Category Archives: Digital Innovation

SEC “Cybersecurity is one of the greatest risks facing the Financial Services Industry”


Mary Jo White, Chair of the U.S. Securities and Exchange Commission (SEC), delivered a Keynote Address Investment Company Institute 2016 General Meeting in Washington, DC on the 20th May

The Commission is the primary regulator of the mutual fund industry which is comprised of 8,131 mutual funds with approximately $15 trillion in assets held by 54 million U.S. households as of March 2016.

White advised that the current and future health of the markets and the financial security of investors depend on the success of both its regulatory efforts and how well the industry participants do their jobs as fiduciaries and responsible leaders of the marketplace.

She highlighted 3 significant areas of regulation for the asset management industry:

  • controls on conflicts of interest;
  • a robust registration, reporting and disclosure regime; and
  • controls on specific fund portfolio composition risks and operational risks

Looking to the future, White highlighted disclosure effectiveness and ETFs as key areas of focus for the SEC. She also highlighted a number of areas where the sector must take the lead.

White believes a key challenge for the industry is the risk in using technology and service providers. She stressed the importance of firms ensuring that a fund is adequately prepared to promptly and effectively respond to risks that may be triggered by service providers and its own use of technology, including implementing alternative and reliable means to satisfy the fund’s regulatory requirements.

Cybersecurity is a particularly critical element of this challenge – as I have said before, cybersecurity is one of the greatest risks facing the financial services industry.  Cyber risks can produce far-reaching impacts, and robust and responsible safeguards for funds and for their investors must be maintained”.

The Commission has been very active in drawing attention to the issue and examining and enforcing the rules it oversees in respect of cybersecurity. Its regulatory efforts are focused primarily on ensuring that our registered entities have policies and procedures to address the risks posed to systems and data by cyber-attacks.

While no one can prevent all disruptions from cybersecurity events, you should consider the full range of cybersecurity risks to your funds and consider appropriate tools and procedures to prevent breaches, detect attacks and limit harm”.

BRG recently undertook a Cybersecurity Preparedness Benchmark Study. The study examined six main areas:

  • Leadership
  • Information Governance
  • Risk Management
  • Essential Protection
  • Incident Response and
  • Security Culture

For financial services, BRG partnered with the Institute of Operational Risk.

The results of the Benchmark will be released shortly.

For further information, please contact:

USA:                      Faisal Amin

UK/EMEA            Tony Moroney

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Canadian Competition Bureau launches FinTech market study

Canadian competition authority

The Competition Bureau has launched a market study into technology‑led innovation in the Canadian financial services (FinTech) sector.

John Pecman, Commissioner of Competition stated:

“The FinTech market study will provide guidance to the Bureau and regulators, to nurture an environment that allows Canada’s FinTech companies to innovate, grow and compete globally.”

Pecman believes that FinTech has the potential to disrupt the financial services sector, spur innovation and generate benefits for individuals and companies across Canada.

The Bureau intends to focus on innovations that affect the way Canadian consumers and small and medium businesses commonly encounter financial products and services, including:

  • peer‑to‑peer banking (e.g., peer‑to‑peer lending and transfers)
  • e‑wallets, mobile wallets and payments
  • crowdfunding, in particular for small and medium‑sized business capital
  • online‑based financial advisory services (also known as “robo‑advisors”)

The study will explore the competitive impact that FinTech is having on the industry, barriers to entry faced by companies, and whether there is a need for regulatory reform to promote greater competition while maintaining consumer confidence in the sector.

Key Questions for the Study

The Competition Bureau is concerned that:

  • With the continued and rapid speed of innovation in the digital economy, tools designed for yesterday’s marketplace may not work well tomorrow
  • When innovation is unnecessarily stifled—by regulation or otherwise—the result can be a less competitive and less dynamic marketplace
  • Similarly, without conscious oversight, when heavily regulated markets become less regulated, consumers can be left exposed without the tools or information to make sound decisions

With these potential risks in mind, the Study will aim to answer the following key questions:

  • What has been the impact of technology‑led innovation on the competitive landscape?
  • What is happening to competition?
  • How will innovation impact competition in the future?
  • How will consumers benefit from FinTech?
  • What are the barriers to entry, expansion, or adoption for FinTech companies? Are the barriers regulatory or structural?
  • What is the current state of the regulatory framework for financial services?
  • Does the regulatory framework support or inhibit competition and innovation?
  • Are regulatory changes required to encourage greater competition and innovation in the sector?
  • Are the consumer protections in place today enough to adapt for the future?
  • What additional protections should be put in place for consumers?
  • Is there a need for greater transparency in fees?
  • What issues should be considered when developing or amending regulations to ensure competition is not unnecessarily restricted?

