HELPING TO SPUR THE GROWTH OF CHALLENGER BANKS? Senthil Kumar, vice president, business development, Oracle Financial Services Over the past number of years, we’ve witnessed a trend in the banking industry that we haven’t seen in more than 100 years, which is the rise of smaller, specialized banks that are ready to service a new breed of consumers known as millennials. The term millennials describes the generation born after 1980, which has never known a world without computers, the Internet, mobile phones, and other mobile devices. This type of consumer is driving traditional banks to revisit and reinvent their whole customer experience and has led to the emergence of challenger banks in the UK; banks with new banking licenses around the world. Millennials already pack a significant economic punch with an approximate U.S. $2 trillion in aggregated net worth, and it is estimated that they will comprise 60 percent of the workforce by 2025. Their behaviours and attitudes are spreading to their elders at a rapid pace, which is why we are seeing consumers of all ages adopt the use of digital channels for everything from banking to retail. For the first time ever the consumer has become completely empowered and, therefore, more demanding. 136
One of the biggest issues facing the banking industry today is that these influential and empowered millennials don’t have a lot of faith in financial institutions1. In a recent trust survey1, where consumers were asked to rank businesses by how much they trust those businesses to “do the right thing”, banks ranked the lowest (at 51 percent) and came in last on a list of eight industries. What these results show is that a single positive or negative experience with a financial institution can have a dramatic, viral effect because these influencers are so socially and digitally empowered. In addition to this, it is now essential for the industry to actually gain trust and loyalty of millennials, no matter how difficult this may appear to be. Given this challenge, it’s important to analyse what millennials want and what will convince them to bank with, and trust, a particular brand. They want their bank to know them, wow them, and empower them. They don’t want their time wasted, for example by filling out applications with their bank every time they need a new product or service. They want a personalized bank, where account managers or loan consultants know who they are after years of loyalty. Finally, they want a commercially competitive bank that gives more eye-catching rates and amenities.
This is the market that the challenger bank has entered. Smaller in size and more agile than their larger competitors, challenger banks are offering more-personalized products and services, as well as innovations in technology (mobile and digital) which deliver a more superior customer service.
Millennials already pack a significant economic punch with an approximate U.S. $2 trillion in aggregated net worth, and it is estimated that they will comprise 60 percent of the workforce by 2025
1 Source: Edelman Trust Barometer, 2014 Global Results. 2 Source: www.moneywise.co.uk/banking-saving/savings accounts-isas/traditional-vs-challenger-banks it-time-you-switched
In 2014, there was a sizeable shift in people’s attitudes toward their banks and their accounts. This was mainly driven by the launch of the Current Account Switch Service guarantee of 2013, which cut the time it takes to move from one bank or building society to another from an average of 18 to 30 days, down to just seven. This saw more than a million people make the move to a new provider2 and also showed just how fed up millennials were with traditional fees and their bank’s inability to know them or wow them. As a result we saw millennials move their accounts to where they felt their needs could be better met. These trends have entrepreneurs in the industry primed to trump their larger, more established opponents; however the more traditional banks aren’t taking this competition lightly. They are seeing this as an opportunity to innovate and take a more holistic look at their business— specifically, how they modernize and transform by adopting and employing a more customer-in approach. It’s a new twist on the story of David and Goliath, as challenger banks are putting their customers at the top of the hierarchy with a “customer-in” approach versus the ageold “product-out” approach. Whether it’s an existing bank or a challenger, both recognize the critical need to up the ante when it comes to putting the customer first. This approach requires a business and technology architecture that delivers digital engagement, externalised customercentric processes, and componentised core capabilities to enable progressive modernization.
Hampden & Co., for example, has opened its new UK private bank this year. The bank is alleging greater choices and offerings for its customers, and in order to do this has implemented a Managed Cloud Services to form the foundation that will enable it to deliver a more personalized service to its customers. However, according to Hampden’s founder and Chairman, Ray Entwistle “it’s not easy setting up a new bank in the world we live in, it’ll take you longer than you think and it’ll cost you more than you think.” What is essential to underpin a personalized approach is a solid technology architecture foundation that supports getting both challenger banks and established banks up and running as fast as possible. Challenger banks are not taking over the lending market and there are still some barriers to growth, which is good news for traditional financial institutions. However, the industry is ripe for change and many are running to get to the finish line before their rivals. Technology companies need to ensure they’re supporting the industry’s paradigm shift in order to strengthen a bank’s operations and help deliver the innovative pieces they need to win over the ever-demanding millennials. The banking industry is seeing a significant shift at this moment in time and luckily these historic and exciting changes are unfolding in front of our eyes.
Senthil Kumar Vice President Business Development Oracle Financial Services Summer 2015
Working with trade unions under the new government Over the last few years, trade union actions have made headlines with strike action threatened in public services such as education, health and transport. The proposals were not welcomed by the Unions who described them as a way of ensuring cuts across the public sector. Whatever your thoughts for the matter, the proposals along with recent developments in case law will change the way businesses work with trade unions. Zee Hussain, Partner at Colemans-ctts and Head of the Employment Department, provides an outline of the new legislation and what this means for businesses and employers.
Trade unions in the private sector Most people are familiar with trade unions within the public sector. However, many private sector employers are also affected by unions. Employers of any size can voluntarily recognise a union, but if an employer has more than 21 employees and 10% of a bargaining unit (which can be all or part of the workforce) are members of a particular union, the employer can be forced to recognise the union under the statutory recognition rules.
Zee Hussain Partner and Head of the Employment Colemans-ctts
Employers, who take over a business, may have to continue to recognise a union under the Transfer of Undertakings (Protection of Employment) Regulations 2006 if the transferring business ‘retains its identity’. There will often be an agreement in place between the union and the employer as to which bargaining units they represent and what they can negotiate. In some industries, such as the paper industry, the agreements regarding pay and conditions are negotiated at a national level and are binding on employers within that industry. In others, the unions may only represent part of the workforce.
Time off for union duties Currently, employees who are representatives of the union have the right to a reasonable paid time off to perform their duties such as carrying out negotiations and attending a disciplinary or grievance meeting with a fellow worker or if they are a learning representative, conducting training needs analysis or promoting the value of training. The fact that reasonable is not well defined has been a source of contention for many employers. The conservative manifesto suggested that the rules regarding facility time would be tightened, meaning that the workforce will still be well represented but with minimal impact on the employer.
Crackdowns on strike action A worrying aspect of recognising a trade union is the prospect that they could encourage the workforce to strike. The reality is that this does not happen often, but the proposals within the conservative manifesto will mean that strike action is a last result. One of the proposals is to introduce a tougher threshold for strike action in the health, transport, fire and education sectors. This would mean that there would need to be at least a 40% turnout on a ballot, and a majority vote, before strike action can take place. It is unclear as to whether this will be introduced across other sectors, but given strikes have taken place with as little as 16% of a workforce voting, it would no doubt be welcomed news for employers. Further, unions will not be able to conduct a strike based on “ballots conducted years before.”
Currently, it is unlawful for a recruitment agency to supply staff to an employer to cover staff that are on strike
The right to say no The reforms will introduce a clearer opt-in to trade union membership for employees, who can choose whether or not they wish to join a union. Unfortunately we have seen workers who have chosen not to strike subject to bullying by other workers resulting in sickness and further stress on resources. Fortunately, there will be tougher rules regarding picketing and intimidation of non-striking workers.
Collective Consultation In early 2014, the TUPE regulations were amended to give more leeway to small employers from the prescribed duty to consult in takeover situations, as well as a more pragmatic approach to consultation over changes in workforce that may take place following a transfer. Also, the previous statutory consultation period was reduced, meaning that employers proposing more than 100 redundancies at one establishment over a 90 day period have to consult for a 45 day period prior to the first dismissal taking effect. Employers who are proposing 20 redundancies at one establishment, within a 90-day period are subject to a 30-day consultation. Employers proposing less than 20 redundancies are not subject to a set consultation period, but still need to consult with staff to ensure any dismissals or changes to terms and conditions are deemed fair. In USDAW v Ethel Austin, which involved the closure of all Woolworths stores in 2008, the Employment Appeal Tribunal (EAT) ruled that employers could not restrict the count of proposed dismissals to individual establishments. As a result, employers who were proposing redundancies across multiple sites found themselves subject to the statutory consultation period, even if a small number of staff were affected at each site. However, the European Court of Justice has recently determined that the statutory consultation period is only triggered where there are more than 20 redundancies at a particular establishment, which in practical terms may mean a particular site. In the majority of cases, employers can take this decision as clearance to handle redundancies at different establishments separately. This is likely to enable businesses to engage in shorter, simpler and less costly periods of redundancy consultation and mean more focussed discussions with any recognised unions that are involved.
