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NEW BANKING REFORMS WILL REQUIRE CAREFUL REGULATION

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Banking

Julian Korek, CEO of Kinetic Partners

The Financial Services Banking Reform Bill will provide the most significant change to the UK banking sector in a generation. Designed to be the legislative response to the financial crisis and other banking scandals such as Libor, one of the bill’s primary objectives was to require banks to separate everyday retail banking activities from their investment banking activities by introducing a ring-fence around the deposits of individuals and small and medium-sized businesses. 

At the EU level, Michel Barnier, the EU Commissioner responsible for internal market and services, published a draft law earlier this year aiming to curb speculative trading at banks and, in certain instances, force banks to ring-fence other trading activities. That said, policymakers are seeking additional clarity on such topics as the degree to which the banks are allowed to trade with hedge funds and, in relation to market making, the thresholds that would trigger mandatory ring-fencing.   The new Capital Requirements Directive (CRD IV), which came into effect on 1 January 2014, brings into force financial buffers to ensure that banks are more able to absorb losses during a crisis. It will also enable the Prudential Regulation Authority (PRA) to hold senior bankers criminally liable for recklessly disregarding their responsibilities. There is likely to be a considerable burden of proof, but essentially, ignorance will no longer be a viable defence for senior managers.

Greater personal responsibility

Banking

Banking

One of the primary goals of the Banking Reform Bill is to increase consumer confidence by ensuring that savers’ assets are kept safe from certain risky investments. The bill will therefore place new responsibilities not only on the banks, but also on CEOs and heads of risk.

As a result, all of these individuals will be held personally responsible for examining how the firm’s funds are being used, as well as fostering an appropriate culture within their organisations. In order to achieve this goal, the bill will put senior staff under greater regulatory scrutiny, effectively making it much harder for those at the top to defer blame if their bank fails to meet its regulatory requirements.  Over the last two years the regulator has increasingly demanded attestations by senior managers, which require a firm’s leadership to sign their names to affirmations that systems and controls are in compliance with FCA rules. These written statements are meant confer a greater degree of personal liability to the signatory.

Interestingly, the findings of Kinetic’s recent Global Regulatory Outlook survey seem to show support for this stance. The survey of 300 senior executives revealed that 27% of CEOs and 40% of employees believe that making executives criminally accountable for the activities undertaken by the firm would serve the industry well, as opposed to only 33% who disagree.

As a consequence, financial services firms may find it more challenging to fill these senior roles, since fewer people may be willing to take on this risk. This sense of personal responsibility, however, is a necessary component of the bill, as it is designed to actively encourage firms to create a culture of responsibility within their organisations.

After all, unless firms are willing and able to make individuals accountable for certain aspects of the business and the functions that they oversee, decision makers will continue to pass important tasks and controls on to others the organisation, which can lead to problems falling between departments.  In order to address this issue, we have found that high-level health checks and deep-dive reviews can often provide senior personnel with a greater degree of confidence when they are asked to sign attestation letters requested by the regulator.

Re-gaining consumer trust  

Another key aim of the Banking Reform Bill is to develop greater transparency for consumers. However, there are no guarantees that this will be the case.  There is concern that the Banking Reform Bill’s restrictions on investment risk might actually limit choice for consumers, which would be counter-productive. Perhaps even more concerning, the operational changes required by the bill could potentially decrease banks’ ability to respond to certain market shocks, since they will limit the crossover between their retail and investment activities. As many have argued that many of the issues that led to the crisis were consumer-generated, for example sub-prime mortgages, one might reasonably question whether these measures realistically reduce the risk to the system.

The good news, however, is that we are already starting to see a significant cultural shift in some organisations, as the consumer protection elements of the bill are encouraging firms to adopt a new perspective on risk. As a result, banks are taking steps to secure repeat business by building greater consumer trust, and forward-looking firms are starting to see how these changes can help to support sustainable, long-term growth for the financial services industry as a whole.

Regulations like the Banking Reform Bill clearly have an admirable goal, as they aim to protect the financial system and build consumer confidence. The question however, is whether the public is truly taking any notice of these changes and whether anyone, including the government, fully understands the implications of the bill’s impact.

Kinetic Partners’ Global Regulatory Outlook survey found that 97% of financial services professionals don’t believe enough has been done to prevent a future crash and only 12% of respondents believe that regulators fully understand how the financial crisis was allowed to happen in the first place. This begs the question as to whether or not new laws and regulations could realistically have an effective impact if public confidence in the regulators is lacking. Building this confidence is imperative for success, and regulators must remain mindful of this as they continue to produce legislation.

Interestingly, Antony Jenkins, CEO of Barclays, stated earlier this year that it would take 10 years to rebuild trust in the bank’s brand. However, only time will be able to tell whether the Banking Reform Bill can help achieve this goal. In the meantime, firms must consider how these regulations can be used to support a fundamental shift in culture, so that consumer confidence can be restored and maintained across the board.

