Market News

On August 31st, 2017, The Basel Committee on Banking Supervision (BCBS) released a consultative document on potential fintech implications for banks and its supervisors in the Financial Services sector. The paper explains how innovative financial technologies disrupt the financial sector, specifically in the banking industries. BCBS assesses the impact of fintech products and services with the help of five ‘forward-looking’ scenarios: The better bank: In this scenario, incumbent banks digitalise and modernise their current business models to retain customer relationships and their leverage to enable innovative technologies. The new bank: Incumbents are replaced by banks driven by innovative technologies because they cannot keep up with the disruptive power of finetchs. The distributed bank: Banks in the financial services fragmentise among fintech firms and banks. The only way for them to prosper is to carve out a specific niche. The relegated bank: Incumbent banks become commoditised service providers and customer relationships are owned by fintech and bigtech companies who function as intermediaries. The disintermediated bank: Banks have become irrelevant as customers directly interact with individual financial services providers. The paper argues that fintechs are going to stir up the financial sphere, which is why rapid adoption that enable fintech technologies need to be developed and implemented by incumbent banks. Standards and supervisory activities imposed by banks should meet all necessary expectations and should be adapted according to prudential standards. In line with these standards, BCBS set out 10 key observations and related recommendations on supervisory issues. The Committee welcomes feedback on the content of the paper which is currently in its review phase. All comments on the proposal need to be submitted before October 31th 2017. The original document can be found here.

On 29 June 2017, the Basel Committee on Banking Supervision (BCBS) published a consultative document on a simplified alternative to the standardised approach to market risk capital requirements. The simplified approach to market risk capital requirements is aimed at financial institutions which are less active on an international scale and not large in nature. The alternative set out in the BCBS proposal includes a simplified approach to the sensitivities-based method (SbM), which is the main component of the standardised approach. The revised Sb method includes: The removal of capital requirements for vega and curvature risks; Simplification of the basis risk calculation method; and A decreased risk factor granularity and correlation scenarios to be applied in the associated calculations. The revised SbM will be subject to supervisory approval and oversight, and will only be available to financial institutions that meet specific qualitative and quantitative requirements. As an alternative, the Committee also seeks feedback on whether retaining a recalibrated version of the Basel II standardised approach to market risk would better serve the purpose of including a simplified method for market risk capital requirements in the Basel framework. To conclude: BCBS’ proposal of the alternative standardised market risk approach is still in its review phase and all comments on the proposal need to be submitted before September 27th 2017.

On July 5th 2016, the European Commission published a proposal to amend the Fourth Anti-Money Laundering Directive (AMLD4). Slightly more than one year later, the regulation marks its implementation date. As of June 26th 2017, all obliged entities will have to comply with the new framework. AMLD4 aims to mitigate the heightened risk of money laundering and terrorism financing activities. The Directive received a substantial amount of support for implementation after multiple financial institutions showed system malfunctions and ineffective crime security controls. The directive’s considerations vary from its predecessor in terms of scope expansion and traceability. The proposed adjustments relate to enhanced Customer Due Diligence (CDD), Beneficial Ownership and public disclosure.   Customer Due Diligence   Customer Due Diligence (CDD) is a critical element for effectively managing risks and protecting systems against potential financial crimes and nefarious activities. Financial institutions and organisations will be required to become more data driven and create risk-based internal models. They will be required to improve the current risk assessment tools for assessing and monitoring economic activities of its local customers and global branches. Beneficial Ownership One of the biggest improvements in AMLD4 is the approach to the Ultimate Beneficial Ownership (UBO). The objective is to require financial corporations and legal entities to accurately gather and maintain beneficial ownership data, while also sharing this data with appropriate government agencies. Public disclosure of information Lastly, the Directive requires national authorities and financial firms to allow public access to beneficial ownership information. This information should be coordinated and aligned and it should comply with the stated requirements of the framework. For example: information about tax criminals that are also UBOs should be disclosed to relevant authorities and third parties in order to prevent abuses in offshore banking. In conclusion, AMLD4 aims to strengthen security, openness and risk assessment between financial institutions and entities. The regulatory framework is expected to consolidate the AMLCTF internal units and to improve the scope of the current Customer Due Diligence and transaction monitoring analysis.