In summary This can be devastating to employers who are forced to down tools and close the workplace if a strike takes place. However, this is set to be reformed which will allow employers to hire temporary staff.
Whilst the proposals are not welcomed by unions and any legislation will be strongly resisted, the proposals do have clear benefits to businesses. The focus on trade union relations should always be on building a happy and productive workforce. Summer 2015
Saving your company from financial failure The idea of seeking help for many financial directors can be daunting. Normally their reluctance to take action occurs for two reasons: Denial of a problem even existing The potential insolvency stigma
Dr. Annerose Tashiro Partner and Head of Cross-Border Insolvency and Restructuring Schultze & Braun
The UK Insolvency Service statistics for Q1 2015 shows overall insolvency levels decreasing. The number of companies entering formal insolvency proceedings was 11.3% lower than during the same period last year. The number of companies entering administration was 16.9% lower than the same quarter in 2014 and is at its lowest level since Q4 2007. Compulsory liquidations also fell compared to last year, reaching their lowest level since records began in 1984. Despite the positive figures, a large number of the companies within the statistics could have turned their company around if they had acted at the right time. Financial Directors or CEOs must face up to their financial difficulties and address them more quickly. Financial problems will become apparent long before the company reaches serious trouble. In many cases, if directors had acted just six months earlier than they did, it could have made a huge difference to the company or its creditors. 140
Is there really a problem with the business? A major problem for financial directors and CEOs is identifying the initial signs suggesting the business is moving down a slippery slope. It is not that directors turn their backs on the situation. But more they convince themselves that there is no problem. They will have a false optimism expecting a new big contract or win will help solve the financial problems. Managing the books can distort the problems - painting over the cracks and presenting the business in a positive light. Instead directors should step back to look at the complete picture early on and find a real solution to the problem. This behaviour is not deliberately irresponsible, but a more a self-con trick. It is particularly common in generational family-led businesses. The current CEO will not want to be the last director to let the business down. Too many directors choose to put their head in the sand. This results in financial administration without a hope of turning it around. Accepting there is a problem as soon as it is clear is the first step to business turnaround. This swift action means there should be a business to save.
Is there a stigma attached to insolvency? From the UK perspective the idea of insolvency is synonymous with failure. This perception suggests CEOs or financial directors are not able to do their job effectively. No one questions calling a lawyer when needing legal advice, nor would a company think twice about contacting a management consultant to develop growth and strategy plans for the next five years. Yet the thought of contacting an insolvency practitioner holds a strong stigma. There is no difference between an insolvency practitioner, lawyer or management consultant in respect to each of them having their own areas of expertise. Calling in the administrators creates fear among the company and board due to this apparent stigma. There is too much emphasis on the perception that the financial director or CEO has not done their job properly and not enough on contacting the best person to help. There are cases like South African Airlines, who were forced by the government to call in professional help last year. Or Standard Charter when Peter Sands tried to convince investors no external help was needed after three profit warnings. Yet another latest profit warning came in April after his resignation in February. Both examples demonstrate that not all companies are willing to accept help early on. Nonetheless, even with this apparent stigma the perception, for the most part, in the UK has started to shift in the past few years.
EUROPE FINANCE There have been various examples of companies like HMV and Thomas Cook changing their business models. Even Morrisons called in turnaround experts last year. Companies, regardless of size, understand the need to seek help before it is too late. Brands like HMV calling in the administrators is a sign of strength, not weakness.
Too many directors choose to put their head in the sand. This results in financial administration without a hope of turning it around
How to solve these issues The UK has not been the only country where CEOs and financial directors are reluctant to seek help. For example, Germany introduced a legal obligation for company directors to come forward when it is unable to pay its debts. They must secure a type of insolvency proceedings to save the business. Of course not every business can be saved. But this structure gives business owners the opportunity to seek help at an early stage. Since introducing changes to the insolvency laws three years ago the culture in Germany has changed. It’s now even easier for businesses to seek help earlier than before. When financial problems start appearing the culture encourages companies to call in professional help. One change introduced was the protective shield procedure. These grant pre-approved businesses a three-month window to create a business turnaround plan. It helps companies re-evaluate their finances and develop a long-term recovery programme.
However, these procedures are not suitable for every business. The protective shield has specific measures that must be met. Meeting these measures does require a lot of time and effort on the company’s part. Meaning many small vulnerable businesses don’t qualify. Even in a robust system like Germany’s there is a still more to be done to aid every business. It means that seeking help as soon as possible is of the utmost importance. Other countries can learn from the German approach. Taking note of Germany would not be about adapting the German system into other countries own insolvency laws. But about identifying specific measures that encourage all businesses to come forward. In six months time there could be readers of this article that find themselves included in the Q1 2016 insolvency statistics. Now is the time to seek help if you have been painting over the cracks and hoping that the positive economic news will result in an upturn in profits, if not this month then next, or the next... It is too easy for CEOs and financial directors to continue down this path. Especially when their minds are made up and they are not ready to acknowledge that there is a problem. Breaking through the mentality of denial and stigma is crucial to turning the company around in the long run.
Strengthening accountability in banking new FCA proposals for consultation On 7 July 2015, the Financial Conduct Authority (FCA) launched consultation proposals on the extension to the FCA’s Certification Regime.
“It is important that the individuals responsible for the deployment of trading algorithms are fit and proper, for example to ensure that the algorithms are adequately tested…”
The proposals form part of a wider new regulatory framework designed by the FCA and the Prudential Regulation Authority (PRA) which will come into force next year and will affect senior managers and key risk-takers at all levels working in UK banks, building societies, credit unions and PRA-designated investment firms. The wider regulatory framework includes the new Senior Managers Regime, Conduct Rules and rules on remuneration. The FCA and PRA have also proposed changes to formalise procedures within financial institutions for whistleblowing. These changes, taken together, aim to increase individual accountability in UK banking and are an important step forward in trying to change behaviour and conduct within banks, which were seen as a major factor in the 2008 financial crisis and in the Libor and Forex banking scandals. With tighter regulatory controls and heightened individual accountability, the changes are likely to result in financial institutions taking a firmer approach in cases of suspected misconduct and may give rise to disputes around bonuses and deferred remuneration.
The Certification Regime applies to anyone who could pose a risk of significant harm to an institution or its customers. Under the FCA’s new proposals, which will be open to consultation until 7 September 2015, the regime will be extended to include those in wholesale market activities and in algorithmic trading, who otherwise would not have been caught by the regime because they are not client-facing. These proposals come following fears about the potential vulnerability of markets to high-frequency trading, fuelled by events such as the “Flash Crash” in May 2010, when US stock indices fell by almost 10% within a matter of minutes. In relation to the regulation of algorithmic trading, the FCA has said, “It is important that the individuals responsible for the deployment of trading algorithms are fit and proper, for example to ensure that the algorithms are adequately tested…to assess their potential behaviour, in particular to ensure they are resilient, do not contribute to disorderly markets or breach market abuse or trading venue rules”. The extension of the regime means that more individuals will be subject to the new Conduct Rules, which set out basic standards of behaviour. Firms will need to issue certificates of fitness and propriety in relation to these individuals. Undoubtedly, firms will also increase their monitoring of staff as they will be under an obligation
EUROPE BANKING to notify the regulators if there are confirmed or suspected breaches of the rules. Employers may seek to update employment contracts and policies to bring them in line with these changes (for example, to ensure that there is a contractual requirement for members of staff to comply with the Conduct Rules). Under the new remuneration rules, bonuses of senior managers will be subject to a longer mandatory deferral period of a minimum of seven years, with no vesting before the third year of the award and vesting subsequently on a pro rata basis. Bonuses of PRA-designated risk managers with senior or supervisory roles will be subject to a minimum fiveyear deferral period, with the minimum deferral period for all other material risk takers remaining at three to five years.
cause employees significant financial losses. It seems inevitable that the grounds upon which employers will seek to avoid paying out deferred compensation or clawback bonuses will become an area of dispute where there are substantial amounts at stake. With stricter regulatory controls and new proposals on whistleblowing procedures,
whistleblowing claim. Whilst a successful whistleblowing claim in the employment tribunal does not necessarily mean that there have been regulatory breaches by an employer, as the subject of the Claimant’s protected disclosure does not need to be proven, these proposals may provide further pressure on firms to settle employment disputes depending on the overall circumstances.
which aim to encourage a culture of openness in the financial services sector and offer greater protection to whistleblowers, individuals may also feel more comfortable in speaking up about regulatory malpractice. As a result, employers may see more employees who are dismissed or subjected to investigations or disciplinary procedures raising allegations of whistleblowing.
