By Bob Lyddon, IBOS
In February 2012 the Financial Action Taskforce issued the latest round of its “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation”. To respond to that and prepare the way for adoption of these recommendations in EU Member States, the European Commission issued under ref 2013/0025 its proposal for an EU Directive on “the prevention of use of the financial system for the purpose of money laundering and terrorist financing”.
Being an EU Directive, it has then to be transposed into Member State law, and then further interpreted by the financial supervisor of the Member State, and then also by the Compliance department of each “obliged entity” (aka bank).
At each level there is no penalty for an excess of zeal in interpretation, meaning that what is permitted at the Directive level may be discounted in national law, or supervisor or bank-specific implementation.
At first glance the very thickness of the papers appears to presage another turning of the screw on international banking.
In the tent or outside?
Current EU AML legislation divides the world into EU/EEA and equivalents, and the rest. It is possible with some difficulty for residents of “EU/EEA and equivalents” to get bank accounts and services in different countries in the EU and EEA where they count as a non-resident. It has become all but impossible for residents of countries outside the tent to get normal banking services inside the tent, because the documents of proof of identity, beneficial ownership etc are issued by entities that cannot be relied upon by the EU/EEA bank.
Instead the customer would have to have those documents translated, notarized and apostiled in their own country, and passed to a lawyer in the country of the bank, who would then confirm their authenticity to the bank.
The countries defined by the EU currently as “equivalents” are limited to the whitelist of Australia, Brazil, Canada, Hong Kong, India, Japan, South Korea, Mexico, Singapore, Switzerland, South Africa and the USA.
Main proposals in 4AMLD
A main step in 4AMLD is the retirement of the EU Whitelisting procedure in terms of a list of countries, to be replaced with a definition of what sources of information a bank can rely on. The sources include the subsidiaries and branches outside the EU of banks that count as an “obliged entity” under 4AMLD. 4AMLD specifies that those subsidiaries and branches must work to the same standards as the “obliged entity” itself: in other words the “obliged entity” is not just that part of the bank that operates within the EU, but all of it worldwide.
The positive impact of this is that a warranty by, for example, a Spanish bank’s subsidiary in Chile can be accepted by (a) other subsidiaries and branches of the same bank (b) other “obliged entities” and their subsidiaries and branches, and this can be regarding any country, not just the ones previously on the whitelist.
4AMLD contains several examples of requirements for banks to verify information independently. It is important for customers that warranties from the customer’s bank can be relied upon by other banks, working within a long-standing and contractual framework, because otherwise it is hard to see how banks will get the comfort they need – other, that is, than by going down the route of translation, notarization and apostiling, with high legal fees and loss of time.
For example, 4AMLD requires that customers maintain records of their own Beneficial Ownership, rather than banks having to piece it together very time. That is all well and good, but it then says that banks cannot rely on data supplied by customers: it must be independently verified. How do you verify the data? Are there any reliable third-party databases that do not themselves use data supplied by customers or by other databases? Are we at risk of Data Laundering? i.e. data that is unreliable at source but is inserted into a database that is used by a second database that the third database regards as reliable.. and so the data becomes solid by being handed on.
One possible outcome of 4AMLD is a field day for lawyers, translators, notaries and makers of apostiles, on the basis that this is the traditional manner of demonstrating documentary bon fides to a foreign third-party. But the intermediaries whose business it is to pass the trust on between third-parties entities themselves fall within the scope of the Directive, such that lawyers inside the EU/EEA may not be permitted to rely on warranties from non-EU notaries and unrelated legal firms, unless that non-EU entity is a subsidiary or branch of the same lawyer. So, for example, if a lawyer in the EU is being asked to confirm the authenticity of papers from Argentina, it could not then directly rely on the notarisation and apostile from Argentina, unless the EU lawyer itself had an office in Argentina to issue it or confirm it. Then the third-party notary should warrant to the Argentinian office of the lawyer in the EU, who then warrants to its related lawyer in the EU, who can then give the warranty to the bank that it is permitted to accept: a lot mouths to feed, with time and money.
The possible good news
The possibility that banks within the EU can rely on the warranties, issued on behalf of customers, of their own subsidiaries and branches outside the EU, or of the subsidiaries and branches outside the EU of other EU banks, that structure appears to be legitimized by the Directive (although it can always be taken away at the levels of Member State law, financial supervisor or individual bank). The warranties could then be regarded as independent. This looks like the most reliable structure for getting the job done, and far quicker and cheaper than translation/notarisation/apostiling.
