Banks under the spotlight (again)

About 6 months ago, I posted a blog on the current state of banking and financial services. It was published before the proceedings at the Royal Commission got underway, and since then we have heard a litany of complaints of malpractice and other inappropriate behaviour by some of our major financial institutions. We have also seen the publication of the Prudential Report into the CBA, commissioned by APRA. But despite the horror stories, is anyone really surprised by either of these findings?

Image: Jacob Edward; Source: Flickr; Some Rights Reserved

Some have suggested that our banking culture is largely to blame – but to me, that is somewhat simplistic, since I don’t think that the culture within our banks is so very different to that of other large companies or statutory corporations. (But I will explore this topic in a future blog.)

We have a love-hate relationship with our financial institutions, especially the 4-pillar banks. The latter have continued to be regarded as some of the most stable, profitable and prudent banks in the world – they are probably among the top 30 banks globally based on their credit ratings. Moreover, during the GFC, it was largely agreed that, despite their participation in complex financial products such as mortgage-backed securities, collateralized debt obligations and credit-default swaps, the big 4 banks helped to prevent a total meltdown in the local capital markets because they had reasonably strong balance sheets, and they worked closely with the RBA to avert the full effects of the GFC.

In fact, so enamoured are we of our banks that, despite the Royal Commission, the banks will not face significant regulatory reforms. One economist at a major fund manager I spoke to suggested that even an in-coming Labor Government would have to confine itself to some sort of bank tax. Anything that would undermine the 4-pillar policy (such as increased competition, rationalisation or foreign ownership) would likely be seen as unacceptable in the current political environment. In addition, since the financial sector makes up such a significant part of the market capitalization of the Australian stock market, most voters hold shares in the banks, either as direct or discretionary investments, or through their superannuation fund. Impacting the financial performance of the banks will have a knock-on effect for customers and shareholders alike.

Despite the relative strength of Australia’s financial services regulatory regime, it’s clear that part of the blame for the current malaise lies with the regulators themselves. None of the transgressions complained of at the Royal Commission or uncovered by APRA’s report on CBA suggest that new regulation is needed (unless we are talking about structural reforms…) In the wake of the GFC, and in line with global banking standards, banks have had to adjust the levels of risk-weighted capital they hold, and meet more onerous compliance costs – as well as rein in riskier lending practices. Yet, it feels like the regulators have not been as vigilant or as pro-active as they might have been – or there is such a “checklist” mentality towards compliance and risk management that banks and their regulators have lost sight of the substance of the law, not just the form.

Having read the APRA report on the CBA, there are a number of issues which need to be addressed, as I suspect that they are replicated (in whole or in part) among the other major banks:

  • All of the incidents covered by the APRA report occurred since the GFC – so, maybe increased compliance obligations are not the answer to these problems, but better supervision and enforcement?
  • Technology is only mentioned about a dozen times in the report – and technology was placed very low in the organizational framework for CBA’s Better Risk Outcomes Program (BROP) – yet banks are increasingly becoming technology businesses
  • Decision-making was seen as being too slow and too reactive, in part due to a collegiate and collaborative environment (surely, the signs of a positive culture?)
  • I would suggest there was a lack of external or independent input at the executive and even board level, and an over-reliance on in-house technical experts – especially in the areas of IT and risk
  • Further, the typical silo structures within large, complex organisations like banks, are the result of an over-emphasis on products and processes, rather than on customers and outcomes. To quote the APRA Report:

“…too many handoffs between silos and layers, with accountability often not clear enough and agreements hard to reach…”

  • Equally, a lack of delegation (especially to front line and customer facing staff) only compounds the lack of empowerment, accountability and transparent decision-making

Despite the strength of the 4-pillar banks and the market share they command, they face disruption and disintermediation from digital platforms, Blockchain technology, decentralized applications, P2P solutions and challenger brands. In fact, banks will increasingly become the digital custodians of our financial data – we will end up paying them to manage our data (rather than simply charging us transaction fees). Banks will also need to restructure their products and services around our personal financial needs and obligations according to our stage of life and other circumstances (rather than simply selling us products), along the lines of:

  • Essential – housing, living, education, health, retirement
  • Mandatory – superannuation, taxes
  • Discretionary – investments, holidays, luxuries

That way, banks will also have a much better “whole of client” view of their customers, rather than the current product bias.

Next week: Culture Washing

 

 

 

Bitcoin – Big In Japan

I spent the past week in Tokyo on behalf of Brave New Coin, meeting with various participants in the cryptocurrency industry – from exchanges to brokers, from industry bodies to information vendors, from connectivity providers to technology platforms. Given its share of Bitcoin trading volumes, and the legal developments currently in motion, Japan is now the focus of attention as it navigates towards a fully regulated and orderly cryptocurrency market.