Interested stakeholders are invited to make a submission to the Bureau.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.


Insurance Supervisors concerned about FinTech

Bank Reg

The International Association of Insurance Supervisors (IAIS) represents insurance supervisors and regulators from more than 200 jurisdictions in nearly than 140 countries.

Its Secretary General, Yoshihiro Kawai, outlined IAIS’s position with regards to FinTech in its recent newsletter.

For Kawai, FinTech presents both a significant opportunity and a threat.

It is giving rise to new business models, applications, processes and products. These could have a material effect on financial markets and institutions and the provision of financial services”.

IAIS focus has been on financial inclusion. It acknowledges that FinTech, in particular mobile or online based sales, has already contributed to a significant increase in insurance sales in some emerging markets.

New technology enables insurers, intermediaries and other financial service providers to customise products and marketing material”.

“However, more opportunities and fewer barriers do not automatically mean better market or customer outcomes and can also give rise to conduct of business risk”.

IAIS believes there are risks when products are sold online or using digital platforms without appropriate advice:

  • Unauthorised insurers could sell insurance to a wide range of customers across borders
  • The growing importance of data leads to risks to privacy protection and data security
  • Sophisticated cyber-attacks may lead to customer data being stolen, manipulated or destroyed

IAIS also recognises that FinTech developments pose substantial supervisory and regulatory challenges.

Kawai acknowledges that both insurance regulation and insurance supervisors need to adapt, foresee potential risks and act in a timely and appropriate manner to pre-empt emerging risks of FinTech.

Kawai concludes that IAIS Members should be well informed and prepared. He rightly points to conduct of business risks. Boards and senior executives of insurance firms need to ensure their products and services are based on real customer needs. Ensuring good customer outcomes is key.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.


65% of UK large businesses experience a cybersecurity breach / attack

BRG cyber securityIpsos MORI and its partner, the Institute of Criminal Justice Studies (ICJS) at the University of Portsmouth, were commissioned by the UK Government’s National Cyber Security Programme to survey UK businesses on their approach to cyber security and the costs they have incurred from cyber security breaches.

The Cyber Security Breaches Survey found that 65% of large businesses experienced a cybersecurity breach or attack in the past year with 25% of these experiencing a breach once a month.

The most common attacks detected (68%), involved viruses, spyware or malware. Key areas for improvement included incident response and staff training.

Ed Vaizey, Minister of State for Culture and the Digital Economy said: “We see a steady stream of breaches and attacks on firms which assume they are on top of security, but still haven’t got a good understanding of the possible impact on their business or what they should do about it”.

Results from the survey are being released alongside the Government’s Cyber Governance Health Check (launched following the TalkTalk cybersecurity attack); the Health Check found that almost half of the top FTSE 350 businesses regarded cybersecurity attacks as the biggest threat to their business when compared with other key risks – up from 29 per cent in 2014.

BRG recently undertook its own Cybersecurity Preparedness Benchmark Study. The study examined six main areas:

  • Leadership
  • Information Governance
  • Risk Management
  • Essential Protection
  • Incident Response and
  • Security Culture

For financial services, BRG partnered with the Institute of Operational Risk.

The results of the Benchmark will be released shortly. For further information, please contact:

USA:                      Faisal Amin

UK/EMEA            Tony Moroney

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Digitalisation – old game, new rules or an entirely new game?

Bank Reg

Erkki Liikanen, the Governor of the Bank of Finland, delivered a fascinating speech at the at the Payments Forum in Helsinki

Some of his key points:

Digitalisation and Financial Services

  • Digitalisation is a wide-ranging use of information and communications technology in the renewal of business models; it may also help create entirely new products and services.
  • Digitalisation also facilitates completely new kinds of operating practices in the financial sector. Traditional players are being challenged by Apple, Google, Amazon, Facebook and Alibaba, i.e. operators whose success is based on the intelligent harnessing of digital platforms and networks e.g. payments and trade financing. In addition, challenge is coming from specialised financial services providers i.e. FinTech.
  • Some traditional operators have forged new partnerships with each other and/or have started cooperating with new players; many banks have established start-up accelerators and incubators for FinTech businesses and/or have made significant private equity investments in start-up companies.