Banking

Hackers can now empty out ATMs remotely – what can banks do to stop this?

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Hackers can now empty out ATMs remotely – what can banks do to stop this? 1

By Elida Policastro, Regional Vice President for Cybersecurity, Auriga

In 2010, the late Barnaby Jack famously exploited an ATM into dispensing dollar bills, without withdrawing it from a bank account using a debit card. Fast forward to the present day, and this technique that is now known as jackpotting, is emerging as a threat and is growing as an attack on financial services. Recently, a hacking group called BeagleBoyz in North Korea have caught the attention of several U.S. agencies, as they have been allegedly stealing money from international banks by using remote hacking methods such as jackpotting.

The reality behind jackpotting

Jackpotting is when cybercriminals will use malware to trick their targeted ATM machine into distributing cash. As this criminal method is relatively easy to commit, it is becoming a popular tool for cybercriminals, and this trend will sure continue in 2021, unless financial organisations implement policies to prevent this and protect consumers.

During this difficult time, when access to cash has never been more important to banking customers, it is imperative that banks give their customers reliable ATMs that work, 24/7, 365 days a year. However, due to the sensitive data that ATMs possess, such as credit card or PIN numbers, they have now become a profitable object for cybercriminals to manipulate. As cybercriminals have been evolving in their efforts of attacking the IP in ATM machines, we will definitely see more jackpotting stories emerge in the coming months, especially with the large return on investment.

How criminals exploit the vulnerabilities found in ATMs

Since ATMs are both physically accessible and found in remote locations with little to no surveillance, this gives an opportunity for criminals to carry out jackpotting, especially with the software vulnerabilities that may exist in many ATMs.

ATM machines have been easily manipulated due to the outdated and unpatched operating systems that they run on. If banks wanted to resolve this issue and update these systems, it would take large amounts of time and money to do so. However, some banks do not have such resource and because of this, cybercriminals take advantage by penetrating the software layers in ATMs and exploiting the hardware to dispense cash.

How can banks tackle this?

As the sector has a complex technical architecture, banking organisations will have to make sure that they have control over the transactions that take place, and this includes the management of security when it comes to communication between various actors. When financial organisations are reviewing their ATM infrastructure, they will also need to protect their most vulnerable capabilities within their cybersecurity. Banks, for example, can encrypt the channels on the message authentication, in the event bad actors try to tamper with their communications.

Because ATM networks need to be available 24/7, banks not only, need to implement greater protection over their systems, but they need to do so with a holistic approach. One action that banks can take is to implement a centralised security solution that protects, monitors and controls their various ATM networks. This way banks can control their entire infrastructure from one location, stopping fraudulent activities or malware attempts on vulnerable ATMs.

Another way for banks to reduce the risk of jackpotting attacks is to update their ATM hardware and software. To do this, they will need to closely monitor and regularly review their machines in order to spot any emerging risks.

What the future holds for the banking industry

As confirmed by the warnings from the U.S. agencies, jackpotting remains a very serious threat for financial organisations. Evidence has also emerged, which shows hackers are becoming more innovative in their tactics. It was reported last year, for example, that hackers stole details of propriety operating systems for ATMs that can be used to form new jackpotting methods.

The emergence of jackpotting highlights the need for banks to actively work to protect their customers’ personal information and critical systems now and for the foreseeable future. In order to stay secure and reduce the risk of attacks, they will need to put in place the aforementioned solutions, which include updating their ATM hardware and software as well as closely monitoring and regularly reviewing their ATMs. As cybercriminals continue to become more innovative in their ways of attacking the machines, the issues mentioned will only continue to rise if they are not addressed. Although the method of jackpotting requires little action from cybercriminals, if financial organisations can implement a layered defence to their ATM security, they can stop themselves from becoming another victim to this type of attack in the future.

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Banking

SoftBank Vision Fund set for new portfolio champion with Coupang IPO

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SoftBank Vision Fund set for new portfolio champion with Coupang IPO 2

By Sam Nussey and Joyce Lee

TOKYO/SEOUL (Reuters) – SoftBank’s $100 billion Vision Fund is poised to have a new number-one asset in its portfolio with the upcoming floatation of top South Korean e-tailer Coupang, furthering a turnaround that has seen the fund yo-yo from huge losses to record profit.

The $50 billion target valuation that Reuters reported this month would likely see the decade-old firm surpass recently listed U.S. food deliverer DoorDash Inc on a roster of assets that also includes stakes in TikTok parent ByteDance and ride-hailers Grab and Didi.

The Vision Fund built up its 37% stake in Coupang for $2.7 billion, mostly at an $8.7 billion post-money valuation, a person familiar with the matter said. The fund is not expected to sell shares in the initial public offering (IPO) that Coupang filed for in New York, the person said, declining to be identified as the information was not public.

