By Louise Courtman at Crossbridge
Throughout 2011 and 2012, the FSA has introduced a number of enhancements to the UK client assets regime, from the Client Money and Asset Return (CMAR) and the creation of the CF10a (CASS Operational Oversight Function), to increased requirements for auditors and the CASS Resolution Pack.How far-reaching and effective have these changes been and what lies ahead in 2013 for CASS compliance? Following the demise of MF Global, the protracted return of clients’ assets to them in the UK, compared to the speed of return experienced in the US, suggests a long road to improving the regime still lies ahead.
Back to basics
Whilst client asset issues have moved higher up the agenda of firms’ senior management, with investment in systems and staff to make firms’ control environments more robust, the FSA is clear in its view, it is still seeing firms getting the basics wrong; Blackrock’s fine last year for failure to have valid trust letters in place is just one example. The regulator has re-affirmed its commitment to the level of increased scrutiny and supervision the industry has witnessed it adopt since early 2009 and sent a strong message that there is a significant amount of work to be done for firms to embed the foundations of basic compliance.
In the autumn of 2012, the FSA consulted on a number of proposed changes to the regulations. The primary objectives of the FSA’s Consultation are threefold: to increase the speed of return of client assets following a firm’s failure, increase the proportion of assets that are returned and reduce the market impact of the failure of firms holding client assets.The introduction of multiple client money sub-pools is intended to fulfil these goals, but will the most radical change proposed to the regime in twenty years, hit the mark?
Speed versus accuracy
In line with the European Market Infrastructure Regulation (EMIR), certain changes must be made to the CASS regulations, to accommodate the different segregation models central clearing counter parties (CCPs) must now offer to clients and to facilitate the transfer, ‘porting’, of clients’ funds to a back-up clearing member, in the event of one clearing member’s default. In part to fully address these requirements and also prompted by the greater protection that clients opting for an individual segregation model can be afforded, the FSA is considering the possibility of introducing multiple client money sub-pools and providing that level of increased protection to a broader range of clients.
Under the proposals, investment firms will have the option of establishing legally and operationally separate sub-pools of client money that may be split along client type or business line (retail versus non-retail, margined versus non-margined business). Whereas the current client assets regime prioritises accuracy over speed, the ability to split out riskier types of business would likely render it easier to resolve and pay out individual claims more quickly. The client money return to some clients should also be maximised, as any client money shortfall would be restricted to beneficiaries of that sub-pool.
It is important, however, not to overlook the degree of operational complexity involved in managing multiple sub-pools and the potential increase in operational errors that may result. Each client money sub-pool would require its own client money bank and transaction accounts, with separate client money reconciliations and segregation to be performed for each pool.Whilst these risks can be mitigated with appropriate operational controls, the cost of set up and ongoing maintenance of the sub-pools is also estimated to be significant. Costs would include record-keeping requirements(client documentation, client on boarding, agent network management, account set up, client reporting and additional staff required to carry out these processes)updates to policies, procedures, systems and controls, legal requirements, staff training, internal and external audit and project management costs. Industry respondents to the FSA’s consultation estimated the one off costs of establishing a first sub-pool to be in the region of £30,000-£5,500,000 and ongoing maintenance costs to be £60,000 to £300,000. One off costs for establishing subsequent pools are estimated to range from £0 to £1,400,000 and ongoing costs from £7,000-£230,000.
Whilst it appears that the introduction of multiple pools would result in a swifter return of funds, without too significant a detriment to accuracy, as well as bringing flexibility to the regime,can the change be extensive enough, given the legislative framework on which the UK regime is based?
Too radical or not radical enough?
The UK client assets regime is based on UK insolvency and company legislation. Not all of the criticism levied at the UK system, in the wake of MF Global, is entirely well informed, as there are important structural differences between the US and UK regimes that enable a more rapid return of assets in the U.S. Firstly, the US benefits from the Securities Investor Protection Corporation (SIPC), an industry funded insurance scheme established for clients of failed brokerage firms, covering them up to $500,000 each. Secondly and most significantly, US insolvency practitioners are not exposed to the same personal liabilities and litigation fears as UK practitioners.
