#2 Insights into the China Market

18 October 2018 by Maxime Poriel

Prior to 2002, foreign investors’ access to China’s domestic capital markets and domestic investors’ access to offshore markets has been hindered by tight regulatory and capital controls. Since then, China has gradually introduced a range of liberalization measures and further strengthened its commitment to significantly easing market access.

Interested to learn more on the different institutional investor schemes in China? Aurexia Institute team have shared an extract from our study “Insights into China.”

#1 Insights into China Market

12 October 2018 by Maxime Poriel

Aurexia’s regulatory experts have delved deeply into the latest initiatives from China which contributed to the opening of its markets and the inflows and outflows of capital investment into its economy. We have produced a study titled “Insights into China”, and this production is the first glance at it.

On 30^th July 2018, the Open-Ended Fund Company (OFC) structure regime came into force. The latest initiative by the Securities’ & Futures Commission of Hong Kong to inject some fuel into its wealth management industry by providing fund managers an alternative option to structure their funds.

There are four core benefits of this fund structure:

1. Corporate Fund Structure – Allowing investment managers an alternative fund structure which they can utilize based on their investment objectives and requirements of their clients
2. Tax Exemption Incentives – Both public and private OFCs will be able to qualify for tax exemption incentives provided they fulfil a set of requirements
3. Umbrella Structure for funds – Flexibility to organize investment fund as an umbrella fund, which can cater for broad investment objectives, with increased attractiveness to a wider spectrum of investors.
4. Single Jurisdiction presence – Fund managers who domicile and distribute funds in Hong Kong will not have to worry about the implications and considerations of legal and regulatory aspects of an offshore domiciled location and onshore distribution.

Benchmark Regulation

11 October 2018 by Maxime Poriel

Insurance Distribution Directive (IDD)

5 October 2018 by Maxime Poriel

Scope:

IDD applies to all insurance distributors:

Insurance and reinsurance undertakingInsurance intermediaries as main professional activity (brokers, insurance representatives) and as secondary occupation (ex: car rental companies)
Online insurance comparators

Objectives:

Strengthen customers protection, especially for unit-linked life insurance products

Enhance the relevance and objectivity of advice in insurance subscription

Harmonize the regulatory framework for insurance products in EU

Strengthen penalties and widens the scope of intervention of competent national authorities

Facilitate cross-border activities of insurance companies

Align regulatory framework for all insurance distributors on sales approach and duty to provide advices

General Data Protection Regulation

16 April 2018 by Maxime Poriel

Overview of the key changes under GDPR:

Increased Territorial Scope: Apply to the processing of personal data of data subjects residing in the Union by controllers and processors in the EU, regardless of whether the processing takes place in the EU or not;

Data Protection Officers: DPO appointment will be mandatory only for those controllers and processors whose core activities consist of processing operations which require regular and systematic monitoring of data subjects on a large scale or of special categories of data or data relating to criminal convictions and offences;

Privacy by design: “The controller shall..implement appropriate technical and organisational measures..in an effective way.. in order to meet the requirements of this Regulation and protect the rights of data subjects” Art.23;

Data Portability: The right for a data subject to receive the personal data concerning them, which they have previously provided in a ‘commonly use and machine readable format’ and have the right to transmit that data to another controller;

Penalties: (maximum fine) up to 4% of annual global turnover or €20 Million – not having sufficient customer consent to process data or violating the core of Privacy by Design concepts;

Consent: The request for consent must be given in an intelligible and easily accessible form, with the purpose for data processing attached to that consent;

Breach Notification: In all member states where a data breach is likely to “result in a risk for the rights and freedoms of individuals” breach notification must be done within 72 hours of first having become aware of the breach;

Right to Access & Right  to be forgotten: Data subjects have the right to obtain from the data controller confirmation as to whether or not personal data concerning them is being processed, where and for what purpose; Moreover, data subjects can have the data controller erase his/her personal data, and potentially have third parties halt processing of the data.

Aurexia SFTR Reporting

28 March 2018 by Maxime Poriel

Following the global financial crisis, the ESRB and the European Commission have explored various ways to regulate the so-called « Shadow Banking » sector.

The EU Securities Financing Transactions Regulations (SFTR) came into effect on 12 January 2016 and aims at regulating and increasing the transparency of securities financing transactions in three ways

• By requiring counterparties to report SFTs to a EU approved trade repository
• By imposing condictions on the Collateral re-use. The collateral provider has to give explicit writing consent about risks & consequences of such agreement.
• By requiring Funds managers to inform investors of their use of SFTs and total return swap in their reports (pre-investment documentation, periodical reports)

Reuse requirements and reports transparency obligations respectively came into effect on 13 July 2016 and 13 January 2017.

• The reporting obligation follows a phased-in approach after the RTS comes into force. Consequently, the reporting obligation should start in Q2 2019 assuming RTS will entry into force in Q2 2018…

Open Banking: a new model to design

20 February 2018 by Maxime Poriel

2018 heralds the dawn of a new era for banks. The PSD2 (revised Payment Service Directive) is a directive that was born on the 12^th of January 2016 when the European Commission decided to fill the gaps left under PSD1. This European directive became national law in the EU member states on 13 January 2018. It enables non-financial institutions to officially become part of the payment service market by offering innovating services and having access to customer banking data. Welcome to the new model: “Open Banking”.

The story so far?

Since 13 January 2018, a breach has opened in the payment services market. Clients’ payment account information can now be accessed by third-party providers (TPPs), a new term born in the PSD2 context referring to a certain type of Payment Institutions that provide a limited scope of payment services. More precisely, TPPs refer to Account Information Service Providers (AISPs) and Payment Initiation Services Providers (PISPs), the two roles introduced by the directive. Although TPPs were doing business long before the enforcement of PSD2, they were operating under legal obscurity. TPPs must now operate under a legally binding framework, finally legitimating their services.