Digitalisation and Financial Platforms

  • The success of many new companies has been based on platforms i.e. an operating model that facilitates value-creating interaction between external producers and consumers e.g. Uber, Facebook, Alibaba and Airbnb.
  • A platform has two functions: it provides a framework for interaction and it sets the ground rules for interaction. Its aim is to create a favourable environment for parties to innovate and generate added value from which everyone benefits.
  • Underlying the enormous growing power of platforms are network effects i.e. each new user also increases the value of the platform for old users.
  • New digital technologies have removed constraints on growth, enabling rapid scaling of business operations; particularly where information is a key production factor.
  • Notable financial market platform phenomena include, for example, peer-to-peer lending and crowdfunding platforms.
  • Platforms and networks are also at the heart of blockchain technology.

Digitalisation and the Payments Market

  • An essential driver of digitalisation is young people who are accustomed to doing everything via the internet, often on a mobile device; new players entering the market have created operating models that place the user at the centre of payment services.
  • Ease and convenience are the features required of payments in the future; from a monetary authority’s perspective, security and reliability should be added to the list as without trust, even the easiest to use payment method will not survive.
  • Real-time payment transmission will be an essential element of the digitalisation of payments in the future, as will 24/7 availability of services.

Digitalisation and Regulation

  • Reliable, secure and efficient payment services that openly and extensively utilises the opportunities of digitalisation may help stimulate productivity growth in an economy.
  • The task of central banks is to ensure the credibility and efficiency of the financial system; and to set common ground rules and regulation to ensure its stability.
  • Technological advances and the entry into the market of new actors and practices are a challenge to regulation; striking the right balance between reliability and safety (of payment services) and the introduction of new innovations is key.

Digitalisation and FinTech are now ubiquitous in Financial Services. And while there are many consumer benefits, there are also risks which creates a real challenge for regulators.

Looking out the curve, regulation will most likely driven by “what a firm does” as opposed to “what the firm is”. Numerous regulators in Europe, the USA and elsewhere have already alluded to this.

The OCC has gone a step further, opining that ultimately consumers will want the protection of buying products and services from firms that are regulated.

It only takes a couple of incidents of market failure and/or consumer detriment for this to become a reality.

In terms of the latter, new players must ensure that “good customer outcomes” feature just as strongly as “customer experience / satisfaction” in their product design and on-going product governance objectives.

For the avoidance of doubt, they are not the same thing!

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Islamic finance grabbles with FinTech

FinTech brg

Earlier this week, Datuk Muhammad bin Ibrahim, the Governor of Bank Negara Malaysia (the Central Bank of Malaysia) gave the Keynote Address at the Global Islamic Finance Forum 5.0 – “Future of Islamic Finance“.

The Governor pointed out that in many parts of the world, Islamic finance is one of the fastest growing segments of the financial industry: “Its reach and influence has expanded beyond the traditional Islamic markets, with increasingly strong footholds in banking, takaful and the capital markets”.

According to the Central Bank, Islamic banking now represents more than 20% of total banking assets in at least 10 jurisdictions (a feat that has been achieved in under a decade), with Islamic financial services are now available alongside conventional financial services in many markets.

The Central Bank acknowledges that the FinTech revolution, coupled with the digital revolution and the widespread penetration of technology, is also impacting Islamic Finance:

FinTech opens up new possibilities for improving efficiencies, reducing wastage and enhancing the customer experience… equally, it is not without risks, particularly with rising cybersecurity threats that could compromise safeguards that protect financial assets and customer data”.

The Central Bank of Malaysia has commenced a review of the changes and additional guidance needed to ensure that the regulatory framework remains appropriate to manage FinTech risks using three lenses:

  1. the impact of FinTech strategies on the management of risks by financial institutions;
  2. the potential for FinTech start-ups to introduce new risks to the broader financial system as a result of regulatory arbitrage;
  3. the impact on consumers

Islamic financial activities in Malaysia are governed by a comprehensive contract based regulatory framework designed to achieve end-to-end Shariah compliance whereby financial institutions are expected to evaluate and manage the impact of their activities, beyond that which is solely concerned with financial gains.