Richard Nicolle (L)
Bonuses already paid will also remain subject to clawback provisions for a minimum of seven years and, in the case of senior managers, up to a further three years in certain circumstances. Under the FCA rules, firms “must make all reasonable efforts to recover an appropriate amount” where there is either “reasonable evidence of employee misbehaviour or material error” or “the firm or the relevant business unit suffers a material failure of risk management”. The new regulatory regime will have ramifications from an employment law perspective for both employers and employees in the financial services sector. Under the new rules, senior bankers in particular will be subjected to new levels of individual accountability and tighter regulatory controls. Some individuals may wish to review and negotiate their contractual duties and obligations or seek higher levels of remuneration in return, whilst others may choose to leave the regulated sector, possibly making it more difficult for banks to attract and retain senior managers. This may be compounded by the extended bonus deferral and clawback periods, which have the potential to
Under the FCA’s new proposals, reports should be made by ‘whistleblowers’ champions’ (a senior manager appointed by the firm to oversee the effectiveness of the firm’s whistleblowing policy) to the FCA where a firm has lost a contested
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Lessons from FCA thematic review on structured products In March 2015, the FCA published the results of its thematic review on structured products (TR15/2), which provides useful insight into the FCA’s expectations on firms’ product governance processes. Although the thematic review considered only structured products, it would be wise for firms involved in the design, manufacture, packaging and distribution of other investment products to take note of the findings, and consider how they may be applied to their own product governance processes. In the FCA’s view, the regulatory responsibilities of both manufacturers and distributors are clear as set out in the FCA’s existing Principles for Businesses and guidance. This is challenging for firms because it could require them to re-examine how they are complying with all aspects of the existing regulatory framework. TR15/2 shows that although the FCA may believe its expectations in this area are clear, many of the firms reviewed have not found it easy to meet them. The FCA also placed clear emphasis on senior management of firms to be responsible for ensuring product governance processes comply with regulatory requirements. This is not surprising in light of the wider on-going reforms to the responsibility framework for senior managers. The commentary around identification of a target market for products (discussed further below) for example indicates the level of detail senior managers will be expected to engage with in the governance process. This will be challenging for senior managers responsible for large businesses.
The thematic review consisted of three strands: retail consumer research and supervisory workstreams with retail and wholesale firms. Consumer research The consumer research found considerable asymmetry between firms’ and consumers’ understanding of how structured products work and the likelihood of them outperforming alternative products. Consumers find it difficult to compare alternatives and to make full use of analytical information. Firms must challenge their current views on consumers’ understanding of structured products and consider what steps they can take to bridge the gaps.
Target market identification The thematic review found that the senior management of firms’ need to do more to ensure that customers are at the forefront of firms’ approach to product governance. The starting point is the identification of a clear target market of end customers at the product design stage and the needs that their product would serve. Senior management should ensure that the identified target market factors inform each subsequent part of the product development and distribution strategy. Summer 2015
EUROPE BUSINESS The FCA found that many firms were unable to demonstrate that they had taken sufficient steps to identify the needs of the specific target market for their products, or that they used the information to inform decisions on product development, selection of distribution channels and their promotion strategy. Firms should review the examples in the thematic review against their processes and consider whether the current processes sufficiently identify the needs of a specific target market.
Manufacturers should consider the type of information distributors already have, their likely level of knowledge and understanding and how best to meet their information needs (e.g. product training).Manufacturers should not make assumptions about the level of product knowledge of distributors’ staff. The FCA said, for example, that firms should not assume that private banking staff are more knowledgeable than financial advisers.
Selection of distribution channels
Manufacturers have been overly reliant on distributors in ensuring that the information provided to the end customer is accurate and likely to be understood by the target market; they should conduct appropriate ongoing due diligence on distributors to ensure that products are reaching the target market.
Both the level of due diligence and the ongoing monitoring of distributors performed by some wholesale firms were found to be insufficient. Manufacturers must have sufficient information to satisfy themselves that distributors’ policies and procedures are appropriate for their product and target market; it is not enough to take assurances from distributors at face value.
Conduct robust analysis and stress testing Structured products should have a reasonable prospect of delivering economic value to customers in the target market. Firms must be able to determine and evidence the value through robust stress testing during the product approval process. Products should not be manufactured or distributed if they fail this process. Quantitative modelling and assessments of a product’s expected return should be used as a tool by which to test the proposition prior to launch – the FCA was concerned that some firms used modelling as validation to approve a product post-launch. Unsatisfactory backtesting and forward simulations carried out by firms meant that some modelling resulted in more optimistic estimates of potential product performance. Firms should challenge and, if necessary, change their modelling assumptions and parameters. For example, it may be necessary to make adjustments to compensate for the variation in economic conditions or the time periods used in backtesting; and firms should use more realistic and less optimistic growth rates in forward simulations. Firms are also required to assess whether products are likely to represent value for money for end customers. In some cases, where value for money assessments considered whether modelled product returns would exceed a chosen threshold, firms placed undue reliance on the maximum possible returns suggested by the modelling rather than the most likely returns. The FCA also stated that firms should consider differences in credit risk between the issuer or guarantor of the structured product and the provider of the alternative product as part of any value for money assessment.
Information to distributors The FCA expects manufacturers to ensure that information provided to distributors is sufficient, appropriate and comprehensible in form and substance.
Next steps The FCA will monitor how firms respond to the findings from the thematic review. The FCA has not ruled out remedial action on previously issued products or enforcement action on firms. If necessary, it may consider updating existing guidance, make new rules or use its product intervention powers in the structured products market. Product manufacturers and distributors of structured and other investment products should carefully consider their product governance processes and ask themselves whether or not they could be doing more to ensure fair treatment of customers throughout the lifecycle of the product. It is clear that product governance will remain an on-going supervisory focus for the FCA.The requirements in this area will soon be reinforced by European legislation, in the form of PRIIPs and MiFID II, both to apply in just over 18 months’ time. Firms will also need to integrate product governance processes into their wider implementation of the new senior managers regime.
Nick Bradbury Financial Services Regulatory Partner Herbert Smith Freehills
Patricia Horton Professional Support Lawyer Herbert Smith Freehills
MIDDLE EAST TRADING
MIDDLE EAST INTERVIEW
egypt TRADE FINANCE IN
Mrs. Nevine El Messeery, Chief Executive Officer and Managing Director and Mr. Mohamed Tousson, Head of Structured Trade Finance Department at Ahli United Bank in Egypt discuss trade finance in Egypt and the best way to counteract the risks associated with international trade finance.
Tanker passing through Suez Canal
What are the opportunities you see facing trade finance in Egypt? How has the landscape changed in recent years? Nevine El Messeery: Egypt is the largest and fastest growing population in the Middle East, with a large import bill of c. USD 65bn and exports that account for c. USD 37bn. Our demand on soft commodities and oil products is significant, and we have an almost chronic gap between our soft commodities consumption and production, leading Egypt to be the world’s top importer of wheat.
In addition, Egypt’s enjoys a unique geographical location falling on the major route for international trading between the Americas, Europe, Asia, and as a gateway to Africa; with great potential resulting from the highly anticipated inauguration of the New Suez Canal extension. Nearby markets are either saturated or unstable; hence, producers have been looking for better opportunities for growth and better margins in new emerging markets, with Egypt at the top of their targets as a huge and major consumer. In fact, Egypt’s large and aggressive population growth, geographical location and resilient marine logistics and infrastructure base, opens a multitude of opportunities in trade finance. AUBE strategy has been in harmony with the country’s priorities to facilitate the trading of the basic and necessary commodities. We have an established portfolio of clients greatly involved in the importation of basic soft commodities and basic food products. Summer 2015
MIDDLE EAST INTERVIEW Ahli United Bank was one of the first banks in Egypt to join the International Finance Corporation’s (IFC) Global Trade Finance program back in 2008 and further expanded your partnership with them last year. Can you tell us more about your partnership with them and the advantages it offers? Nevine El Messeery: AUBE’s relationship with the IFC dates back to 2006 when the IFC contributed in financing AUB’s expansion in the Middle East and North Africa through convertible debt and equity; with the debt conversion executed in 2013 to control 5.2% of the group’s ownership. Since then, many venues of cooperation exist between the group and the IFC. The global trade finance program was put in place in 2008 and aims at enhancing the developing countries’ banks capacities to provide trade finance products through providing of guarantees and risk participation agreements (i.e. direct funding). The cooperation under the USD 5bn program was in line with AUBE’s expansion- and dominance- in financing the commodity trading business in Egypt. The partnership with the IFC creates ample synergies between AUBE- with its large presence in the GCC and North Africa- and the IFC with its international footprint. The collaboration enhances and facilitates the trade flows between the developed and the emerging markets. The IFC extends support to the banks via guarantees and direct funding and risk participation agreements allowing enhancing the transaction volumes of trade finance executed by the banks under the agreement. What are the risk factors associated with international trade finance and what is the best way to counteract them? Mohamed Tousson: Commodity price volatility, FX, counterparty, performance and Sovereign risks are the most common risks inherent in trade finance transactions.
