By Matt Smith, CEO of SteelEye
The second Markets in Financial Instruments Directive (MiFID II) was supposed to introduce the largest overhaul of the financial services industry in decades. With over 1.4m paragraphs of rules, MiFID II had a number of laudable, far-reaching aims covering virtually all asset classes traded within the EU, including the goals of increased transparency, reduced costs for investors and a clampdown on market misbehaviour in the financial industry.
However, despite coming into force on 3 January 2018, MiFID II is starting with more of a whimper than a bang and has not yet even been introduced into the national laws of 17 EU countries, including the Netherlands and Spain. Rather than signifying a radical shakeup of the financial industry, MiFID II has been marked by a series of delays and uncertainties, including major exchanges failing to implement the regulation on time, postponement of the dark pool caps, unpredictability surrounding Brexit, and even the possibility of a MiFID III.
The situation so far
MiFID II was meant to open the clearing of futures contracts to competition through a policy known as ‘open access.’ However, on the date of implementation, regulators in Germany and the UK, and later Sweden, granted a reprieve to their domestic exchanges, not of three or six months but of 30 months. This extension was blamed on uncertainty surrounding the status of the UK’s capital markets following Brexit; however, many in the industry have cited it as an example of regulators bowing to vested interests. As market leaders have found themselves unable (or unwilling) to meet MiFID II’s demands, with many voicing concerns over the new open access rules and their impact on industry competition, another MiFID II policy has been postponed – this time, for more than two years.
Another MiFID II target was ‘dark pooling’ – the practice of allowing investors to trade without having to reveal what they are buying or selling. Under MiFID II, a cap was put in place on these dark pools in an effort to move investors back onto “lit” public stock markets. These caps were meant to be accompanied by a list of European equities that were to be excluded from trading via dark poolsbut the publication of this list was delayed for three months by the European Securities and Markets Authority (ESMA)due to a lack of data. Legally, the MiFID II dark pool caps still came into force on 12 January but,without data showing which instruments would be excluded, it was difficult for ESMA to know ifthe cap had been reached, leaving it unable to enforce penalties for breaching the rules. This meant that the hundreds of European equities that would have been caught out were granted a last-minute respite, and one of MiFID II’s biggest changes is not yet being enforced.
Another aim of MiFID II was to make the market more competitive by introducing an unbundling requirement for fund managers to charge analysts for research rather than receiving it for free in return for supplying brokers with trading business. The end of such inducements was supposed to spark the growth of a new generation of independent research boutiques. However, this has yet to be seen. It seems that most managers are choosing to payt out-of-pocke for research, putting further pressure on profit margins. This removes or at best delays the benefits of fragmenting the market, as firms continue to use their familiar bank and broker analysts in fear of contravening the ban on unsolicited research.
What does the future hold for MiFID II?
Although the future of MiFID II is far from clear at this juncture and may continue to be for the next few years until its full impact is evident, it is likely that MiFID II will have a far-reaching, broadly beneficial impact on the financial industry across Europe, though with still many issues to address before it can delivernew opportunities for financial firms. These include questions about consistent implementation of the rules in every jurisdiction affected.
ESMA published the list of equities affected by the dark pool limits in early March, which should allow regulators to police these pools more effectively under MiFID II. According to new research from Thomson Reuters, dark pool trading has halved in the wake of these rules being introduced earlier this month. There is still some concern in the market, however, that in the long term trading will migrate to registered systematic internalisers (SIs), a group of banks and dealers that operate under an off-exchange trading regime. Critics have argued that SIs will simply become a new version of dark pools, a private alternative to regulated public exchanges. This could prompt more action and a toughening of the rules by regulators as they try to increase the transparency of such activity.Once the data accompanying dark pool caps has been published, regulators can begin to analyse the market to see where improvements to the regulation are required.
Additionally, the UK’s impending exit from the EU in 2019 leaves considerable uncertainty. There is speculation that the UK could opt for ‘MiFID II-lite’ in some or all areas, with the government choosing to translate diluted MiFID II’s standards into UK legislation to better align with the UK’s financial markets. On the other hand, there is still the risk of a hard Brexit wherein no regulatory technical standards are agreed – leaving the financial industry in a state of limbo.It should however be borne in mind that the FCA was the architect of many of the record-keeping and reporting principles embedded in MiFID II. Moreover, with the aftermath of the UK’s previous dalliance with “light touch regulation” still fresh in memory, the national regulator is unlikely to favour watered-down standards that could see London regarded as a less safe or transparent marketplace for global capital.
Whatever the outcome, the strength of the UK’s regtech and fintech offering means the City will be well-placed to adapt to Brexit’s realities and their effect on the resulting regulatory regime. Fintech and regtech firms’ flexibility and agility means that they can easily adapt and update their offerings as the market changes, helping them to quickly validate any future offerings as the post-Brexit landscape begins to take shape.
There is also the question of a MiFID III. Already, hiccups with MiFID II’s implementation have caused regulators to consider the creation of a third iteration of the regulation and a speedy rewrite of the rules, with Brexit set to make this more likely by presenting a significant challenge to some of MiFID II’s core objectives such as improving transparency in financial markets. Many suspect that if the UK and the European Commission fail to harmonise the financial services landscape post-Brexit in a way that includes MiFID II’s core objectives, a third iteration of the regulation, and another major overhaul of the market,may be required.
In the meantime, we will likely see UK financial businesses benefit from the new regime in a number of ways. MiFID II has already encouraged the rapid growth of an innovative regtech industry and this is set to continue in the future, as businesses increasingly look to technology to help them improve their working practices, cut costs and risk, improve agility and gain new insights – all while ensuring regulatory compliance. Requiring businesses to review their data has led to the emergence of a number of new technologies that capitalise on this valuable resource, and in the long-term this will allow businesses to become better-informed about the decisions they make, identify patterns and trends within their organisation and the wider industry, launch new products and improve customer satisfaction.
As the industry adjusts to this new regulatory landscape, attention will shift from mere compliance to the opportunities provided by this new frame work of rules. MiFID II certainly has the power to accelerate a reshaping of the financial sector and, once the dust settles and uncertainty fades, a more transparent, competitive and trustworthy industry should emerge.
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.
UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies
- UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
- This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.
The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide. The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland. The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.
With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs. Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.
The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites. UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.
Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies. Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”
Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”
Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship. Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems. We look forward to working together on further partnership as we move forward.”
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