Daniel Goggin, Head of International Banking & Finance Clients from Blacktower Financial Management Group
MiFID was undoubtedly brought into being for all the right reasons. There were too many casualties of the 2008 financial crisis and the European Union (EU) understandably decided it needed to act in order to better regulate financial markets. Importantly, this included a desire to provide greater protection to investors. MiFID II was a natural progression of the initial directive and came into force last year (03 January 2018); it covers nearly all assets and professions within the EU financial services sector.
However, there is increasing realisation that imperfections in the instrument – which is comprised of 7,000 pages and nearly 1.5m paragraphs of rules – may have given rise to a number of unintended side effects. Some of the most disquieting of these concern the way in which the many demands for enhanced costs transparency, record-keeping, product governance and regulatory requirements have had a debilitating impact on smaller and mid-cap brokerages, many of whom have found that they are ‘drowning’ under the added burden.
But there is a light on the horizon: the rise of the networks or so-called ‘whale‘ firms who take on the burden of compliance and regulatory adherence has thrown a lifeline to the smaller brokers.
The difficulties were foreseeable
We should not be surprised at the fallout from MiFID II. Many firms were already struggling to survive in the face of the previous regulatory regime as well as coping with escalating professional indemnity costs. Further, when the FCA recently increased the Financial Ombudsman Scheme’s compensation limit from £150,000 to £350,000, some firms saw their PI excess go up by as much as 1000%. And, as is so often the case with target-driven regulations, the workers at the coal face are hamstrung; analysts are now likely to spend as much time proving that they have met certain targets – for example, regarding the frequency of interactions with clients – as they are to be carrying out actual research.
Rather predictably, it is larger firms that have best been able to prosper in this formidable and unforgiving environment. Not only do they have greater resilience to cope with onerous regulatory demands, they also have the resources to grapple with compliance and perhaps even circumvent some aspects. Smaller firms risk being pushed to the margins while larger firms consolidate, threatening a potential monopoly of the financial advice market.
Larger firms, know full well that they are too big to collapse. Couple this with their ability to develop ‘box-ticking’ systems that allow them to be technically, if not spiritually, compliant with MiFID II, and it is clear that however well-intentioned the directive might be, it has created extremely choppy waters for the smaller advisory and family offices. Such firms do not have the resources, power or sheer size to swim freely. Instead, they must take pains to ensure that every commercial and investment decision they make is thoroughly researched and justified – particularly when larger and consolidated firms have recently become engaged in a merciless series of price wars.
Against this background, smaller firms have found that unless clients are of high net worth, they are simply not valuable enough to warrant the amount of time, energy and expertise necessary to properly advance their interests and, anecdotally at least, there seems to have been an exodus of more senior analysts from smaller brokers. As compliance demands take their toll, bonuses and commissions are shrinking, leaving many smaller firms staffed only by junior analysts.
Could this be the beginning of an inexorable tide that takes financial advice firms towards consolidation and eventual monopolisation? Recent illustrations of this trend include Rothschild buying a stake in equity research house Redburn; the 2018 merger between finnCap and Cavendish; and Shore Capital’s recent acquisition of Stockdale.
Improving service but compounding the advice gap
It’s worth reiterating the point made above that an unintended consequence of MiFID II has been the way it has served to widen the proverbial advice gap that first became apparent following 2013’s RDR (Retail Distribution Review). With the initial cost of production of financial advice increasing, as well as the ongoing charging, risk and transparency demands, clients with less than £50,000 represent poor value to advisers.
Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association (Pimfa), recently told the Financial Conduct Authority that RDR has served only to increase client costs and widen the advice gap. He said the FCA “needed to recognise the unintended consequences of the regulatory obligations that it places on firms.” *
However, we must be careful not to throw the baby out with the bathwater: it is clear that together RDR and MiFID have served to increase the quality of financial advice; it is just that such advice is probably available to fewer clients, with advisers now somewhat forced to service only more affluent clients who can help them meet their essential running costs.
Could the ‘whales‘ help keep the smaller fish buoyant?
The important question now has to be; ‘How do we enable smaller firms not only to survive but to prosper while also offering clients a valuable and adequately regulated service?’
It seems that the answer may be a new paradigm in which larger financial ‘whale’ networks effectively carry smaller and mid-cap brokerages on their backs to prevent them from ‘drowning’ in the face of the heightened regulatory demands and transparency requirements.
By making smaller firms part of established analyst coverage and corporate access networks, whales can help them negotiate the numerous and unforgiving currents and tidal swells created by both MiFID II and RDR.
By providing outsourced compliance support amongst other important resources, a network immediately presents a solution. Other advantages of network affiliation are numerous and can include access to global products and banking services, greater licensing options, use of back office systems and highly developed CRM suites, alongside the ability to offer established DFM portfolios.