Without a fundamental change to the legislative framework, the impact of enhancements to the regulations, such as multiple pools, can only ever go so far. There is also the question of how an equivalent UK insurance scheme would be funded and how feasible it would be to overhaul the legislative framework. Multiple pools are not the only proposal on the table from the FSA, however, so what are the other options to improve the regime?
Is the alternative better?
It has long been hinted at that the FSA is considering revoking the ‘alternative approach’ and certainly the Lehman Supreme Court ruling of February last year, which determined that the statutory trust over client money arises on receipt of the funds from a client, rather than at the moment of their segregation, brought in to question the value of its existence.
Under the alternative approach, whereby banks are able to receive funds in to their house account and segregate client money based on the close of business balance the previous day, there is an element of exposure that exists for money that is due to be segregated, but has not yet been. There is no guarantee, however, if the ‘normal approach’ were to be adopted across the board, that the calculation of funds to be segregated would be more accurate, given the complex multi-product, multi-currency operating environment of banks. Is it worth the FSA abolishing the alternative approach and creating serious practical difficulties for complex investment firms; difficulties the alternative approach was originally designed to mitigate?
If the alternative approach were to be retained, there are other possibilities – firms could be obliged to keep a balance in any account(s) used under the approach that is at least equal to the amount of client money to be segregated,or to hold a buffer in accounts to cover the cost of any potential losses incurred through the firm’s failings. Firms could even seek private sector mutual insurance to cover potential losses. It remains to be seen if the alternative approach will survive the current review of the regulations that is underway, though the same can also be said for the ‘banking exemption’.
Do not bank on it
There is a widely held view across the industry that the FSA is also considering revoking the ‘banking exemption’. The banking exemption permits licensed deposit taking institutions to hold funds as deposits, instead of under the client money rules. It is easy to make the assumption that all clients are seeking CASS protection and that this is the best possible form of protection for all clients, but is this actually something of a misnomer?
Under the CASS rules, client money must be diversified across a number of agent banks, so that a maximum of 20% of a firm’s client money can be held intra-group or with group related entities. It is rare that the identity of agent banks with which funds are held is disclosed to clients and what the potential credit exposure therefore is. Conversely, under the banking exemption, clients knowingly place their funds with an institution, the credit risk of which they are aware. Whilst the Financial Services Compensation Scheme only covers clients up to a certain threshold for deposits, if the banking exemption were to be removed, would that limit the options open to clients for protection of their funds?
If changes such as the removal of the alternative approach or the banking exemption were to be introduced, the path to implementation for investment firms currently operating these would be long, complicated and costly and furthermore, restricted by the UK legislative framework, alone may not fulfil the FSA’s objectives for CASS compliance. Is it actually a different type of client assets regime that is in fact needed?
Time for regime change?
It is important to remember the speed of return of assets to clients fundamentally depends on the complexity of issues at the time of a firm’s failure. The current CASS rules give primary focus to protection in the event of insolvency. Should the industry instead be working towards a regime that places greater emphasis on compliance when firms are solvent entities?
With the current market share in the UK at over £100 billion for client money and £9.7 trillion for client assets, and with the potential for that share to grow further still with the segregation models CCPs are now obliged to offer under EMIR, client asset protection will remain central to the FSA’s agenda.
Changes have been and are still being made to move towards an improved regime, but the fundamental overhaul that is required is not possible without the co-operation of government and the industry. Whether there will be a brave new regime is not yet clear, but the path ahead is definitely not a short one and the beginning of the end of a new era of CASS compliance is certainly not around the corner quite yet.
Data Unions, fisherfolk and DeFi
By Ruby Short, Streamr
In the fintech world it seems every month there’s a new trend or terminology to get acquainted with. From just learning about cryptocurrency a few years ago, to the crazy boom markets of 2017-18, the market has now moved on to DeFi, or Decentralised Finance to those less in the know.
It’s a trend which is gathering momentum, too – $275m of crypto collateral was invested in the DeFi economy in early 2019, but by February of this year it hit $1 billion, and by the end of July this number had risen to $4 billion.