An article has been featured on one of the top leading consultancy websites where our Senior Consultant, Paul Nielsen, reflects on the growing trend towards RPA adoption across the globe, and provides an overview of the trade offs involved. The article can be found here.

On February 23rd 2017, the European Banking Authority (EBA) announced the final Regulatory Technical Standards (RTS) on secure customer verification and communication. The European Central Bank (ECB) and EBA have been working closely together in order to finalise the RTS under the PSD2 regulation. The final RTS offers a strong foundation for an open and secure market in retail payments in the European Union zone. The completion of these standards took an intensive 18 months of policy development, collaboration between stakeholders and integration of their differing views. Drafting the PSD2 Regulatory Technical Standards was not all plain sailing. It has resulted from different trade-offs between various and, at times competing, PSD2 objectives, i.e. facilitating customer convenience, enhancing security, protecting security, as well as contributing to the integration of the European payments market. The EBA received over 200 reverts on its published Consultation Paper, in which concerns were raised in regards to certain RTS items. The EBA addresses these concerns in a table which supports the RTS, including issues such as the exemptions from the application of strong customer authentication on the basis of risk level, and the amount and recurrence of transactions, as well as the payment channel used for the execution of the transaction. In line with these concerns, the EBA has also introduced an exemption on transaction risk analyses based on defined fraud levels and on payments at so called ‘unattended terminals’ for transport or parking fares. Moreover, the EBA has also removed previous ISO 27001 references and other specific characteristics on strong customer authentication. The final RTS draft also addresses the communication channels between different payment service providers. This decision is connected to a part of PSD2 that does not allow the current practice of third party access without identification. The PSD2 regulation is set to be applied 18 months after adoption of the RTS by the EU Commission. The original article can be found here.

EU and U.S. regulators have ultimately defined the final follow-up steps regarding the Solvency II negotiations. The agreement relates to ensuring consumer protection and to contributing to a heightened regulatory certainty for insurers and reinsurers active in the EU and U.S. zone. The Solvency II reconciliation paper comprises of three areas which are significant to supervisors. The paper includes agreements relating to reinsurance, group supervision and the exchange of insurance information. The last paragraph of the agreement was added by the U.S. Congress on January 13th 2017. Essential actions for completion are to be taken by the European Council and Parliament. The idea of middle ground on Solvency II was envisioned to take place late 2016 when in November a joint public statement was released, stating that EU and U.S. representatives are making progress in ‘identifying negotiation points of convergence and areas requiring further work’. Following November, the December statement specified that the regulators made ‘significant progress’ towards establishing a final agreement. The original article can be found here.

Santander leaving the R3 Blockchain technology consortium is another sign that Blockchain is approaching the ‘Peak of inflated expectations’. Every financial institution has initiatives or Blockchain proof of concepts in progress but industry wide adoption will only be established when the ‘Through of Disillusionment’ phase in the Hype Cycle is passed. Gartner Inc’s ‘Hype Cycle for Emerging Technologies’ is a framework for many strategists, planners and global market developers to follow technology trends. The Hype Cycle provides a wide cross-industry perspective collected from more than 2,000 technologies. Taken together, the perspectives shape a to-the-point list of trends and technologies that should be considered in developing emerging technology portfolios. The 2016 Hype Cycle for Emerging Technologies distinguishes three trends that will play an important role in changing the innovation of digital business. The Hype Cycle assists businesses in how they can accurately respond to the rapid technological changes. The key technology trends are: Transparently immersive experiences: the accelerating pace of technology innovation will give rise to a transparent connection between people, businesses and things. The perceptual smart machine age: the occurrence of so-called ‘perceptual smart machines’ will enable businesses to store a great amount of data to accustom to contingent situations or to solve sudden problems. The platform revolution: new platforms continue to arise from emerging technologies. The co-dependent integration of these eco-system platforms support the development of new business models which minimise the gap between humans and technology. The components of the Hype Cycle are believed to have a great impact on the strategic planning of organisations, enabling an active business culture of competitive advantage. The original article can be found here.