For example, Nexus Global, the only IFA network to have gained Network Membership status with The Federation of European Independent Financial Advisers (FEIFA), offers its members a full network menu including free FEIFA membership for one year. IFAs can continue operating under their own branding and style while being covered by an overarching network of support.
In practice, partnership with such whale firms means that all of compliance, payroll, report/advice checking, marketing and more can be brought under a single umbrella, giving advisers more time to interact meaningfully with their clients and, crucially, to focus on what they do best: advancing their investors’ interests.
But there are risks …
While all that sounds brilliant, the danger with the new paradigm is a familiar one: the whales may simply become too big to fail. If a firm knows its collapse can precipitate a financial crisis it may be emboldened to act recklessly and to effectively intimidate the regulator. It may even move, or at least threaten to move, jurisdiction if it does not get what it wants. Furthermore, the richer a firm becomes, the more power it has and the greater its potential legal clout. And not only can it recruit the best lawyers, it can poach inside talent from the regulators, remaining one step ahead of them in the process.
A view to the future
Greater transparency in the financial services industry is undoubtedly a positive and noble intention – for example, recent research from Thomson Reuters has already indicated that MiFID II has served to halve the practice of dark pool trading in the EU.** Yet, as MiFID II is not yet two-years-old it is still too early to say just how beneficial or complicated its long-term impact may prove to be.
Of course, Brexit adds a further layer of uncertainty. There are even suggestions that post-Brexit, the UK may water-down or abolish MiFID II altogether, but bearing in mind that the FCA was instrumental in the development of the directive, it is hard to envisage any situation in which this could happen in the near-term.
Still, given some of the unintended consequences of MiFID II it is not unreasonable to suppose that MiFID III might be around the corner. Whatever the case, advisers, like clients, must remain on their toes; those who don’t are unlikely to survive.
The Future of Software Supply Chain Security: A focus on open source management
By Emile Monette, Director of Value Chain Security at Synopsys
Software Supply Chain Security: change is needed
Attacks on the Software Supply Chain (SSC) have increased exponentially, fueled at least in part by the widespread adoption of open source software, as well as organisations’ insufficient knowledge of their software content and resultant limited ability to conduct robust risk management. As a result, the SSC remains an inviting target for would-be attackers. It has become clear that changes in how we collectively secure our supply chains are required to raise the cost, and lower the impact, of attacks on the SSC.
A report by Atlantic Council found that “115 instances, going back a decade, of publicly reported attacks on the SSC or disclosure of high-impact vulnerabilities likely to be exploited” in cyber-attacks were implemented by affecting aspects of the SSC. The report highlights a number of alarming trends in the security of the SSC, including a rise in the hijacking of software updates, attacks by state actors, and open source compromises.
This article explores the use of open source software – a primary foundation of almost all modern software – due to its growing prominence, and more importantly, its associated security risks. Poorly managed open source software exposes the user to a number of security risks as it provides affordable vectors to potential attackers allowing them to launch attacks on a variety of entities—including governments, multinational corporations, and even the small to medium-sized companies that comprise the global technology supply chain, individual consumers, and every other user of technology.
The risks of open source software for supply chain security
The 2020 Open Source Security and Risk Analysis (OSSRA) report states that “If your organisation builds or simply uses software, you can assume that software will contain open source. Whether you are a member of an IT, development, operations, or security team, if you don’t have policies in place for identifying and patching known issues with the open source components you’re using, you’re not doing your job.”
Open source code now creates the basic infrastructure of most commercial software which supports enterprise systems and networks, thus providing the foundation of almost every software application used across all industries worldwide. Therefore, the need to identify, track and manage open source code components and libraries has risen tremendously.
License identification, patching vulnerabilities and introducing policies addressing outdated open source packages are now all crucial for responsible open source use. However, the use of open source software itself is not the issue. Because many software engineers ‘reuse’ code components when they are creating software (this is in fact a widely acknowledged best practice for software engineering), the risk of those components becoming out of date has grown. It is the use of unpatched and otherwise poorly managed open source software that is really what is putting organizations at risk.
The 2020 OSSRA report also reveals a variety of worrying statistics regarding SSC security. For example, according to the report, it takes organisations an unacceptably long time to mitigate known vulnerabilities, with 2020 being the first year that the Heartbleed vulnerability was not found in any commercial software analyzed for the OSSRA report. This is six years after the first public disclosure of Heartbleed – plenty of time for even the least sophisticated attackers to take advantage of the known and publicly reported vulnerability.
