1 november 2016 - eversheds sutherland€¦ · 1 november 2016 matthew gough chair, partner &...
TRANSCRIPT
Digital Financial Services Conference
1 November 2016
Matthew Gough
Chair, Partner & Head of Digital Financial Services
09:15• Welcome from chair – Matthew Gough, Eversheds
• The economics of digital financial services and the regulatory regime – Ram Mahendran, SRM Economics
• The CMA’s proposed remedies using technological advances and how they are being taken forward –Colin Garland, The Competition and Markets Authority
• Blockchain – Andrew Henderson, Eversheds
• Friend, not foe: collaborating with Fintechs – Colin Farquhar, Deloitte
11:20 Coffee break
11:40• E-signatures – Craig Rogers, Eversheds
• Automated advice – Karan Shanmugarajah, WealthKernel
• Social media and digital financial services – Andrew Terry, Eversheds
13:00: Networking lunch
Today’s agenda
Eversheds LLP | 02/11/2016 |
−Eversheds Digital Financial Services series:• First annual conference – September 2015
• Digital Financial Services and technology platforms – February 2016
• Digital Financial Services and Payments and regulatory matters – June 2016
• Digital Financial Services and data protection and cyber crime – October 2016
• Second annual conference – today
• Previous event materials are available at eversheds.com/digitalfinancialservices
−Today’s focus: exploiting new technologies
Welcome and Setting the Scene
Digital Financial Services Conference: Exploiting New Technology
Eversheds LLP | 02/11/2016 |
− The use of Digital Financial Services is continuing to grow
− OFCOM’s 2016 survey found:• 67% of Internet users bank or pay bills online
• 40% of Internet users bank or pay bills online once a week
• 32% of Internet users bank or pay bills with smart phone
− Cap Gemini’s Wealth Management report in 2016 stated:• 56% of global Wealth Management firms have digital as a top three priority in the short
term
• 64% of HNWI’s globally expect their relationship to be mostly or entirely digital
Setting the Scene
Digital Financial Services Conference: Exploiting New Technologies
Eversheds LLP | 02/11/2016 |
− On the insurance side Accenture has reported:• $2.6 billion invested in 2015 in Insurtech deals
• 300% increase from 2015
• Increasing in 2016 and 45 Insurtech deals signed in Q1 of 2016
− With regard to Blockchain:• 1,700,000 transactions in the Blockchain ledger each week in October 2016
• Bitcoin reached a high of $1,216 in December 2013 and it is currently around $650 per Bitcoin
• In May 2016 Santander was the first UK bank to start using Blockchain for international payments
Setting the Scene (continued)
Digital Financial Services Conference: Exploiting New Technologies
Eversheds LLP | 02/11/2016 |
− According to EY London was the leading Fintech City in 2015 generating £6.6 billion in revenue and employing 61,000 people
−FCA’s Project Innovate continues to progress• By September 2016 more than 300 firms of all sizes have been assisted by the FCA in 2
years
• 69 firms applied in July 2016 to the first tranche of the Regulatory Sandbox and 24 were accepted
• Sectors supported by the Sandbox include retail banking, insurance, advice and profiling and IPO
• FCA has signed international co-operation agreements with Australia and Singapore
Setting the Scene (continued)
Digital Financial Services Conference: Exploiting New Technologies
Eversheds LLP | 02/11/2016 |
−Today we will look at the increased use of technology and financial services
−Eversheds’ specialist lawyers are joined by industry experts to cover a range of topics
−There will be a short Q&A at the end of each presentation
Setting the Scene (continued)
Digital Financial Services Conference: Exploiting New Technologies
eversheds.com©2015 Eversheds LLPEversheds LLP is a limited liability partnership
For more information contact:
Matthew Gough
+44 292 047 7943 [email protected]
1 Callaghan SquareCardiffCF10 5BTUnited Kingdom
Digital banking: how does it impact on vulnerable customers and what regulatory and economic issues does it create?
Presentation for Eversheds – Digital Financial Services Conference
1 NOVEMBER 2016
www.srmeconomics.co.uk
Overview of today’s presentation
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• Does technology result in customers being more or less vulnerable?1.
• Do online banking customers get discounts passed on to them or do they subsidise traditional banking customers?2.
• Do digital technologies both reduce firms’ costs and improve customer service? Or is there a trade-off? How can we measure this?3.
www.srmeconomics.co.uk11
Why are we talking about this?
www.srmeconomics.co.uk
Q1. Can technology help or hinder vulnerable customers?