According to crypto exchange Binance, DeFi refers to “a movement that aims to create an open-source, permissionless and transparent financial service ecosystem that is available to everyone and operates without any central authority.” Essentially it gives full asset control to those who use it, whether this is through peer-to-peer models or DeFi applications.
These apps, known as DApps, run on a blockchain network meaning they’re not controlled by a single authority. And as they are also Open Source, they are publicly available – characteristics that make transactions quicker, more affordable and more efficient than their centralised counterparts, where data is stored on servers managed by one authority (think traditional banks).
So why is DeFi getting so much attention?
DeFi is exciting for many because it gives more people more control over their money. Where much of the financial sector is traditionally centralised it inherits bias, thus restricting many people from their funds and what they can do with it.
With this approach, anyone can make investments or get into trading much more easily, and, most importantly, keep control in the hands of the user and not large corporations.
One of the preliminary benefits of this control is the improved visibility we gain over our financial data. In fact, any data we produce in general, whether online or through smart devices is predominantly controlled by giant centralised platforms such as Google and Facebook. In many cases users are unaware of where this is being sold on, or at least have been up until now.
As with DeFi and DApps, a way to decentralise this control has been introduced – in the form of Data Unions. A relatively new concept, this is a framework that enables individuals to bundle together their real-time data with others to create valuable insights which can be sold on, offering each the chance to earn revenue. It is helping businesses and individuals realise the value of the information they produce.
How does it work?
Our data on its own holds little value, but once bundled with multiple data sets from other people and sources and combined in a Data Union, it becomes an attractive set of insights to buyers who can use it to improve their market knowledge, product or service.
Data is shared through an app on the device or object via Streamr’s Data Union framework, a toolbox, which any developer or company can integrate into their existing products. It also allows individuals to choose which particular data types they share and monetise, and which they keep private.
This information then passes, encrypted, through the Streamr Network, to the Data Union where it’s bundled with others’ data for sale on the Marketplace – a process called crowdselling, which has the potential to generate unique data sets by incentivising trade directly from data producers.
What’s more, Data Unions can be set up to capture any form of data. For instance, a music streaming company could commission their own app where users could sell their listening and genre habits paired with their demographic info.
What has this got to do with DeFi?
Data Unions can help provide a means of DeFi direct to the people that need it most.
To break this down, a Data Union is beneficial because it enables any internet user to be paid for their data, which is unlike any data tax that has been proposed by many politicians. And, the advantage of a DeFi solution is that anyone can get paid from it because the finances are no longer dependent on their jurisdiction, but on which products they are using. Putting these together can have endless benefits.
We’re already seeing this happen, with a framework being used to improve the lives of financially marginalised groups. Tracey is a blockchain enabled Data Union working in partnership with WWF.
The application incentivises Filipino fisherfolk to record their catch and trade data digitally through direct data monetisation via the Streamr Marketplace. This data makes the first mile of their seafood products through the supply chain, traceable. With regional fish stocks declining, accurate catch yield data is a desirable insight for third party members such as retailers and final buyers.
The benefits of this model are twofold. Many fisherfolk in the Philippines are unbanked, meaning they don’t have a bank account. Trading this data gives them access to finance and loans previously out of reach, changing them and their family’s livelihoods. It also enables a self-sustaining ecosystem that captures accurate traceability data and helps these areas monitor their overfishing levels for more sustainable fishing.
What does this mean for us for the future?
We’re seeing a lot of momentum building around all forms of online decentralization,and the potential is huge. Over the coming years we will see these systems become ever more integrated into the existing internet stack, which will profoundly impact our possibilities online. Soon, it will become normal to take part in the internet’s data economy.
We see internet users becoming members of several Data Unions and have a range of different options to choose from that best suits them and their data sets. Personal data monetisation will no longer be a privacy issue we’re all suffering under, but rather a question of whether we want to sell our data or not. Users will have the freedom to choose for themselves if they want to sell their data or not and ethical data sharing will become the norm.
ECOMMPAY expands Open Banking payments solution to Europe
Open Banking by ECOMMPAY facilitates fast, secure and simple payments
International payment service provider and direct bank card acquirer, ECOMMPAY, has today announced the expansion of its payment system Open Banking by ECOMMPAY to Europe. The solution allows consumers to initiate online payments to merchants.