The report also found that 91% of the investigated codebases contained components that were over four years out of date or had no developments made in the last two years, putting these components at a higher risk of vulnerabilities. Additionally, vulnerabilities found in the audited codebases had an average age of almost 4 ½ years, with 19% of vulnerabilities being over 10 years old, and the oldest vulnerability being a whopping 22 years old. Therefore, it is clear that open source users are not adequately defending themselves against open source enabled cyberattacks. This is especially concerning as 99% of the codebases analyzed in the OSSRA report contained open source software, with 75% of these containing at least one vulnerability, and 49% containing high-risk vulnerabilities.
Mitigating open source security risks
In order to mitigate security risks when using open source components, one must know what software you’re using, and which exploits impact its vulnerabilities. One way to do this is to obtain a comprehensive bill of materials from your suppliers (also known as a “build list” or a “software bill of materials” or “SBOM”). Ideally, the SBOM should contain all the open source components, as well as the versions used, the download locations for all projects and dependencies, the libraries which the code calls to, and the libraries that those dependencies link to.
Creating and communicating policies
Modern applications contain an abundance of open source components with possible security, code quality and licensing issues. Over time, even the best of these open source components will age (and newly discovered vulnerabilities will be identified in the codebase), which will result in them at best losing intended functionality, and at worst exposing the user to cyber exploitation.
Organizations should ensure their policies address updating, licensing, vulnerability management and other risks that the use of open source can create. Clear policies outlining introduction and documentation of new open source components can improve the control of what enters the codebase and that it complies with the policies.
Prioritizing open source security efforts
Organisations should prioritise open source vulnerability mitigation efforts in relation to CVSS (Common Vulnerability Scoring System) scores and CWE (Common Weakness Enumeration) information, along with information about the availability of exploits, paying careful attention to the full life cycle of the open source component, instead of only focusing on what happens on “day zero.” Patch priorities should also be in-line with the business importance of the asset patched, the risk of exploitation and the criticality of the asset. Similarly, organizations must consider using sources outside of the CVSS and CWE information, many of which provide early notification of vulnerabilities, and in particular, choosing one that delivers technical details, upgrade and patch guidance, as well as security insights. Lastly, it is important for organisations to monitor for new threats for the entire time their applications remain in service.
On the Frontlines of Fraud: Tactics for Merchants to Protect Their Businesses
By Nicole Jass, Senior Vice President of Small Business and Fraud Products at FIS
Fraud isn’t new, but the new realities brought by COVID-19 for merchants, and the rising tide of attacks have changed the way we need to approach the fight. Even before the pandemic broke out earlier this year, the transition to digital payments was well underway, which means fighting fraud needs a multilayered, multi-channel approach. Not only do you want to increase approval rates, you want to protect your revenue and stop fraud before it happens.
A great place to start is working with your payment partners to refresh your company’s fraud strategies with emerging top three best practices:
- AI-based machine learning fraud solutions helps your business stay ahead of fraud trends. Leveraging data profiles to model both “good” and “bad” behavior helps find and reduce fraud. AI-based machine learning will be increasingly essential to stay ahead of the explosive and sophisticated eCommerce fraud.
- Increasing capabilities around device fingerprinting and behavioral data are essential to detect fraud before it happens. While much of the user-input values can be easily manipulated to look more authentic, device fingerprinting and behavioral data are captured in the background to derive unique details from the user’s device and behavior. Bringing in more unique elements into decisioning, can help authenticate the users and determine the validity of the transactions.
- Prioritize user authentication. User authentication is a vital linchpin in any fraud defense and should receive even greater priority today. Setting strong password requirements and implementing multi-factor authentication helps curb fraud attacks from account takeover.
As well as working with your payment partners it’s more critical than ever to protect online transactions while not jeopardizing legitimate purchases. Fortunately, there are a few things you can do right now to address these concerns:
- Monitor warning signs
Payment verification is an important part of protecting your business. There are a variety of strategies to employ including implementing technology utilizing artificial intelligence and machine learning to help catch certain patterns. In addition to technology, here are a few other tips that may serve as warning signs. These are not a guarantee fraud is occurring, but they are flags to investigate.
o The shipping address and billing address differ
o Multiple orders of the same item
o Unusually large orders
o Multiple orders to the same address with different cards
o Unexpected international orders
- Require identity verification
Finding a balance between protection and ease of purchase will ultimately help you protect your customers and your business. The following tactics can make it more difficult for fraudsters to be successful:
o For customers that have a login, require a minimum of eight characters as well as the use of special characters in your customers’ passwords
o Set up Two-Factor Authentication that requires a One-time Passcode (OTP) via SMS or email
o Use biometric authentication for mobile purchases or logins
- Monitor chargebacks
Keeping good records is essential for eCommerce. If a customer initiates a dispute, your only available recourse is to provide proof that the order was fulfilled. Be prepared to provide all the supporting information about a disputed transaction. Worldpay’s Disputes solutions can connect to your CRM and provide you dual-layer protection against friendly fraud, first deflecting them before they arise and then fully managing chargeback defenses on your behalf.
