The EU Financial Transaction Tax has a very high global profile, as trading entities and legislators begin to understand the potential impact that lies ahead. Capital markets and buy-side firms have now implemented their solutions to handle the French tax and elements of the Italian tax while the task of getting prepared is underway, or at least on the agenda, for most Heads of Tax or Operations for other FTT’s. The major consultancy firms are busy advising asset managers, banks, brokers and custodians globally on the best approach as the FTT sands continue to shift.
Pre-existing regimes are hampering EU negotiations, with France understandably pushing for a more limited tax in line with its own. Further European announcements on individual jurisdictions are certain to only make the situation even more complex and capital markets firms are beginning to understand just how much is beneath the surface of the FTT iceberg. Of particular note is the impact of FTT on fixed income trading; no doubt the FTT rules for this asset class will be changing.
It is likely that a consensus will be reached sometime in Europe in 2013, but the implementation of rules and detailed legislation in each country will perhaps take a further 6-12 months after that. In all likelihood each country will apply various rates and have different reporting requirements. There will still be many complexities and a multitude of rules involved in rebating and netting, amendments to backdated trades and the retrieval of missing data. Add to the mix the varying systems interfaces and trading formats, global mandates and the differing roles of the asset manager, broker and custodian, and one begins to appreciate the challenge that capital market players face.
The Financial Transaction Tax has become a global phenomenon, in that any firm buying a French or Italian equity for one of its clients – even if it is an overseas asset manager – will need to consider the collation of tax on that trade. If the firm has passed this responsibility to a third party such as a custodian, it will ultimately still have to oversee the tax calculation and posting to the custodian. Even an inter-company transfer within an asset manager that crosses jurisdictions where the FTT applies must calculate the tax and advise the custodian for reporting and payment.
The Italian experience
Meanwhile the collation of Italian data with its increased level of complexity is making life much harder for firms trading in Italian securities. What at first appeared to be a straightforward tax in France has become more complicated in Italy. Even since 1 March when financial firms began capturing the data in Italy, the problems being experienced are far greater than those of France. For example, gathering the underlying security information prior to applying one of more than 50 different fees for the tax on derivative trades, adds great complexity. In the absence of clear methodology guidelines for calculating tax on a derivative trade, financial firms face an uphill struggle as they prepare to begin the reporting phase on 1 June.
There is also the question of the underlying structure of a derivative. Firms need to understand all of the elements involved in a derivative, as theoretically, some of these may be non-taxable. For example, if a derivative has partially invested in Germany, which rate of tax will apply? The rate of tax is applied at the derivative level, but for an Italian derivative where 51% of the value is based on German equities, does no tax apply?
Indeed, trading in Italian stocks through major banks has dropped sharply amid a wider fall in volumes since Italy introduced the tax. Trading volumes have dropped by some 40 percent between January and March 2013. This is partially due to the fact that Italy moved forward with the tax in isolation! Initial signs are that people may also be confused and avoiding Italy altogether because they are not sure whether FTT will effect their trade.
For those firms involved in calculating the FTT, there will be far more data flows within the organisation in order to understand how a derivative is structured. There will also be a need for scalability in back-office systems, as the amount of processing to undertake this analysis will spike. This processing is also happening in real-time, both pre- and post-trade, with the resultant changes being made to the deal ticket.
For any firm with a dealing system, that system is not designed to handle the post trade payments and declarations involved in FTT. Is the solution to run two systems, one for pre-trade and one for post-trade? Or do you have one system that can do both?
The market challenge
Most institutions have tactical solutions in place but are now looking for a strategic solution. Tactical solutions are resource intensive and typically have little workflow or flexible rules, making them expensive to run. As each country implements its own unique version of the FTT, brokers, custodians and fund managers will potentially need to develop a unique set of rules for each jurisdiction.
What aspects of implementing FTT schemes has been the most challenging to date? According to industry feedback, time to market and the uncertainty around the legislation are causing the most consternation. Institutions know from experience that as soon as an FTT scheme is registered, there are only a few months’ lead-time from the requirements being provided by the tax authority to the financial firm having to pay and report. And there are many different interpretations within the industry concerning the individual FTT country scheme registrations. From a systems perspective, it is therefore very difficult to come up with a standardised approach that will future-proof any investment designed to meet all the needs of this tax.
For capital markets firms, one thing that is certain is that there will be numerous other countries introducing a tax in the coming years. The alternative is to either select a vendor provider or build something internally that will be able to manage the processes and messaging. Key questions for Chief Operating Officers or Heads of Tax to ask include: how much of the functionality do you really need to build, bearing in mind the post-trade systems that you already have internally; how will the rules vary in the different jurisdictions (there is a real benefit here in having an out-of-the box solution which has been designed to be able to adapt to the differing regimes); and how quickly could your IT team design and implement a new FTT system?