To mitigate such risks, AUBE works on two main pivots: 1. Executing the proper due diligence on the counterparties (client and bank) and be very selective in choosing our clients and counterparties. 2. Integrating the full supply chain in our portfolio. The adopted strategies enable the bank to engage in a transaction with top tier counterparties, with wide experience and knowledge in their sectors. In addition, by integrating the full supply chain in the portfolio, including international suppliers, first hand importers, manufacturers and end buyers, the bank will be provided with prudent market intelligence and the wider image of the industry thus ensuring that the proper early warning signals along the supply chain exist. Moreover, strong relations are built with international banks- who are involved in Trade Finance- as a result of the integration. Besides, proper sovereign risk and market analysis are conducted on a timely basis. In addition, adequate control over the goods and the cash is ensured to enhance the bank’s security. Moreover, when it comes to soft commodities, the bank is engaged in the commodity hedging leg of the trade transaction to ensure mitigating the risk of price volatility. As for the currency fluctuation risk on the portfolio, the bank only takes calculated FCY exposures after carefully evaluating our resources of foreign currency. Regarding the FX fluctuations effect on the client, the bank ensures to properly tailor financing facilities to decrease the risk, and adequate financing cushions are enforced to absorb any losses resulting from currency fluctuations. How are the challenges in obtaining trade finance different for SME’s versus large corporations? Mohamed Tousson: Large corporations usually have a stronger financial position, more developed and sophisticated business models and relatively more
experience; these companies, therefore, have better abilities to absorb any adverse business cycles or losses. However, the appetite for providing SMEs with structured trade finance exists. Monitoring of successful successive trade transactions executed from the client’s own sources through AUBE’s counter is a precondition to accept the engagement in trade finance with our clients regardless of their size. Their ability to procure goods and profitably sell them is examined prior to extending any financing opens the door for cooperation to companies in all sizes on performance basis. What are the different types of trade finance instruments available? Mohamed Tousson: The conventional trade finance instruments encompass IDCs, ODCs, LGs, LCs, and SBLCs. In addition, a number of third party monitoring and controlling tools include Stock Monitoring Agreements, Collateral Management Agreements, Cargo specs inspections and certifications. The mentioned tools, when incorporated in the financing structures, create comprehensive trade finance products that meet the trading companies’ efficient operations requirements while securing the bank’s position.
Nevine El Messeery (L) Chief Executive Officer and Managing Director Ahli United Bank
Mr. Mohamed Tousson (R) Head of Structured Trade Finance Department Ahli United Bank Summer 2015
MIDDLE EAST FINANCE
MIDDLE EAST FINANCE
FRONTIER FOR DEBT FINANCE
By Nigel Swycher, CEO of patent analytics company Aistemos The world is changing in ways that have profound implications for banking and, more specifically, debt finance. The onetime bedrock of corporate value, the tangible solidity of physical property, is being replaced by relative ephemera â€“ intangibles, and in particular intellectual property (IP), now dominate enterprise value.
Nigel Swycher CEO Aistemos
This is not mere conjecture; the facts speak for themselves. It is estimated that upwards of 70% of enterprise value is attributable to intellectual property and intangible assets more generally. Indeed, recent analyses suggest that intangibles make up 53% of the total assets of the FTSE100.All this represents a number of challenges for the banking community.
Fixed assets, against which debt finance is traditionally secured, are becoming less important. The more fixed assets slide into relative obscurity in terms of their contribution to the vitality of corporate balance sheets, the less solid the ground on which debt finance is advanced. So, as the balance swings ever more towards intangibles, banks must choose between simply advancing less credit and cranking up the extent to which intangible assets are recognised as security. Not even cash flow projections, still the mainstay of debt finance modelling and decision-making, are immune to the rise of the intangibles. More than ever in our knowledge-based economies, ideas and innovation are vital to competitiveness, and therefore future cash flow. Here IP once again comes to the fore. IP strategy, as well as the value and risk associated with patent portfolios, is a direct proxy for innovation. Quite simply, lending decisions based on financial performance projections that do not include a view of IP are incomplete. Summer 2015
MIDDLE EAST FINANCE A New Frontier The perhaps unpalatable truth for the banking community is this: Intangible assets, and more specifically IP, present challenges that must be overcome; a new frontier that must be explored and, ultimately, accepted as a key component of the debt finance markets. Before that can happen, however, there are some major barriers to overcome - chief amongst them the fact that intellectual property rights (IPRs) are not so much opaque, as invisible to the banking community. As things stand, IP is “unbankable”, as the authors of the UK Intellectual Property Office’s report, Banking on IP?, put it. To a large extent this problem starts with a lack of data. Not the largely useless detail around how many patents an organisation owns, but a macro view of the strength of corporate patent portfolios, where assessment of risk and value is arrived at according to direct and relevant comparables. In other words, an analysis that is compatible with prevailing banking models. As it happens, the vast quantities of data required to build this view already exists, and has done for some time. Until now, however, it has not been accessible to the financial markets in any practical sense, for numerous reasons - the available data is complex, incomplete, distributed and only comprehensible to IP specialists such as patent attorneys, licensing executives or litigation lawyers.
Big Data to the Rescue Today this situation is changing. Big data solutions are giving bankers an opportunity to achieve a new level of insight and understanding as to the strength of IP assets – insight that has, until now, been impossible in any practical sense. In this context, “big data” is a shorthand that describes a three-stage process. First, the aggregation of all data relating to intellectual property and related events e.g. litigation and licensing; second, the application of data science and machine learning to analyse the data; and third, the use of analytics to analyse the drivers of risk and value. This big data approach enables IP business intelligence tools like Cipher to aggregate, analyse and visualise the world’s data relating to innovation and the drivers of IP risk and value - data relating to over 30 million patents, 1m+ owners, 100,000 licenses and 50,000 litigations. They provide real time access to insight around who owns which technology, the output of R&D, corporate technology trends, and the key drivers of IP risk and value - and thereby offer a new lens through which to assess the hidden 70% of corporate value.
This approach is best understood by reference to a 2x2 Grid: Value (High)
C T Risk (High)
In this visualisation, the position of two companies T (the focal point of the analysis) and C (a competitor or peer) are compared relative to each other. T has lower IPR value and greater risk than C. The relative positions are generated from data associated with the size, quality and nature of the IP portfolio (a value driver), whether the companies aggressively assert their IP, or conversely are frequently targeted by others (a risk driver), and known licensing activity of both, as both licensor or licensee (a value driver). Behind this simple grid visualisation is a wealth of data – now aggregated, organised and accessible – and capable of being presented in diagrammatic form. Crucially, because this data relating to patenting activity, litigation, licensing and more also presents a target businesses’ position relative to close competitors or the main players in a specific market sector, it is also useful. It provides the banking community with a genuine insight into something that was previously in darkness - the relative IP profiles of T and C.
Big change For now banking is a long way from truly exploring IP’s new frontier. Debt finance remains in relative darkness when it comes to understanding IPRs and intangibles more generally – and that will remain the case until the banking community engages with the big data solutions that can deliver real insight. But make no mistake, IP is a significant source of value and big data delivers new insight. Thanks to the increased availability of data, the low cost of cloud computing and smart implementations of data science, banks will gain the tools they need to truly engage with IP as a corporate asset. Intangibles will come into full view and the role of IP as debt security will be sufficiently understood to help shape a whole new market for corporate finance. Summer 2015
MIDDLE EAST FINANCE
Sharia-compliant auto leasing drives 25% CAGR growth
Small ticket leasing, Islamic banking style, is a growing market area. Sharia financing is any type of banking activity that is consistent with the principles of sharia law and its practical application through the development of Islamic economics. We spoke with Bader Khalaf Al Shammari , CEO of Al Yusr Leasing and Financing in Riyadh to find out more.