Secondly there are wider provisions for a risk-based approach and Simplified Due Diligence under certain circumstances and as long as tripwires are not fallen over on Beneficial Ownership and the involvement of PEPS (Politically Exposed Persons).
If frameworks can be created – or existing ones adapted – so that banks can apply Simplified Due Diligence to new customers when these are referred into them from a reliable source, then we have a workable way of continuing to offer international banking services to legitimate businesses. Otherwise customers from outside the tent may find themselves excluded from banking services inside the tent, meaning they are excluded from the marketplace.
Don’t ignore “lockdown fatigue”, UK watchdog tells finance bosses
By Huw Jones
LONDON (Reuters) – Staff at financial firms in Britain are suffering from “lockdown fatigue” and their bosses are not always making sure all employees can speak up freely about their problems, the Financial Conduct Authority said on Monday.
Many staff at financial companies have been working from home since Britain went into its first lockdown in March last year to fight the COVID-19 pandemic.
One year on, the challenges have evolved from adapting to working remotely to dealing with mental health issues, said David Blunt, the FCA’s head of conduct specialists.
“During this third lockdown, there has been a greater impact on mental well-being, with many people struggling with job security, caring responsibilities, home schooling, bereavements and lockdown fatigue.”
Bosses should continually revisit how they lead remote teams, he said.
“The impact of COVID-19 is creating a huge workload for those considered to be high performers, while the remote environment potentially makes it much more challenging for those who were previously considered low performers to change that perception,” Blunt told a City & Financial online event.
Companies should consider “psychological safety” or ensuring that all employees feel confident about speaking out and challenging opinions.
“We’ve heard varying reports of how successful this has been,” Blunt said.
Pressures in the financial sector were highlighted this month when accountants KPMG said its UK chairman Bill Michael had stepped aside during a probe into comments he made to staff.
The Financial Times said Michael, who later apologised for his comments, had told staff to “stop moaning” about the impact of the pandemic on their work lives.
Blunt was speaking as the FCA next month completes the full rollout of rules that force senior managers at financial firms to be personally accountable for their decisions to improve conduct standards.
There have only been a “modest” number of breaches reported to regulators so far as firms worry about being “tainted” but more cases will become public as sanctions are revealed, Blunt said.
“Regulators won’t be impressed by lowballing the figures.”
(Reporting by Huw Jones; Editing by Mark Heinrich)
UK regulators need global ‘competitiveness’ remit, says UK Finance body
By Huw Jones
LONDON (Reuters) – Keeping the City of London competitive should be an “across the board” objective for Britain’s financial regulators after Brexit, a UK banking industry body said in a paper published on Monday.
Britain’s finance ministry is consulting on future financial regulation after the UK’s departure from the European Union cut the City off from the bloc’s financial markets but left it free to set its own rules as it competes with New York, Singapore and, indeed, the EU.
UK Finance, which represents high street banks, said the international competitiveness of UK banking would be enhanced by more proportionate regulation.
Mindful that the Bank of England is opposed to a formal competitiveness objective which would require it to consider the ability of UK banks to compete globally, the finance ministry has suggested some activities could be subject to less red tape like burdensome reporting requirements.
“The sector is of major importance to the UK economy, and this calls for international competitiveness to be a principle to which the regulators must have regard across the board and not just in respect of specific activities,” UK Finance said.
Consumers have faced a string of financial scandals, from pensions to the mis-selling of payment protection insurance, piling pressure on regulators to better protect them.
However, UK Finance took a more qualified stance, saying regulators should also remind consumers that they bear responsibility for their decisions.
Britain’s regulators are funded by levies on financial firms and UK Finance said annual requirements have risen by 11.5% over the past four years to nearly 900 million pounds.
“We therefore believe there is merit in reviewing the overall cost of regulation, in particular compared to that in other major financial centres, to ensure it does not act as a disincentive for firms to do business in and from the UK,” it said.
Any significant divergence from EU regulations could scupper attempts to secure an ‘equivalence’ ruling which would allow some UK banks and financial institutions to directly serve clients in the bloc again.
(Reporting by Huw Jones; Editing by Kirsten Donovan)
How do you adapt your insurance pricing strategy in the face of increased price competition?