Open Banking by ECOMMPAY leverages Open Banking technology, which enables third-party providers to access banks’ data to provide payment initiation through API connections. The news comes as research by the Open Banking Implementation Entity recently showed that uptake of Open Banking has doubled over the past six months, with more than two million consumers making use of the data-sharing service.
ECOMMPAY’s solution will allow consumers to connect to over 4000 banks in more than 28 European countries, while merchants can accept payments from customers in real-time, directly to their bank account. The solution is available in the UK, Latvia, Estonia and the Netherlands, and will be rolled out to further countries soon.
Benefits for consumers as well as merchants
For shoppers, Open Banking by ECOMMPAY means confidential information is accessed in a secure manner, compliant with GDPR requirements. Financial data is stored in one place so that credit decisions on loans or other transactions can be made promptly. Purchases can be made easily via smart devices, and consumers simply log in to their online banking via their mobile app to approve payments.
Merchants benefit from access to new infrastructure for payments. Without the need for credit or debit cards, chargeback risks due to fraud or an inability to capture funds are eliminated, while card fees are cut too. As the process does not require intermediaries, the payment process is efficient, and can also be customised by region, currency and other localised requirements. While banks usually have full control over the services customers need such as loans or transfers, Open Banking brings these decisions under a single administration.
Simplified European expansion
Historically, businesses growing into new markets would require a local banking relationship to facilitate the collection of direct debit payments, and face multiple complications around legal requirements, licenses and compliance. However, Open Banking by ECOMMPAY allows companies to use one efficient, cost-effective and simple payment solution to expand within Europe.
Paul Marcantonio, Executive Director of ECOMMPAY, commented: “Open Banking is revolutionising the way we pay, and the recent growth in its use indicates people are looking for more payments choice. Open Banking for Europe by ECOMMPAY will allow us to cater to the increasing number of people taking advantage of this secure, real-time and simple payment technology. Our solution will let merchants quickly expand into new markets and accept payments directly from customers’ bank accounts.
“With the pandemic shifting businesses online faster than ever before, the need for fast, safe and secure payment methods is growing. There is an urgent need to cater to a variety of payment methods, and at the same time to counter fraud and cyber-crime.”
ECOMMPAY has enjoyed steady growth since its launch in 2012, and has built a global presence with six international offices and operations in key markets including Asia, Europe, Africa, Russia and the UK. The company is a principal member of Visa and Mastercard, and a member of Visa Direct and MoneySend, as well as being the first payment provider on the PayPal Commerce Platform and the first acquirer to implement a Mastercard Dashboard.
The company will be hosting a webinar on Open Banking on 10th December. ECOMMPAY and its host speakers will look at the different opportunities that open banking brings for businesses, the challenges faced implementing it, and how to make it work from every business angle. Key topics will include how Open Banking will impact online business in the future, the effect of Brexit and Covid-19, and how to become an early adopter.
The Hidden Costs of International E-commerce
By Gavan Smythe, Managing Director, iCompareFX
Taking a business globally can be an attractive prospect, potentially targeting markets with fewer competitors, taking advantage of a larger consumer base and even gaining access to cost-effective manufacturing resources.
However, it’s not as simple as just shipping product overseas. Successful international traders conduct extensive market research, understanding each region’s barriers to entry – whether it’s regulations around communication and marketing, finding key contacts in supply chain management or navigating legal and cultural restrictions.
This also means identifying the hidden costs of international trading, which threaten the bottom line of businesses.
The price of peace of mind
Online trading isn’t without its complications. Buying online means handing over confidential bank or card details and, without the right protection in place, it can leave consumers open to theft and fraud.
That’s why e-commerce payment services include a gateway model, which secures transactions by encrypting the cardholder’s details and managing the payment process for the merchant.
However, like any specialist service, merchants pay to keep this sensitive data safe. Gateway fees are typically calculated as a percentage of the transaction amount. And while this payment model is useful for SMEs – helping them efficiently scale – it represents an additional cost that many business owners don’t account for.