MIDDLE EAST FINANCE As of 2014, sharia compliant financial institutions represented approximately 1% of total world assets. By 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and as of 2014 total assets of around $2 trillion were sharia-compliant. Although Islamic Banking still makes up only a fraction of the banking assets of Muslims, Sharia financing has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018, according to Ernst & Young.
Assets, the focal point of finances Al-Yusr auto leasing outlined the advantages to Shariacompliant financing. Bader Khalaf Al Shammari stated that sharia compliant financing is very relevant to ethical financing, with the principles of equitable distribution for everyone. It brings the ideals of fair trading, judicious spending of wealth, and the well-being of the community as a whole.
“A major fundamental is the genuine underlying transaction with assets being the focal point of finances,” said Bader Khalaf Al Shammari So what do SMEs need to consider when applying for financing, you might wonder. Bader Khalaf Al Shammari says SMEs need to consider the fact that the lenders will follow the correct steps relevant to pre-assessment for the utilization of funds. The purpose of applying for financing, the cost of such funding versus the expected return by the SME itself, is to be carefully evaluated and projected. SMEs need to consider that lenders will always follow measures pertaining to risk assessment, the financial standings of the SME and the repayment capacity are some of the factors involved. For SMEs, the two main benefits of leasing are the tax holidays enjoyed by the lessor (since the lease payment is considered an expense) along with the ease of facilities approval since the assets continue to be registered and owned by the financier. The value of leasing as finance option is maximized when the lease is ending with ownership. Assets are acquired by lessees without injecting heavy capital. Looking ahead, Bader Khalaf Al Shammari points to the 25% CAGR growth in the sector as the evidence for plenty of opportunities still to come. “The development of tailor made innovative products and focusing on the services for the segment remains a major challenge,” Bader Khalaf Al Shammari proudly claims.
Ijarah schemes Under the leasing with a promise to own (or Ijarah) scheme, the financial institution buys the car on behalf of the customer, according to the specifications provided by the customer. The financial institution then gives the vehicle to the customer on lease and charges rent for its use. At the end of the financing period, ownership of the car is transferred to the customer upon final balloon/residual payment. In some cases, financial institutions charge rent on a fixedrate basis. In other cases, a variable leasing rate is offered to the customer. The variable rate is typically pegged to the interbank rate in the local market. Although Sharia-compliant car financing products are constructed differently, they share some common attributes with regards to their compliance with Sharia rules. These include the direct participation of the financial institution in the car sale and purchase. The nature of a financial institution’s participation will vary, depending on the model on which car financing is based.
Financial institutions cannot benefit from penalties paid by the customer in the case of late payment. Such charges are typically required to be donated to charity. In some cases, Sharia scholars have allowed financial institutions to retain a portion of penalties on account of the cost incurred in recovery. The restriction on financial institutions to impose any additional charges or fees at their own discretion, other than those which have been agreed upon with the customer at the beginning of the financing period, based on the customer’s obligations in that particular contract. This requirement will have different implications depending on the model used.
Bader Khalaf Al Shammari CEO Al Yusr
MIDDLE EAST INSURANCE
Supported by domestic demand: Surge in credit insurance A surge in demand for credit insurance, in diverse sectors, ranging from the food industry to the chemical industry, has driven business this year for Turkish credit insurance player Euler Hermes Turkey. An estimated 1,200 companies across all sectors will be using credit insurance in 2015, according to Euler Hermes. Increasing DSO and foreign exchange rate volatility have driven domestic demand, from which the credit insurance sector also stands to benefit. Euler Hermes Q1 results were solid start to the year, the company claims, with growth increasing over the last quarter of 2014, driven by a â€œrecord level of new production and the strengthening of non-euro currencies,â€? Wilfried Verstraete, chairman of the Euler Hermes board of management, said in a statement.
Ozlem Ozuner CEO Euler Hermes Turkey Summer 2015
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MIDDLE EAST INSURANCE Revenues were Eur 670 million, up 5.1% over Q1 2014, and net income was Eur87 million, an increase of 5.3% over the same period. Going forward, the company suggests that low-interest rates, low oil prices, and the weak euro are positive factors for the Eurozone in particular. Strong growth is still to be expected in non-mature markets, coming from increasing awareness of credit insurance and insolvencies are expected to decrease globally by 2% in 2015, which will put additional pressure on prices, according to the company.
Need for more protection Euler Hermes secures companies’ receivables in addition to helping them choose the right clients with the support of data and analysis.
We put the following questions to Ozlem Özüner, CEO of Euler Hermes Turkey: How does credit insurance work? Credit insurance is provided to companies selling on an open account basis. Let’s say that Company A is selling to Company B. Company A is insuring the risk of non-payment from its buyer (Company B) with us at Euler Hermes. The insurer takes the payment risk of Company B and indemnifies the claim in the event of non-payment by Company B. What are the current trends you see? More companies are using credit insurance within their risk management systems. Trade finance and associated products such as direct debit and securitisation are used together with credit insurance. Why is trade credit insurance a better alternative to letters of credit? Letters of Credit create an operational workload for the applicant, and they cost more when compared to a credit insurance policy. Credit insurance does not only guarantee payment of the buyer, but it also provides a risk management system to the insured and assists turnover growth.
As of June 2015, the company had insured
EUR 5.5 billion worth of trade receivables. Thanks to Euler Hermes’s global leadership in trade credit insurance and its leading role in creating awareness in Turkey, the company’s trade credit insurance premium growth in Turkey was at double digit numbers at the close of June 2015 compared to same period last year. The CEO of Euler Hermes Turkey, Ozlem Özüner, thinks there is more need for protection across all sectors and thinks growth in 2015 will surpass last year. This year they want to give attention to food, pharma as well as machinery & equipment industries. Özüner says all exporting sectors are at their target and believes Euler Hermes needs to support exporters in a year where Turkish export destinations carry high insolvency risks. Euler Hermes currently works with HSBC, Finansbank and Yapi Kredi Bank as a distribution partner. “Turkish companies operate in a very competitive environment, and in order to succeed, they need favorable domestic conditions for the production and export of value-added products, knowledge of their counterparty risks,” Özüner said at a conference in Istanbul last November. “Credit insurance can be a driving force in international trade, not only as exporters target new markets but in helping them to identify quality buyers with whom they can develop healthy turnover growth.”
What are the common misconceptions about credit insurance? Sometimes when the product is new to a market, it may be seen as the credit insurer is not giving enough limits to the insured party to cover its trade. However, once the credit insurance is in place, both the insurer and the insured create a working relationship based on getting to know the business and the buyers. After the commencement of the policy, the insured sees that the insurer is able to cover most of its trade and even support the increase of turnover with the limits allocated to the buyers of the insured. Following the Turkish Banking Regulator, BDDK’s latest decision, credit insurance policies will be accepted as second-degree collateral by banks. What impact do you see this having on the market? More banks are approaching us to sign loss payee agreements, assigning our policies to them to be used as collateral. Bank channel penetration within the overall premium production of our company is increasing. Is Euler Hermes launching any other new products or services this year? We have recently launched bonding in the Turkish market. It was a product provided only by the banking sector until this year. Euler Hermes is the first insurance company providing this product to the Turkish customers. We already see a lot of interest to our offer from Energy, Construction and Logistic sectors. Summer 2015
MIDDLE EAST BANKING
From SME to SHB Dr. Bernd Van Linder, the CEO of Saudi Hollandi Bank, explains how tailoring solutions for different sized businesses in the Kingdom, and developing products to take advantage of mobile phone technologies, has driven company growth Saudi Hollandi Bank (SHB) experienced a net profit income increase of 21.3 percent in 2014. What do you attribute to this success? There are three key drivers of our success: efficiency and capital strength, investment in our core businesses and a single-minded focus on our customers. Together their impact has ensured that we continue to grow and to broaden our market presence. We are already a force to be reckoned with in corporate and institutional banking and are growing our retail presence steadily and surely. In serving our large corporate, institutional and small and medium-sized enterprise (SME) customers, we have diversified our portfolio, further improved our service efficiencies and expanded our range of products and services, helping us to achieve record growth in both assets and income while registering ever higher levels of customer satisfaction. Of course, the positive economic environment in the Kingdom
is helpful, and we continue to benefit from the government’s investment in infrastructure projects, participating in the financing of a number of high-profile transactions. We are particularly proud of the strides we have made in serving SME customers and continue to make significant investments in supporting this essential sector of the economy. Pleasingly this has been recognised in a number of industry awards. Similarly, although we have not traditionally been among the bigger retail banks, we have grown our profile in this segment as well. By focusing on providing the right solutions for retail customers, we have become a leading provider of home finance and are growing quickly in other retail banking products. SHB is a strong supporter of small to medium sized businesses. Can you tell us more about some of the support services you offer SMEs? How does the support offered to SME clients differ from the needs of large corporations? SMEs are important customers to us and our experience working with them over the years shows that they have their own very specific requirements, which are different from those of both large corporates and retail customers. Getting the service offering right is critical and we have developed specialist skills in this area to support them, viewing this as an area of strategic importance for the bank. Summer 2015
MIDDLE EAST BANKING
We understand the unique characteristics of SMEs and acknowledge that access to financial services for many of these businesses remains severely constrained.