SoftBank Group Corp and Coupang declined to comment.

Achieving a $50 billion valuation would add to good news for the fund which is bouncing back from an annual loss in March. This month, it announced record quarterly profit, driven by the listings of DoorDash and home seller Opendoor Technologies Inc and share price rise of ride-hailer Uber Technologies Inc.

HIT PARADE

The fund has written big cheques for late-stage startups to fuel rapid growth, with two-thirds of the value of its portfolio concentrated in 10 assets including Coupang.

The 10 include 25% of British chip designer Arm – to be sold to Nvidia Corp pending regulatory approval – but not stakes in high-profile stumbles like office-sharing firm WeWork.

The fund’s largest assets include its 22% stake in DoorDash, whose share price has doubled since the firm’s December IPO, sending its market capitalisation to $65 billion.

FACTBOX: Vision Fund’s investment hit parade

SoftBank initially invested in Coupang in 2015, adding it to a stable of e-commerce hits that included 25% of China’s Alibaba Group Holding Ltd, before placing it under the fund.

The e-tailer has grown rapidly during stay-home policies while the COVID-19 pandemic has forced other portfolio firms like Indian hotel chain Oyo to scramble to preserve cash.

Analysts see Coupang’s $50 billion valuation as feasible given its first-mover status and as it expands beyond replacing brick-and-mortar retail with a rising number of online channels.

It is the biggest e-tailer in South Korea that directly handles inventory, with 2020 purchases at about 21.7 trillion won ($19.62 billion), showed data from WiseApp.

“The market’s assessment isn’t exaggerated,” said analyst Park Eun-kyung at Samsung Securities. “Coupang’s market leadership is a premium factor.”

($1 = 1,106.1800 won)

(Reporting by Sam Nussey in Tokyo and Joyce Lee in Seoul; Editing by Christopher Cushing)

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Five things to look out for in HSBC strategy update

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Five things to look out for in HSBC strategy update 3

By Alun John

HONG KONG (Reuters) – HSBC Holdings PLC will update its “transformation” plan announced a year ago on Tuesday, when the Asia-focussed lender also reports annual results.

As part of its latest strategy, the bank said in February last year it would shrink its investment banking operations and revamp its businesses in the United States and Europe resulting in 35,000 jobs being cut.

HSBC’s pretax profits for 2020 is expected to fall 38% to $8.3 billion, according to analysts’ estimates compiled by the bank, because of the impact of the COVID-19 pandemic.

Here are five key things to look out for in the new plan to revive its growth —

1. How will HSBC boost fee income?

The bank has promised details of its plans to make more money from the fees it earns from selling products to customers than it does by pocketing the difference between the interest rates it offers savers and charges borrowers.

This could involve selling more products to wealth management clients, charging corporate clients in different ways, and maybe even charging retail clients for basic banking services.

2. What do the plans to double down on China and Asia mean?

HSBC intends to refocus resources from elsewhere on what it calls its “high returning Asia business”, but investors want to know what this means in practice for markets and business lines.

Politics could make this harder. HSBC has been attacked by British lawmakers for assisting Hong Kong police with investigations into pro-democracy activists, including freezing some bank accounts.

CEO Noel Quinn said last month the bank had to comply with police requests and he could not “cherry-pick which laws to follow”.

3. Will HSBC resume paying a dividend?

HSBC has not announced a dividend since the third quarter of 2019, on instructions from the Bank of England. This angered retail investors in Hong Kong who tried unsuccessfully to have the policy changed.

The regulator has since lifted the ban, and British rival Barclays said Thursday it would pay a dividend of one pence a share. However, despite beating analyst expectations with its 2020 results, Barclays shares fell as a vague outlook without profit targets left investors underwhelmed.

HSBC investors will be looking beyond the day’s numbers for concrete commitments towards improved returns and a more positive outlook for key economies.

4. How will HSBC shrink its U.S. and European footprint?

HSBC’s French high street banking operations are up for sale, but it has had trouble finding a buyer.

The market is due an update on whether HSBC has managed to find a buyer on terms it will accept, or whether it will seek to wind the business down more gradually.

HSBC will also give details of how it will accelerate its existing efforts to shrink assets, staff and branches in the U.S., which accounted for 0.5% of the group’s pre-tax profit in the first half of last year.

5. More job cuts on the way?

HSBC employed 307,000 people at the end of 2010. The bank’s management said last year it was aiming to reduce the headcount of 235,000 closer to 200,000 by 2023. Investors want to know whether the new plan will mean deeper cuts. Nearly every new strategy launched by HSBC in the past decade has resulted in fewer people being employed by the bank.

(Reporting by Alun John; Editing by Sumeet Chatterjee & Shri Navaratnam)

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