Those tempted to simply roll out the cheapest service risk damaging their reputation by potentially being an unsafe seller and one which undervalues its customers. This will eventually impact revenue, as customers look elsewhere, and merchants navigate the costly time spent ironing out problems with insecure payments.
When it comes to choosing a payment gateway service, key considerations should include working with a provider which operates across the same regions and checking contract terms. Some providers may charge set-up fees, monthly subscription fees or implement a blanket charge if a minimum volume of transactions isn’t met.
Merchants should also consider whether to use a direct or indirect payment gateway. While direct payment gateways allow consistent branding with customised design and copy, it may cost extra to integrate the service with an existing website.
Indirect gateways take users away to a separate payment portal on a different page. This is cost-effective to install and can appear more secure to users as they may be using a familiar and trusted payment gateway brand
Calculating conversion fees
As a business owner, payment gateway solution providers charge a number of percentage fees. While for sellers in domestic markets the fee structure can be quite simple, for online sellers in overseas markets, the fee structure becomes complex.
For example, as an international online seller, you can be subject to additional costs for processing international cards, plus additional currency conversion costs back to your business’ home currency.
In some circumstances, this can cost up to 9 percent of your sale revenue. A business has the choice of passing these costs on to the customer or to reduce its profit margin in international markets.
Businesses shouldn’t rush when it comes to choosing a provider. Taking the time to review and compare what’s out there puts them in a stronger position to choose the perfect match.
Providers vary in their offerings, from the regions they operate in, to their fees and exchange rates and even transfer speeds. Those who value trust and transparency may be willing to pay slightly higher to work with a provider which offers exceptional customer service standards, helping them navigate the currency exchange process.
For those moving into multiple markets, it’s worth using a comparison service or tool to make sure they’re partnering with the right provider for each currency pair and region, as it’s unlikely a single provider will offer a blanket ‘best solution’ across the global market.
The role of multi-currency accounts
Having looked at the impact of currency conversion fees, what can businesses do to mitigate these costly charges when it comes to trading in an increasing number of currencies?
Opening a multi-currency account allows businesses to access the speed and affordable conversion costs needed to make the most of international trading. They allow businesses to access unique local banking details in foreign countries and all balances and transfer controls are accessible within a single dashboard.
Not only are the conversion fees associated with these accounts much lower compared with transferring currencies between bank accounts but it’s also quick and efficient – allowing businesses to access funds almost instantly and pass this convenience on to customers.
Specialist money transfer companies that offer multi-currency account solutions offer these services at no monthly cost. Simple and low-cost fee structures are applied on currency conversion and outgoing funds. And incoming receipts of money transfers don’t cost a penny.
Not all multi-currency account solution providers offer access to the same currencies. Furthermore, not all payment gateways offer support for payouts in multiple currencies. Businesses should conduct an assessment of current and future customer and supplier locations to choose the most appropriate solution provider.
Conducting an internal risk assessment helps businesses decide which multi-currency account makes sense for them, based on key requirements, like the number of supported currencies, target regions, potential overdraft facilities and ease of transfers.
Managing international suppliers
In many industries, international e-commerce is not as simple as just sending products to different regions. Logistics and legal regulations across the world mean businesses are often required to work with local specialists to deliver their service or offering.
This may mean working with local manufacturers to produce products in each region or simply partnering with local marketing, PR or advertising professionals to create culturally sensitive brand awareness in the native language.
In these cases, the business becomes the customer. They are required to make payments in multiple currencies as they manage their global operations.
For example, UK bank accounts charge relatively large fees to make payments in foreign currencies and these soon add up when running operations around the world.
This is where multi-currency accounts again prove fruitful. Not only do they allow businesses to hold multiple currencies – which is ideal for sellers – but they can also send money to other accounts with minimal fees if they’re in the same currency.
Paying suppliers in the same region as their customer base can remove the double currency conversion by receiving payment gateway payouts in the foreign currency and paying out of the multi-currency account in the same currency. No currency conversion is necessary in this scenario.
Businesses able to identify all these costs and admin fees up-front will be best placed to get the most value from the research and comparison stage when comparing providers.
Ultimately, they’ll achieve the lowest possible fees for each market, currency and transaction.
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