We, therefore, offer easy, straightforward and quick solutions that address this segment’s specific banking needs. For example, we have developed a specialised risk acceptance framework for assessing SME credit, which helps us to better serve these customers in a prudent yet progressive way. We know that face-to-face dealings are important for the owners of these businesses, so we have broadened our outreach by opening SME business centres right in the centre of SME clusters, like those we see in the Balad area of Jeddah, for instance. SHB is a leader in Internet banking and recently launched “ The business owner toolkit”, a new Internet microsite for SME clients. Why is incorporating technology into banking vital? What challenges has it brought? Beyond the obvious visibility of social media, technology is also enabling the growth of mobile banking and customers are embracing the use of their smartphones and tablets to handle transactions. The demand for applications that are both useful and easy to navigate is growing fast. Smart phone penetration in Saudi Arabia is already close to 75 percent and the potential to broaden the usage of this channel and to place it at the heart of customer relationships in retail banking is huge. When we launched a mobile banking app, over a quarter of our existing Internet banking users registered almost immediately without any direct marketing efforts. Digital transformations like this give banks an opportunity to provide customers with ever more convenient services and can also play a major role in building customer loyalty. Many new loyalty programmes in retail banking are now built around approaches that allow product managers to more deeply understand customer behaviour and needs. Technology is allowing the analysis of data that in turn helps to formulate offers and rewards that strengthen bonds and enhance customer experience at the same time. SHB has realised the potential in this digital transformation and has evolved its loyalty programme proposition to its customers accordingly.
Over the past two years, SHB has increased the number of branches in the Kingdom. Do you have any further plans for expansion? Having a significant physical presence throughout the Kingdom is a key part of our strategy to support businesses and families wherever they are based. We know that customers appreciate being able to meet with our professionals face-to-face and we encourage an environment of open, friendly and straightforward service as part of our culture. To that end, we increased the number of branches by 20 percent last year and boosted the number of technologically advanced ATMs to 382 and we have plans to open another 80 branches within three years. Family business IPOs in the Saudi market were extremely active in 2014. What do you attribute this to and do you expect it to continue in the upcoming year? The growing economy and new regulatory initiatives are expected to drive investor confidence and bring liquidity to the market, while government spending on infrastructure and the diversification of the Kingdom’s oil-based economy is creating more opportunities for the private sector. These developments are likely to lead to more companies wishing to raise capital from the market. Reflecting this, the Capital Market Authority is continuing to focus on measures to encourage IPOs, including the streamlining of listing rules, which will encourage many family-controlled firms to launch IPOs, in turn provoking a much-needed deepening of the equity markets in Saudi Arabia. The growing number of planned IPOs in the upcoming year is a testament to this approach, and we are seeing investor confidence on the rise. What is SHB’s banking strategy for 2015? We will continue to operate under the strategy I outlined earlier, allocating capital and resources in a rigorous process to support the growth of our core customer businesses. Whether corporate, institutional, SME or retail customers – we work hard to become the bank the Kingdom always chooses. Summer 2015
MIDDLE EAST BANKING
Banking IN JORDAN Haethum Buttikhi, Head of Retail and Private Banking at Jordan Kuwait Bank (JKB) spoke with us about the private and retail banking sectors in Jordan. What are the current trends you see taking place in the private banking sector? In an increasingly competitive market, the focus has been on improving the clientsâ€™ overall experience. Investment solutions are becoming more sophisticated and tailored to meet each individualâ€™s investment objectives and needs. Who are Jordanâ€™s high-net worth individuals and how have their attitudes towards wealth management changed over the past few years? Mainly family business owners and entrepreneurs as well as retired Jordanian expats and regional nationalities that have moved to Jordan from Iraq, Syria and Libya. After the financial crisis and slower domestic growth, clients have become more conservative and prefer to seek investment guidance from their trusted financial and investment advisors. In general, every client is different; it all depends on their individual financial needs and their risk appetite.
Haethum Buttikhi Head of Retail and Private Banking Jordan Kuwait Bank
Let’s talk money
MENA Invest is an innovative and dynamic financial institution based in Beirut and licensed by the Central Bank of Lebanon to offer asset management, capital markets and advisory services. The firm provides a full-service platform sustaining a comprehensive product offering covering all asset classes and many developed, emerging and frontier markets and geographies. Through its offices in Beirut and Geneva (MENA Invest Asset Management SA – Geneve), the firm thrives to deliver a sophisticated, first-class and bespoke investment advisory and investment management service. The firm’s dedication to achieving superior returns and the combined skills of its team representing decades of experience in a wide range of asset classes and investment solutions, allow for a versatile offering adapted to clients’ needs.
MIDDLE EAST BANKING How does your Private Banking Unit help clients manage their daily finances and achieve their long-term financial goals? JKB’s Private Banking Unit works with an open platform structure in terms of international investments and wealth management, in which JKB invests and trades for clients in all major asset classes and global markets through JKB’s relationships with major international banks. More so, private banking is about relationships; you need to be close to your clients and understand their needs and manage their expectations. Our strategy is to constantly build and maintain the strong relationships with our clients, have a full and comprehensive understanding and knowledge of their finances, investment needs, and their risk appetite. Additionally, continue to build business relationships with a number of international banks and financial institutions in order to benefit from their experience in developing investment products that can be customized to the Jordanian market and that take into account the investment preferences of different customers. What does the future of retail banking look like and what role does technology play? Technology plays an important role in the banking industry. The Bank is known for being a leader in introducing electronic service delivery channels, its hi-tech infrastructure, e-branches, widely spread ATMs, and internet banking facilities are an attribute to this. In addition, JKB was the first bank in Jordan to provide ATMs for persons with visual impairment and Interactive Teller Machines (ITM). At JKB, We are continuously working on enhancing our products tailored towards our retail customers while expanding and maintaining a clear and transparent partnership with them as well as focusing on enhancing the customer experience and service in the aim to deliver targeted profitability, growth and service.
The demographics in Jordan with about
70% being under the age of 35
and smart mobile penetration rates in the country make it particularly susceptible to migrating more transactional services online.
CSR has always been important to Jordan Kuwait Bank. Can you tell us some of the ways you support the social economic development in Jordan? One of the most important elements of Jordan Kuwait Bank’s institutional logo “More than just a bank” is embodied in the Bank’s commitment to work at enhancing its social role and improving its relations with the local community, as well as contributing to achieving economic and social development as a partner with other national institutions. JKB’s CSR initiatives over the years include supporting conferences and symposia; encouraging cultural, artistic and sporting activities, an example of which is providing civil society organizations and relevant associations with the opportunity to use the Bank’s theater free of charge as a venue for their activities. The Bank also provides support to initiatives and activities that hinge around awareness and positive influence in the fields of health and the environment. In addition, JKB realizes the importance of supporting education; among the Bank’s initiatives in this field is extending financial assistance to a number of underprivileged students, and providing scholarships to talented student to attend Jordanian universities.
The Bank also provides annual support to Al-Aman Fund for the Future of Orphans, covering the cost of university studies for a number of students, in the aim of guaranteeing a better future for orphan students upon their graduation from care homes, to become productive members of society. The Bank also provides general and practical training opportunities for university and community college students to complete their graduation requirements. The Bank exerts every effort to carry out its role in humanitarian areas through its continued support to most charitable organizations operating in poor and underprivileged areas, supporting families and empowering women. Additionally, the Bank contributes annually to SOS Village to support two of its homes. Summer 2015
MIDDLE EAST FINANCE
Linking Contracts to Transactions Using Semantic Technology to Transform Client Onboarding, Netting and Collateral Agreements By Rupert Brown, CTO Financial Services, MarkLogic The combination of bankers & lawyers can be a potent mix at the best of times and when it comes to drafting derivatives trading agreements between a financial institution and a complex multinational you have the potential for endless confusion and disputes. This is exacerbated by the need for all financially interlinked businesses to improve the precision and scope of their transactional risk reporting to their political masters and global regulators. We really need to create a systematic way of binding transactions to the agreed contracts that can be validated at scale, and consistently, by machines with their human overseers. The good news is that semantic technology now has the potential to clarify and reduce the current spectrum of contractual risks in Financial Services. But first, let’s take a look at why they exist as part of the process today.