Bitcoin is now accepted in Bic Camera stores in Japan (Photo: Rory Manchee – all rights reserved)

On my previous visit to Japan, I commented on the extent to which it was still a cash economy – even major museums and galleries don’t accept plastic, and my pre-paid foreign currency card issued by a major Australian bank was only accepted at a limited number of ATMs: 7-Eleven, and Japan Post. But according to expats I spoke to last week, this situation has changed over the past couple of years.

One of the reasons I was given as to why Japan is taking a lead in regulating cryptocurrencies is its previous perception of having a somewhat lax approach to money laundering. Part of this might be explained by the limited technical integration and interoperability with the global banking system (somewhat akin to Japan’s approach to telecoms, where in the past, it was impossible for overseas visitors to use their mobile phones on the domestic network).

In addition, as China has cracked down on most things crypto, so has Bitcoin trading activity shifted to Japan. This growth in Bitcoin trading volumes can also be linked to Japan’s passion for retail forex trading, now expanding into crypto.

Earlier this year, the Japanese government passed legislation that recognises bitcoin as a legal form of payment. (Note: this does not mean that bitcoin is legal tender – shops do not have to accept it; but if they choose to take it as payment for goods and services, then it is no different to paying in cash or by credit card when it comes to things like consumer rights, for example.)

Later this month, the main regulator, the FSA is expected to announce new regulations to govern cryptocurrency exchanges and brokers. Currently, exchanges that accept Yen deposits for cash trading of crypto must be licensed as payment institutions. By the end of March 2018, my understanding is that all exchanges and brokers must be fully licensed to operate – for both cash trading, and futures and margin trading. Anywhere between 20 and 50 exchanges have applied for a license.

Currently, participants in the “legacy” securities and futures industry are either registered with the JSDA or the FFA. Likewise, it is expected that the FSA will appoint a similar self-regulating entity to have official oversight of the cryptocurrency markets, under the overarching authority of the FSA. However, there are two rival blockchain and cryptocurrency industry associations that are vying for this role – which is where things become a little political. One group claims to represent the “pure” crypto world, whereas the other might be seen to represent more of the traditional market. No doubt the FSA would prefer not to have to choose…

Key considerations for the FSA are retail investor protection, and market stability. The total market cap of all cryptocurrencies is now around US$150bn. If we assume that 10% of these assets are held in Japan, when compared to the total capitalisation of the cryptocurrency exchanges themselves, this creates a significant risk for the FSA should there be a market collapse or a run on Yen-based crypto deposits.

Equally, the FSA does not want to stifle innovation in an area of financial services where Japan is keen to take the lead. For example, Japan has witnessed a couple of bitcoin-denominated corporate bonds (more like privately syndicated short-term commercial paper) that demonstrate an investor appetite for this new asset class.

Meanwhile, in preparation for this new regulatory environment, and in anticipation of the increased interest by major banks and asset managers, there is a project underway to create an institutional-strength order management platform connecting banks, brokers and exchanges. I also heard of offshore fund managers looking to launch a crypto-based ETF for distribution in Japan.

Finally, at the risk of blowing our own trumpet, Japan’s leading financial vendor, Quick is now quoting the Bitcoin Liquid Index (BLX) alongside other FX data it distributes from around the world:

 

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin, its clients or any other organisations I work with. These comments are intended as opinion only and should not be construed as financial advice.

Next week: Tech, Travel and Tourism

 

 

FinTech and the Regulators

What’s the collective noun for a group of financial services regulators? Given the current focus on FinTech sand box regulation and the cultivation of innovation, but also the somewhat ambiguous (and sometimes overlapping) roles between policy implementation, industry enforcement and startup monitoring, may I suggest it should be an “arbitrarium”?

Whatever, a panel of regulators (ASIC, RBA, APRA and AUSTRAC) came together at the recent FinTech Melbourne meetup to showcase what they have been working on.

First up, ASIC talked about their Innovation Hub and Sandbox, designed to accelerate the licensing process. Most of the FinTech startups engaging with the Innovation Hub are operating in marketplace lending, digital/robo advice, payment solutions and consumer credit services. Meanwhile, ASIC is seeing a growing number of enquiries from RegTech startups, and as a result, the regulator will be running a showcase event in Melbourne in the near future.

Next, the RBA gave an update on the new payments system (NPP), which will operate under the auspices of the Payments System Platform Mandate. A key aspect of this “pay anyone, anywhere, anytime” model is ISO 20022, the data standard that covers “simple addressing” as part of the payment interchange, clearing and settlement protocols. The system is due to go live later in 2017.

The biggest news came from APRA, in their role of licensing Authorised Depository Institutions (ADIs). According to APRA statistics, 26 new ADIs have been approved in the last 10 years. Most licenses come with significant conditions attached, so APRA is looking to simplify the process and encourage more competition. Similar to ASIC’s sandbox model, new entrants will be able to apply for “restricted ADI” status, under a 2-year license, with certain limitations on the size and volume of their book of business. Essentially, there will be a less onerous startup capital requirement, and the new regime is expected to be operational in the second half of 2018.