Arguably, FinTech and Islamic finance techniques are both disrupting traditional structures in the conventional financial industry. It is appropriate therefore that consumers, companies and investors in Islamic finance are equally able to optimise digital developments.

According to the Central Bank Governor “to elevate the Islamic finance industry to the next level, the formulation of game-changing strategies must bring in elements that leverage on technology, accelerate innovation and develop well-rounded talent to meet future needs of Islamic finance”.

The challenge for regulators around the world is how to regulate FinTech in a manner which does not kill innovation. In reality, “what you are” should not determine the regulatory approach; regulation should be based on “what you do”! And central to this, in every market, is the protection of consumers.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

US Treasury Intent on Improving Online Marketplace Lending

US Treasury 2.PNG

The US Treasury Department has issued a white paper “Opportunities and Challenges in Online Marketplace Lending”.

Online marketplace lending refers to the segment of the financial services industry that uses investment capital and data-driven online platforms to lend either directly or indirectly to consumers and small busi­nesses.

This segment initially emerged as a “peer-to-peer” marketplace, with companies giving individual investors the ability to provide financing to individual borrowers. As products and business models have evolved, the investor base for online marketplace lenders has expanded to institutional investors, hedge fund, and financial institutions. In recognition of this shift in investor base, the market is no longer accurately described as a “peer-to-peer” market.

Treasury now refers to these companies as “online marketplace lenders.” In its white paper, it provides an overview of the evolving market landscape, reviews stakeholder opinions, and provides policy recommendations.

It also acknowledges the benefits and risks associated with online marketplace lending and highlights certain best practices applicable both to established and emerging market participants.

Several common themes emerged, including the following:

  1. Use of Data and Modelling Techniques for Underwriting is an Innovation and a Risk: While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations. Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.
  2. An Opportunity Exists to Expand Access to Credit: The online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
  3. New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle.
  4. Small Business Borrowers Require Enhanced Safeguards: Commenters drew attention to uneven protections and regulations currently in place for small business borrowers.
  5. Greater Transparency Can Benefit Borrowers and Investors: Responses strongly supported and agreed on the need for greater transparency for all market participants including pricing terms for borrowers and standardized loan-level data for investors.
  6. Secondary Market for Loans is Undeveloped: Although loan originations are growing at high rates, the secondary market for whole loans originated by online marketplace lenders is limited.
  7. Regulatory Clarity Can Benefit the Market: A large number argued that regulators could provide additional clarity around the roles and requirements for the various market participants.

The white paper also introduces a number of recommendations for consideration by the federal government and private sector participants:

  1. Support more robust small business borrower protections and effective oversight;
  2. Ensure sound borrower experience and back-end operations;
  3. Promote a transparent marketplace for borrowers and investors;
  4. Expand access to credit through partnerships that ensure safe and affordable credit;
  5. Support the expansion of safe and affordable credit through access to government-held data; and
  6. Facilitate interagency coordination through the creation of a standing working group for online marketplace lending.

The white paper identifies potential trends that will require on-going monitoring. These include the evolution of credit scoring, the impact of changing interest rates, potential liquidity risk, increasing mortgage and auto loans originated by online marketplace lenders, potential cybersecurity threats, and compliance with anti-money laundering requirements.

Critically, the business models and data-driven algorithms supporting this industry have largely developed in favourable credit conditions. Treasury believes it is important to consider policies that could minimize borrower risks and increase investor confidence in a less favourable credit environment.

A few other points of note:

  • The Consumer Financial Protection Bureau (CFPB) began accepting consumer complaints against marketplace lenders in March
  • The US Supreme Court is embroiled in a case that has major implications for online marketplace lenders: Madden -v- Midland Finance. At issue is whether the National Bank Act, which pre-empts state usury laws regulating the interest a national bank may charge on a loan, continues to have pre-emptive effect after the national bank has sold or otherwise assigned the loan to another entity
  • The ousting of the chief executive of LendingClub after a board review will increase the pressure for further regulatory scrutiny of the online marketplace/peer-to-peer lending businesses

Looking forward, it’s not “what you are” but “what you do” which is likely to determine the regulatory and governance framework for online marketplace lenders; and the expectations of directors and senior executives.

Consumer protection will be centre stage of the evolving regulatory agenda.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.