Inconsistent Definitions, Complexity and Problems with Paper Defining the relationship between a contract and the subsequent transactions that it facilitates can be a drawnout process. For most organisations, contracts are the result of negotiations and include the “who, when, where, why and how,” while transactions are typically defined as “what is done.” The ongoing evolution of these definitions, as well as related and evolving standards associated with them, has created numerous ontologies, taxonomies and coding schemas that are difficult for legal and accounting teams to utilise consistently and then maintain over the lifetime of a business relationship. Speaking of complexity, it is difficult for financial institutions to grasp the variety of the products that they trade - especially when new “Special Purpose” structures may need to be created to meet a client’s specific needs or retain their loyalty.
Rupert Brown CTO Financial Services MarkLogic
MIDDLE EAST FINANCE In today’s Smart Order Routing/low latency world we often perceive that the supporting contracts are short-term opportunistic entities encompassing a lifespan of just weeks or months. In reality however, we need to be able to define contracts that evolve consistently right through from client onboarding to termination: potentially a lifespan of 25 years or more. Currently this largely manual task is costly and repetitive, incurring considerable legal fees. It is also fraught with errors because human interpretations of clauses are prone to inconsistency: the “redlining” process is largely achieved by email interchanges where the whole document is often renamed in a variable fashion depending on the author/editor. It is time the Financial and Legal industries tackle this process head on and learn lessons from the digital editorial process that has revolutionised the media sector over the last 15 years. These goals are hard to achieve with paper-based contracts. Contracts exist to determine the scope of a “Joint Enterprise” and to mitigate the risk of disputes via the application of consistent legal process within a jurisdiction. If we can systematically simplify how they need to be interpreted and ideally automate most of that work then we can react to far more events from basic notification processes through to Force Majeure or Termination clause invocation without the need to “rummage in the filing cabinet”.
Semantics in Contracts Today’s semantic technology ensures computers know where to look and what to look for. Semantics discover and connect related data in order to make better businesses decisions based on all applicable information. Ontologies tell the computer what to look for within an agreed set of definitions of elements of a transaction, such as Financial Industry Business Ontology (FIBO). Semantics tells a computer what an entity is related to and therefore what actions to take, in which order and on which items.
Semantics can address many financial services issues such as:
What is the significance of a credit event or other corporate action on a business relationship? Where to look for its impact? Know what to do when you have found a contract that is impacted. Know what items in the contract schedule have to be acted upon.
So let’s now look at some key areas where we should look to apply this technology and what end results can be delivered.
Client Onboarding The overarching Client Onboarding process must be the starting point for applying semantic linkage across contractual documents – wherever possible the industry and supporting government agencies need to move to the “Linked Open Data” approach rather than the current workflow-based “copy” approach. Having standard ontologies that define the range of documents and their interdependence will bring much-needed transparency to a process that frustrates both sales staff and their potential customers alike. The streamlining of financial and regulatory reporting enabled by the broad adoption of XBRL as a global standard has done much to simplify the collection and automated analysis of institutional activity and will doubtless accelerate in the coming years. There will, however, always be the need for companies to hide some of their strategic intentions by the use of “offshore” havens and “blind trusts” that will need “fair use“ disclosure agreements before they can be accessed. In truth, these do not preclude the use of a semantic linked data approach but merely a more complex set of interaction protocols that are triggered when the linkage is traversed.
Netting and Collateral Agreements In the eye of the post-crunch regulatory storm, two points related to netting and collateral agreements come to mind. The Basel III family of systemic risk mitigation regulations brings a focus to the chain of events that must unfold when a counterparty’s credit worthiness materially changes - mostly due to its own activities but also the sectors and jurisdictions it operates in. The recent raiding by Greece of its reserve accounts held at the IMF - ironically to pay the same IMF the latest tranche of interest on its bail-out loans - may prove in time to be a valuable case study: a semantically rigorous Netting Agreement would not have enabled Greece to use this mechanism and would have forced a default. Applying the capability to embed semantics into Collateral Agreements gives us a very powerful tool by which to meet the stringent requirements for counterparties to post collateral of sufficient quality to meet a varying span of credit ratings and levels of “stress” or lack of liquidity in the market.
Summary Innovative financial institutions are implementing semantics to capitalise on their highly complex pools of data, turning them into a competitive advantage that drives better business results. With a comprehensive view of all data, presented within the context of the business, these organisations can mitigate risk, increase agility and time to value, and leapfrog competitors. Implement semantics today to unlock the true potential of your data.
MIDDLE EAST INTERVIEW
MIDDLE EAST INTERVIEW
Challenges and Opportunities in the GCC Mustafa Ahmed SalmanÂ Chairman United Securities LLC
United Securities was established in 1994 with an objective to provide investment services in Oman. Currently, it is the leader and pioneer in providing all types of financial service requirements to its clients in the country and abroad. The company offers its services to a wide spectrum of clients including retail investors, high net worth individuals, government pension funds, and private, public and government companies. Our editor Wanda Rich spoke with Chairman Mr. Mustafa Ahmed SalmanÂ to find out more about their success and the challenges and opportunities facing the investment industry in the GCC. What are the biggest challenges and opportunities you see facing the investment industry in the GCC? The overwhelming interest in the region over the past decade has resulted in
some gaps in the industry. The regulatory requirements are improving but should reach global standards. More family owned businesses should enter the market and become accessible to local as well as foreign investors. This will also improve the depth of the market and increase liquidity levels in the long run. A simpler and common framework should be created for institutions to access the GCC markets as a whole such as a common clearing and depositary. Diversification of the economy is happening albeit at a slow pace, we expect the non-oil GDP to grow more rapidly and the dependence on the oil reduce going forward. You began operations over twenty years ago, how has the industry changed and what initiatives do you feel have contributed to your continued success? The equity markets in the GCC have gone through tremendous changes in the past decade. Corporates which were initially shy of entering the public space have realized the various advantages of sourcing capital through the stock markets and deploying them effectively in their business. This trend has primarily been a forced progression and as a result of the rapid growth and capital requirements
it entailed. The evolution of various business opportunities brought with it a host of professional managers both from within the region and abroad. They have imbibed the best practices from across the globe and transferred the same here. Currently, we have an increasing base of local and foreign participants in the equity and bond markets. There are over 100 Asset management companies managing 400 funds with a total corpus of near to $50bn in the region. Further, there is a private equity segment which separately manages over $20bn. The fund management industry has not only grown in size but also in terms of sophistication and risk controls. The aggregate market cap of the listed GCC companies in the GCC has almost doubled from 2006. Adding to the growth of the industries, companies have also evolved to become investor friendly, adhering to disclosure norms and publishing data on a voluntary basis. The improvement in transparency has been acknowledged by several international agencies such as MSCI which recently upgraded Qatar and UAE to an emerging market status after thorough consideration and in-depth research of the entire process flow in the capital market. We have grown both horizontally and vertically during this Summer 2015
BEST TRADE FINANCE BANK EGYPT 2015
BEST TRADE FINANCE BANK BY GLOBAL BANKING & FINANCE REVIEW
MIDDLE EAST INTERVIEW period. Vertically we added more clients to existing business verticals such as brokerage while horizontally we introduced more products such as asset management and private equity. We have also grown geographically across the region. We have direct exposure in Egypt which is the most vibrant market in the region. The company also started US trading desk making the developed markets accessible to local investors. The United GCC fund was launched as an open ended fund and catering to any investor interested in the region. This has promoted our reputation and maintained our leadership position. Can you tell us about some of the innovative products and solutions you offer to help individuals and institutional investors achieve their investment objectives? We have continuously re-invented ourselves to suit the rapidly changing scenarios and that has been the primary reason for our success. We were the first to launch internet trading in the country. We have offered several portfolio structures to suit each client’s risk and investment profile. We have also created portfolios that are sector specific and strategic in nature. The United GCC Fund is a growth fund with a flexible investment strategy appropriate for investors who want to take exposure in the region.