PSD2 has a big impact upon traditional banking players. Account Servicing Payment Service Providers (ASPSPs) also commonly known as banks, are obligated to grant access to their customer payment accounts to any TPP that has preliminarily obtained authorisation from the competent regulatory authorities. Access to payment account information is obtained via dedicated Application Programming Interfaces (APIs), the technical specifications of which have been drawn up by the European Banking Authority (EBA).  These changes may well disrupt the banking industry and be a substantial threat for banks. Newly accessible data could be exploited to introduce customers to more innovative services than banks can offer today.

What PSD2 is for?

Digital banking has become a daily habit for consumers. Customers’ needs are moving, mainly steered by technological innovations. Indeed, over the last few years the new generation (The Millennials) have become key Banking customers. Accustomed to user friendly digital services through their mobile phone or laptop, Millennials are mainly responsible for the changes that operate across industries. These services are mainly provided by digital giants such as US-based GAFA (Google, Amazon, Facebook, Apple) or China-based BATX (Baidu, Alibaba, Tencent, Xiaomi). The banking industry has been following that trend for years, with Fintechs landing on the market and proposing innovative financial services.

However, rapid innovations in the digital Banking industry were outpacing regulatory measures that were not sufficiently protecting end users against security risks inducted by the fast-growing fintech industry. As an example, 81%[1] of French consumers said to be concerned about their financial and banking information. Therefore, it was the regulator’s duty to react and compensate for the lack of consumer protection. Limiting fraud while promoting innovation are the real issues being faced by PSD2.

Should banks feel threatened by Open Banking?

“Banking is necessary, banks are not” as stated by Bill Gates in 1994. Faced with this new challenge, banks as we know them must radically adapt their strategies to their changing environment. Failure to properly grasp and adequately respond to the impact of Open Banking could have serious consequences for their sustainability in the longer term.

Banks have been coping with the Fintech intrusion for nearly a decade. Open Banking gives banks a new challenge regarding Fintechs presence: now Fintechs will be regulated and legally protected, they surely will become more valuable. If they want to keep the interest of their customers, banks must adapt their strategies. And this is what they are currently doing. According to a PWC study[2], banks are already working along with Fintechs to create a ground-breaking industry, and most of them will build partnerships in the next 5 years and will strengthen their innovation strategies.

Unfortunately, Open Baking is likely to give birth to more critical threats soon. Leading tech companies have started to set foot in the banking industry since early 2017. In eastern Asia, WeChat Pay (Tencent Group) already counts more than 200 million users[3]. Bearing in mind that Tencent Group is ranked world’s fifth market capitalisation gives a better understanding of the threat. For now, American GAFA and Asian BATX are not yet a danger for banks. But Open Banking will be a boon for these giants to conquer the market and grow even bigger.

How will be the Banking industry in the coming months?

The fight between Banks and Big Techs will certainly not happen without the Fintechs. The Bank / FinTech alliance seems to be the current strategy chosen by the banks to ensure they remain in the banking industry as a key player. However, banks can still rely on a major asset in their adversity with the Big Techs: the trust of their customers. And this trust is needed in a market where the consumer feels fragile.

Although banks still hold the most important asset in the Banking industry, things could change with the upcoming General Data Protection Regulation (GDPR). Indeed, GDPR will complement PSD2 on the banking market. This regulation will support consumer protection by securing their data. Where PSD2 offers an Open Data source, GDPR will ensure that the customer data is protected. Then what will happen when GDPR regulation comes into force on May 25^th, 2018? How will banks face this new challenge? Will customers feel more comfortable sharing their data?

Follow Aurexia blog to stay informed!

[1] RSA statistics, 2018

[2] PWC, Global FinTech Report 2017

[3] Forbes, 2018

2018 EU-wide Stress Test exercise

11 January 2018 by Maxime Poriel

Context and objectives

• The banking industry has been subject to numerous major reforms since the financial crisis to make the financial system more stable and secure. Since the global financial crisis of 2007, the stress test exercises have become progressively predominant in the range of tools used by prudential authorities.
• The EBA, in cooperation with the European Systemic Risk Board (ESRB), initiates and coordinates EU-wide stress tests to assess the resilience of financial institutions to adverse market conditions. The objective of the EU-wide stress test is to provide supervisors and market participants with a common analytical framework to compare and assess the resilience of EU banks.
• The stress test is conducted on the basis of a common methodology with relevant scenarios and a set of templates that record the starting point data and stress test results to allow the assessment of EU banks.
• 2018 EU-wide stress test draft methodology has been released on June 7th 2017. It is subject to discussion between the banks and the regulator.

Target Operating Model Compliance

6 November 2017 by Maxime Poriel

Organizing the function: best practice model

Artificial Intelligence

19 September 2017 by Maxime Poriel

What is artificial intelligence?

• Artificial intelligence can be defined as a set of technologies able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision-making, translation between languages…
• AI software can handle huge amounts of unstructured and structured data to reduce manual tasks and provide game changing business intelligence

What will be the implications for the private Banking industry?

• During the next decade, traditional Wealth Management firms will face increasing competition from Fintech companies proposing financial services based on AI
• However, the private banking firms can also choose to partner with editors to develop disrupting : new client services and improve operational efficiency using AI-powered technologies like machine learning, cognitive search, natural language processing…
• Are you familiar with what these technologies mean? And do you know how they can add value to the wealth management industry?