- Monitor declines
Credit card issuers mitigate fraud by automatically declining payments that look suspicious, based on unusual card activity such as drastic changes in spending patterns or uncommon geolocations of spending. You can check your own declined payment history to help spot a potential problem. When volumes increase, the help of a payments fraud management partner is beneficial.
- Protect your own wallet
While you take the steps to protect your business, it’s also important to be mindful of your own protection—it’s incumbent on all responsible consumers to be vigilant about their data. Whether it’s simple awareness of how the fraudsters are operating today, sticking to trusted brands when shopping online, and thinking twice about what data you share and who you share it with, you’ll soon see how often you are sharing personal information about yourself.
Using payments to streamline everyday transport
By Venceslas Cartier, Global Head of Transportation & Smart Mobility at Ingenico Enterprise Retail
Once upon a time the only way to get from A to B on public transport was with cash – and likely a pre-paid ticket bought from a physical office. Nowadays, thanks to technological developments, options range from contactless and mobile payments, to in-app tickets and more. As payment methods advance, consumers and merchants are naturally moving towards Mobility as a Service (MaaS) systems, integrating various forms of transport services into a single mobility service, accessible on demand.
This move towards MaaS does not only streamline the consumer experience, it has other positive impacts too. Incentivising public transport use reduces environmental pollution, improves mental wellbeing by reducing travel-related stress, and aids productivity by freeing up time otherwise spent driving. With this in mind, let’s take a look at the current trends affecting the transport sector, as well as how payments can optimise transportation for both operators and consumers alike.
Optimising transport with payments
The payment process is integral to any service. A payment service provider (PSP) can provide a range of key benefits to operators by proving a gateway to the transportation open payment ecosystem, and ensuring they meet objectives in 3 key areas.
- Environmentally, by reducing the use of personal cars and alleviating pollution and congestion.
- Societally, making urban mobility more inclusive in terms of improving access to all areas and for all socioeconomic classes.
- Economically, by optimising investment in eco-structure and fostering financial transactions, therefore improving the wealth of the city.
Payments professionals’ expertise and technological solutions can make payments easy again for transport operators. They can provide a range of options so that the customer can choose which one is right for them, leveraging the capabilities of the mobility services’ infrastructure (contactless, mobile wallets, P2P, closed-loop, QR code, and blockchain).
Furthermore, they can help promote inclusion and sustainable urban development. For example, methods such as prepaid virtual cards, or mobility accounts linked to a prepaid account can reduce the risks of excluding the unbanked. The environmental impact per kilometre can also be reduced, along with the use of vehicles with lower emissions per person per kilometre.
Finally, PSPs can put merchants’ minds at ease, providing payment liability, allowing aggregation of all due amounts from all mobility service providers, and collecting payments in one single transaction from users while dispatching revenue between mobility service providers.
COVID-19’s disruption to the travel industry cannot be overlooked. In fact, research suggests that public transit ridership is down 70% across the globe since the onset of the virus, longer distance travel has seen reductions of up to 90%, and payment by cash has seen a 60% drop.
Being realistic, these behavioural shifts are unlikely to revert anytime soon, so it’s important for merchants to keep this in mind when thinking about payment methods. More than 70% of consumers and travellers say they are likely to avoid the use of cash over the next six months. As a result, more than 40 countries have already raised their contactless payment threshold, further helping consumers to avoid contact with frequently touched pin pads.
However, the pandemic has only accelerated the way things were heading already and highlighted the benefits. Within the context of the pandemic, transportation needs to reinvent itself and adapt its processes to suit the shift in commuter habits that we’ve already seen and will continue to see in the future.
Other trends to keep an eye on
Contactless has been steadily growing on the transport scene, as have mobile payments and in-app purchases. In fact, the recent move to mobile and online ticketing is the most promising method so far, having seen significant growth in the last few years and having been accelerated by COVID-19 as discussed above. Once consumers move to these easy, convenient, and seamless methods, it’s rare that they revert – so it’s a good idea for operators to think how they can cater to these preferences.
Speed and convenience are a must for busy travellers – but not at the expense of data security. Finding the right payments partner is therefore crucial so operators can safeguard their customers’ personal data, while also keeping on top of other security regulations/features such as P2P encryption, PCI certification, and tokenisation.
Next steps for operators
Public transport is essential for many peoples’ everyday lives – COVID-19 or no COVID-19. As such, mobility service providers can make a great difference to their service and operations by implementing the right solutions.
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