The upcoming United Balanced fund will be a mix of both debt and equity offering investors with consistent yields coupled with capital appreciation. As a one stop shop for all financial needs, we have been active in the private equity side wherein we assisted and advised several companies to raise capital, add partners and grow their businesses. Our US trading desk provides further avenues for investors looking to invest in the products that are not available locally. Most of all, our well connected network in the region provides timely and valuable information to us which is passed on to our clients effectively. This has been much appreciated, and our patronage has only grown. How do you ensure customers are receiving the best customer experience available? We have dedicated relationship managers who are constantly in touch with clients. These relationships span several years, and any issue is quickly resolved in the most amicable manner. Our growth in the past several years is clear evidence to the satisfaction level of our clients. What advice would you give new investors? New investors must understand that Oman as well as the GCC has its own characteristics much different from other markets
in the world. The uniquely positioned regional markets offer sectors and companies that are still in their nascent stage of growth. The minimal time for setting up a business, hassle free operations, low cost of infrastructure, tax free haven and stable currency have been some of the main attractions. The influx of capital has also led to widespread improvement in the regulatory and policy framework of the region as a whole to match and accommodate the objectives of the local and international investors. As a result of the increasing attention the GCC union on a combined basis has entered the trillion dollar economy club and growing at a much faster pace than its peers. This kind of size and rate of growth is difficult to ignore. There is a great opportunity to have a portfolio that will provide a consistent yield as well as offer capital growth. What does the year ahead hold for United Securities LLC? We are planning to launch a new fund this year which will be a mix of both debt and equity. It will be placed diametrically opposite to our current fund thereby catering to investors with a totally different risk profile. We also plan to expand our reach to other countries in the GCC. Our objective is to provide global solutions for the local community and we hope to achieve it soon.
United Securities offers the following services Equity Brokerage: The largest non-banking securities broker in Oman. It provides its customers with a platform to trade in the Muscat Securities Market. It also offers brokerage in the GCC, Egypt, and US markets. United Securities has been continuously awarded the best brokerage services provider in MSM over the past several years. Asset management: Established track record of providing superior returns to investors. Manages discretionary portfolios worth over RO 170 million (USD 440 mn). The Asset Management Department is mandated as fund managers for several government and quasi government pension funds as well as many of the large corporate and HNIs. Corporate Finance: Undertakes Private Equity Placements, Issue Management, Capital Restructuring, and Deal facilitation for corporates in Oman Equity Research: Provide insights to clients to base critical investment decisions in various stocks in the regional markets.
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Our focus on creating innovative Shari’a compliant products for our customers has resulted in our appreciation at a global level. Most Innovative Islamic Credit Card, UAE 2015 Best Islamic Bank for Auto Financing, UAE 2015 Best Islamic Bank for Personal Financing, UAE 2015
We look forward to more such successes in the days ahead.
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MIDDLE EAST FINANCE
Barely scratching the surface The state of global banks and financial servicesâ€™ Vendor Risk Management programmes The use of third parties in business isnâ€™t a new concept, with many organisations today outsourcing for significant cost and efficiency benefits. Indeed, with growing pressure to focus on core business functions, reduce expenditures, increase profitability and revenues, whilst still providing immaculate customer service, more and more financial institutions are leveraging third parties to carry out critical business processes and operations.
MIDDLE EAST FINANCE
Today, banking and financial services’ third-party relationships have evolved far beyond the traditional models of goods and service providers and vendors to include agents, agency agreements, debt buyers, and franchisees. With an ever-expanding network of relationships, the measures needed to manage the associated risks, reputation of the stakeholders, and cashflow become vital to the viability of the business. In association with the Risk Management Association (RMA), MetricStream conducted a research survey to learn how financial institutions currently manage their vendors and the kinds of risks that such reliance on third-party relationships pose. In the heavily regulated financial services industry, findings of the research point to the need to address some key areas; vendor governance, including vendor management frameworks, vendor selection and monitoring processes, and fourth party suppliers.
Vendor management frameworks The survey is a clear indication that most organisations’ Vendor Risk Management (VRM) programmes are not as strong as they could be. Best practice stipulates that VRM programmes should be risk-focused, providing the oversight and controls proportionate with the institutions’ own risk appetite.
Until now, however, many financial institutions have simply relied on governance frameworks based around procurement with a decentralised approach to VRM. Of the organisations surveyed, most have VRM programmes that are only in their infancy and, worrying still, none have complete confidence in their decentralised approaches. The issue of having individual departments in charge of their own VRM programmes – of which 70 percent of financial institutions do – is that the same vendor may operate across multiple business units, meaning that there is little understanding of the enterprise’s total risk exposure with that single vendor. Indeed, if that vendor experiences a data breach, or was associated with corruption, the full extent of the damage – financially and reputationally – could be catastrophic.
Vendor selection and monitoring Vendor selection and monitoring is an important part of any successful VRM programme, and it’s clear from the survey findings that financial originations recognise this fact, despite there being room for improvement in a couple of key areas. A bank must conduct the proper due diligence on third parties before entering into a contractual relationship, and should not just rely on prior knowledge of the vendor. Rather, they should have in place the processes for continuous in-depth assessments on the third party’s capability to perform the activities commensurate with the risk and complexity of the relationship. Summer 2015
MIDDLE EAST FINANCE As financial institutions are quite likely to have hundreds – even thousands – of vendors, it’s not feasible to give all of them equal attention. Therefore, vendor due diligence programmes must be more comprehensive for those third parties who are providing or supporting a critical activity, such as a core banking system that supports daily functions. Experts have suggested that critical third parties should include any vendor with the potential to impact a bank’s reputation, or prevent it from complying with laws, or defend itself against cyber attacks. Most financial institutions have multiple experts for third party selection who are responsible for researching potential vendors. Due diligence is often a multi-round process that evaluates the vendors’ IT, information security, finance, legal, business planning and continuity management.
In regards to suppliers of critical activities, according to the research findings, 97 percent of banks have defined, or are in the process of defining, what their critical activities are. In addition to the due diligence questions, 72 percent conduct a site visit to the vendor’s premises and 25 percent reassess the risk on an annual basis. However, it’s interesting to note that this is often an annual service as opposed to a process driven by risk management, which may suggest a need for better monitoring and decision triggering factors. The role of vendor monitoring rests with a few different functions in the organisation, all of whom play a role in ensuring that vendors are meeting the organisation’s established expectations and objectives. In cases of critical processes being outsourced, senior management, when making recommendations on third-party relationships, must present the assessment results to the board for its approval.
Perhaps the most surprising statistic from the research findings is that 67 percent of financial institutes do not perform any due diligence on their fourth parties, despite the potential risks involved. 20 percent perform due diligence on fourth parties at the time of sourcing a third party, and 13 percent do so when the primary vendor notifies them of a new fourth party. Given the huge influence a fourth party can have on a bank’s critical activities, this seemingly ‘out of sight, out of mind’ mentality shows naivety and proves that many banks’ VRM programmes, in some cases, are only scratching the surface. It’s imperative for financial organisations to have the required control mechanisms in place to address fourth-party supplier risks. Organisations should maintain a complete list of their suppliers through data analysis of accounts payable, contracts, and risk-related information. Moreover, organisations should use supplier risk management systems to ensure that key vendor data is kept up-to-date for all vendors, and especially for those further down the chain. The organisation must also monitor the third party’s ability to assess, monitor, and mitigate the risks associated with its reliance on subcontractors. Enterprise-wide, centralised vendor risk management For financial institutions of any size, managing third party risk with a mature vendor governance programme is extremely difficult. Indeed, the problem is only exacerbated as firms grow in size and scale, and rely on outsourcing strategies to meet evolving pressures. Therefore, financial institutions are investing in technology that can help them keep pace with new sanctions, frequent regulatory changes, increasing complexity, and a diverse, global, and multi-tier vendor network. By utilising enterprise-wide and centralised systems that can collect, maintain, and analyse vast amounts of data, those in charge of leading their organisation’s vendor risk management programmes will be able to make risk-based decisions that strengthen third party relationships and drive better performance.
Fourth party suppliers In an attempt to reduce the complexity of their VRM programmes, many companies have started to use larger vendors to reduce their exposure. This approach does pass some of the risk down the chain, as the larger vendors have their own reputation to protect. On the other hand, the prolific use of vendors and vendor subcontractors means that financial institutions are now part of a bigger ecosystem which also includes multiple tiers of vendors and third-parties. The more tiers, the more complexity, especially in the face of a data centre power outage, for example, which can have regulatory and reputational repercussions further up the chain. 184
Piyush Pant Vice President– Strategic Markets MetricStream
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Global Banking & Finance Review is a leading financial portal and Print Magazine offering News, Analysis, Opinion, Reviews, Interviews & Vid...
Published on Sep 17, 2015
Global Banking & Finance Review is a leading financial portal and Print Magazine offering News, Analysis, Opinion, Reviews, Interviews & Vid...