Finally, AUSTRAC gave an update on their responsibilities under the AML/CTF Act 2006. While AUSTRAC has selective oversight of FinTech startups, it has responsibility for 14,000 reporting entities, including businesses holding gambling permits. Acknowledging there is something of regulatory lag when compared to new business models and new technology, AUSTRAC pointed to the Fintel Alliance, launched earlier this year, and which may run its own pilot sandbox. Currently undertaking a legislative review and reform exercise, a key aspect of AUSTRAC’s work is undertaking product and sector risk assessment.

During the audience Q&A (including some interesting contributions from ASIC Chairman, Greg Medcraft) there was discussion of cryptocurrencies and blockchain solutions vis-a-vis the NPP, and how to address the potential conflict of laws, for example between KYC and privacy and data protection.

Next week: YBF FinTech pitch night

 

What might we expect in 2017?

On a number of measures, 2016 was a watershed year. Unexpected election results, fractious geopolitics, numerous celebrity deaths, too many lacklustre blockbuster films, spectacular sporting upsets (and regular doping scandals), and sales of vinyl records are outpacing revenue from digital downloads and streaming services. What might we expect from 2017?

Detail from "The Passing Winter" by Yayoi Kusama (Photo by Rory Manchee)

Detail from “The Passing Winter” by Yayoi Kusama [Photo by Rory Manchee]

Rather than using a crystal ball to make specific predictions or forecasts, here are some of the key themes that I think will feature in 2017:

First, the nature of public discourse will come under increased scrutiny. In the era of “post-truth”, fake news and searing/scathing social commentary, the need for an objective, fact-based and balanced media will be paramount. In addition, the role of op-ed pieces to reflect our enlightened liberal traditions and the need for public forums to represent our pluralist society will be critical to maintaining a sense of fairness, openness, and just plain decency in public dialogue.

Second, a recurring topic of public conversation among economists, politicians, sociologists, HR managers, career advisors, bureaucrats, union leaders, technologists, educators and social commentators will be the future of work. From the impact of automation on jobs, to the notion of a universal basic income; from the growth of the gig economy, to finding purpose through the work we do. How we find, engage with and navigate lifelong employment is now as important as, say, choosing high school electives, making specific career choices or updating professional qualifications.

Third, the ongoing focus on digital technology will revolve around the following:

  • The Internet of Things – based on a current exhibit at London’s Design Museum, the main use cases for IoT will continue to be wearable devices (especially for personal health monitoring), agriculture, transport and household connectivity
  • Fintech – if a primary role of the internet has been for content dissemination, search and discovery, then the deployment of Blockchain solutions, the growth in crypto-currencies, the use of P2P platforms and the evolution of robo-advice are giving rise to the Internet of Money
  • Artificial Intelligence – we are seeing a broader range of AI applications, particularly around robotics, predictive analytics and sensory/environmental monitoring. The next phase of AI will learn to anticipate (and in some cases moderate) human behaviour, and provide more efficacious decision-making and support mechanisms for resource planning and management.
  • Virtual Reality/Augmented Reality – despite being increasingly visible in industries like gaming, industrial design, architecture and even tourism, it can feel like VR/AR is still looking for some dedicated use cases. One sector that is expected to benefit from these emerging technologies is education, so I would expect to see some interesting solutions for interactive learning, curriculum delivery and student assessment.

Fourth, and somewhat at odds with the above, the current enthusiasm for the maker culture is also leading to a growing interest in products that represent craft, artisan and hand-made fabrication techniques and traditions. Custom-made, bespoke, personalized and unique goods are in vogue – perhaps as a reaction to the “perfection” of digital replication and mass-production?

Fifth, with the importance of startups in driving innovation and providing sources of new economic growth, equity crowdfunding will certainly need to come of age. Thus far, this method of fund-raising has been more suited (and in many cases, is legally restricted) to physical products, entertainment assets, and creative projects. The delicate balance between retail investor protection and entrepreneurial access to funding means that this method of startup funding is constrained (by volume, amounts and investor participation), and contrary to stated intentions, can involve disproportionate set up costs and administration. But its time will come.

Finally, as shareholder activism and triple bottom line reporting become more prevalent (combined with greater regulatory and compliance obligations), I can see that corporate governance principles are increasingly placing company directors in the role of quasi-custodians of a company’s assets and quasi-trustees of stakeholder interests. It feels like boards are now expected to be the conscience of the company – something that will require directors to have greater regard to the impact of their decisions, not just whether those decisions are permitted, correct or good.

One thing I can predict for 2017, is that Content in Context will continue to comment on these topics, and explore their implications, especially as I encounter them through the projects I work on and the clients I consult to.

Next week: The FF17 Semi Finals in Melbourne