Finding the right solution
With these questions in mind, it will probably make sense for the major houses that may have several entities in different jurisdictions involved in the tax calculations, to have a separate engine to handle the FTT. The ability to interface with other post-trade systems will be very important and for the larger firms, that typically have the most systems operating across geographies, asset classes and investment strategies, this will tend to necessitate a standalone FTT system. For the smaller brokers and asset managers, it will be a simpler process that can possibly be handled using existing in-house tax applications or an ASP service.
In terms of reporting requirements, from France we know that there are two separate activities that need to be recorded: one for the actual trade and one for the tax being applied by the relevant authorities. The system needs to be able to make a report to the client and it needs to be able to rebate the net tax liability. The ideal situation is to have one engine that can handle all markets, so when a new market comes on stream the firm does not have to build anything new – it can simply upload data for that market and produce a report.
We still have a long way to go on this journey and the landscape will be forever changing as we travel. One thing that we do know is that FTT is a rules-based problem that will require a rules-based solution, that is able to configure and adapt to the current rules and those that will inevitably change. Outside of the eleven EU voting states, other countries, such as the USA, Ukraine, Hungary, Switzerland and South Africa are considering or have introduced an equivalent tax. At present it is a global issue for European markets, but soon it will be a global issue for global markets.
If all goes to plan, the FTT will become law and all eleven adopting countries will go ‘live’ on 1 January 2014. This will exert an immense strain on tax processing within brokers, custodians and asset managers. Inevitably there will be some compromise and dilutions along the way, as has been the case with almost every major item of European financial regulation in the last five years. But with the search for new government revenues influencing almost every economy in Europe, FTT is a headache that will not be dispelled easily.
Denis Orrock CEO, GBST Capital Markets
ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper
Today, Deutsche Bank has released the third installment in its “Guide to ISO 20022 migration” series, which offers a comprehensive update on the industry shift to the de facto global standard for financial messaging: ISO 20022. This paper comes at a critical time for the ISO 20022 migration, with a number of changes to existing timelines and strategies from SWIFT and the world’s major market infrastructures having been announced this year.
The paper explores the latest developments, including SWIFT’s year-long postponement of the migration in the correspondent banking space. The decision meets industry calls for a delay and also provides ample time to build the new central Transaction Management Platform (TMP) – a core feature of SWIFT’s new strategy that will allow the industry to move away from point-to-point messaging and towards central transaction processing.
It also details the wave of action that has been seen by market infrastructures around the world – with many, including the ECB, EBA CLEARING and the Bank of England, announcing revised migration approaches.
“Now more than ever, with shifting timelines and strained resources, it is vital that banks and corporates alike do not view the ISO 20022 migration as just another project that can be put on the back burner,” says Christian Westerhaus, Head of Cash Products, Cash Management, Deutsche Bank. “The delays in the correspondent banking space, and across several market infrastructures, should not be seen as an opportunity for banks to take their foot off the pedal. The journey to ISO 20022 is still moving ahead at speed – and internal projects need to reflect this.”
The Guide also highlights the implementation issues on the migration journey ahead – most notably surrounding interoperability between market infrastructures, usage guidelines and messaging formats. This is achieved through a series of deep dives, case studies, and points of attention drawn from Deutsche Bank’s internal analysis.
“As this year has proved, nothing is set in stone, “says Paula Roels, Head of Market Infrastructure & Industry Initiatives, Deutsche Bank. “The ISO 20022 migration involves a lot of moving parts and keeping abreast of the latest developments is critical for banks and corporates alike. As the deadlines near, and the ISO 20022 story develops, this series of guides will continue to highlight key points for consideration over the coming years.”
The Psychology Behind a Strong Security Culture in the Financial Sector
By Javvad Malik, Security Awareness Advocate at KnowBe4
Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.
Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.
With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.
Defining Security Culture: The Seven Dimensions
In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:
- Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
- Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
- Cognition: The understanding, knowledge and awareness of security threats and issues.
- Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
- Compliance: Written security policies and the extent that employees adhere to them.
- Norms: Unwritten rules of conduct in an organisation.
- Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.
All of these dimensions are inextricably interlinked; should one falter so too would the others.
The Bearing of Banks and Financial Institutions
Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.
Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.
Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.
Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.
Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?
Towards Achieving Excellence
There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.
By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.
Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.
Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.
Has lockdown marked the end of cash as we know it?
By James Booth, VP of Payment Partnerships EMEA, PPRO
Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.
Has cashless gone viral?
Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.
Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.
More choice than ever before
Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them.
As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z.
Does social distancing mean financial exclusion?
As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.
Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.
There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.
Supporting the transition away from cash
Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.
Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.
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