By Ketil Kristensen, Senior Advisor, Insurance, SAS
Many countries in Europe have in previous years experienced increased price competition for general insurance products. Especially in Southern Europe, the competition has been very fierce, fuelled by online price comparison websites. In Spain, Portugal and Greece, there has been a substantial drop in average premiums for products like motor, home and health insurance. This poses a real threat to the profitability of property and casualty insurers.
While some insurance products are highly specialised and almost impossible to compare, most common products have increasingly become commodities. Consumers can now easily compare them online.
When comparing insurance policy prices and details becomes as effortless as getting quotes for airline tickets or hotel accommodation on price comparison sites, more insurance companies will eventually enter the market. And thus price competition will increase.
Preparing for a price war
Once the price war starts, there is no way to avoid it. And insurers need to meet their competitors head-on.
To win a price war, insurers need to be meticulous when they set the premium levels. They might also need to rethink the definition of “profit” when they are making pricing strategies for the future. In a market where premium levels are volatile and the competitive situation may change rapidly, insurers also need the capability to evaluate potential future scenarios in a short period of time.
Setting the premiums right
In the fast-paced digital era, customers expect insurance prices to be easily available online. They will make inquiries for insurance covers for their cars or homes on price comparison websites and expect the prices to be available immediately. From an insurer’s point of view, the premium customers will see on their screens when comparing insurance policy prices is the sum of the insurer’s technical premium and the commercial loading.
The technical premium represents the break-even price that the insurance company would charge for the policy if it had no costs and no desire to make a profit. Commercial loading represents the sum of the insurance company’s costs and the profit it expects to make on the policy. Technical pricing is the subject of many actuarial textbooks. But as machine learning algorithms make their way into actuarial departments, we will need to rewrite those books. Modern pricing techniques that include machine learning algorithms are a notable improvement compared to traditional models. If applied properly, ML models will result in more accurate technical pricing given the same data.
But what about commercial loading? How much profit should the insurer aim for?
Every one of us has a different tolerance for how much we would pay for, e.g., a car insurance policy. Some customers don’t consider price to that important. Others will try to search for a better deal elsewhere, regardless of how much time the process would take. Most customers are somewhere in between.
Being able to price the insurance products analytically based on the “willingness to pay” is, for many actuaries, seen as the holy grail of insurance pricing.
Most insurers already do personal pricing to some extent today. For example, they give different discounts to policyholders with equal risk. However, there is often a great potential to do segmentation and price calculations in a more analytical manner. Ideally, insurers would like to set the premiums as high as possible, but not so high that customers move their policies to another insurer.
On the other side, insurers would like to move customers away from their competitors by offering low premiums – but not too low. The insurer must first determine the price sensitivity of insurance customers and then price each insurance policy so that it maximises the profit for the insurer. At SAS, we refer to this as portfolio optimisation.
Insurers that can quickly reoptimise changing prices in the online market will also quickly identify customers that are at risk for churn. They can then perform the appropriate actions to prevent this from happening.
When insurers think “profit,” they usually mean the income statement for next year. This is about to change. The concept of Customer Lifetime Value (CLV) is becoming more and more common in the insurance industry. And many insurers are now refining their pricing strategy based on a maximisation of the CLV of all its customers, thus not focusing solely on the profit definition in the income statement. The CLV of an insurance customer is the net present value of this customer for the insurer, where behavioural effects like renewal, cancellation and cross-selling of other insurance products are considered for the entire lifetime of the customer.
To accurately compute CLV for a customer, the insurer will need data that describes the behavioural patterns of the customer. Most insurance companies have quite a lot of such data available – the problem is usually that it is not adequately structured. In practice, to quantitively identify the customer lifetime value, insurers need to integrate both actuarial and customer behaviour models. Once a system for this is in place, insurance companies will have a strong quantitative foundation to compute the customer lifetime value of their policyholders.
SAS and insurance pricing
Price competition is changing the insurance market right now. When a customer determines where to buy insurance, the price is the most important factor. Thus, to stay competitive and still run a profitable business, insurers need to set their premium levels just right. The evolution of price comparison websites – which provide real-time quotes on competitor prices and increased access to data that contains information about the customer’s insurance risk – has made the actuary’s job of calculating the premium more complicated.
Over the years, SAS has worked together with insurers to ensure that strong system support is in place to compute premium levels down to an individual policy level. These pricing systems have been put through the test in some of the most competitive insurance markets in Europe. They have turned out to be a valuable strategic tool for insurers to balance the desire for profit against the desire for market share. And maybe most important of all, they have enabled these insurance companies to effectively join the price war, fight it and still make a profit.
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