• Digital banking helps customers overall as seen in the BBA’s ‘The way we bank’ series, although there may be distributional effects.
• As they are able to use standard banking products anywhere and anytime they like, the 2015 LBG ‘Annual Report’ stated that 55%
of their customers’ needs are meet digitally. In total, LBG has an online customer base of 11.5 million customers.
• There has also been an increase in the number and variety of products and providers that customers can choose from.
• However, vulnerable customers are not like the majority of a bank’s customers, as per the FCA’s occasional paper 8 ‘Customer
vulnerability’. More work needs to be done into how specifically vulnerable customers are affected by an individual firms’ digital
technology.
• The ‘Mind the Gap’ study made the following statement regarding vulnerable customers.
• “Financial inclusion, and access, now directly relate to the FCA’s objectives of consumer protection and competition, including
within it support for more vulnerable consumers, encouraging a real degree of effective choice for consumers and clarity and
transparency over products purchased, particularly when it comes to terms and conditions.”
• Overall, there are ways that digital technology may be helping or hinder vulnerable customers. The overall impact cannot easily and
arguably shouldn’t be measured at an industry level as it more about how an individual firm uses and applies the digital technology
developments.
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Summary: what is the overall impact of technology?
www.srmeconomics.co.uk
Q1. An economists view of the ‘Mind the gap’ reportMETHODOLOGY
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Work performed independently between July and Nov 2015, commissioned by the
FCA
50 customer interviews28 interviews with industry experts; charities, consumer bodies, industry
organisations and firms
Aim was to understand access issues that consumers face, these were broken down
into the following types
Digital and physical barriers
Barriers to bankingBarriers caused by
credit file issuesBarriers facing older mortgage borrowers
Barriers to accessing insurance
6 consumer focus groups
www.srmeconomics.co.uk
An economists view of the ‘Mind the gap’ report
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Key access issues Summary of issue SRM Economics view
‘The Maze’ – Process, requirements and eligibility
• Physical barriers to accessing financial products • Conflicting or limited information is often provided between firms.• Consumers’ struggle to understand products, relates to all issues.• Lack of explanation as to why a customer has been denied a product, leads to
future self limiting behaviours.• Products may not match consumers needs.
• Documentation issue is relatively small, the complicated nature of financial products is well known.
• Conflicting information within firms is something firms need to monitor, as well as reasons as to rejection.
• Rejections could come with a reason and alternative.
‘The Fog’ – Market navigation and comprehension
• Consumers struggle with technical language of financial products.• Difficulties in understanding benefits, costs and exclusions of products.• Many myths around credit scores, that can impede access to mainstream credit.• Search for the most appropriate product is difficult.• Consumers who are ineligible for products may have difficulties compounded
by time taken to establish eligibility.
• Product comparison website can help this.
• The risk is that these services cannot compare all characteristics.
• Consumers value product features differently.
‘The Void’ – Digital and physical barriers
• Practical exclusion from financial products, linked to physical access or digital exclusion.
• Older people, people with disabilities and consumers living in rural areas are most likely to struggle with physical access.
• Also likely to experience digital exclusion, along with low income customers.• Lack of access to technology, or lack of confidence/computer literacy can result
in exclusion.
• Digital barriers are a relatively new and unexplored issue.
• Have greater importance given the rise if internet only providers and online only offers.
• Issue may dissipate naturally?
www.srmeconomics.co.uk
Q2. Do online customers get the discounts they should receive?
• Economic price theory suggests that, in efficient markets the price
of the good is equal to the marginal cost of producing the final
good.
• The marginal cost of providing a product to digital customers
should be lower.
• This theory can be seen in the graph to the right.
• The equilibrium market price would be lower (and quantity higher)
if the market was supplied by a digital technology only.
• However, the digital equilibrium price is below the price that
would be required to supply traditional banking services. If banks
were to charge the same (lower price) traditional banking
activities could become unprofitable, perhaps rationalising the
reduction in supply of branches as digital banking grows.
• Further issue here is that new entrants may have a marginal cost
below that of ‘traditional’ banking providers.
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Economic theory
Pri
ce
Quantity
Demand Supply Traditional Supply Digital
www.srmeconomics.co.uk
Retail banking has exhibited significant cross-subsidisation, but digital banking challenges the extent to which this is viable
16
Price range for
legacy customers
• This includes depreciation on tech-platform investment.
Incremental costs for digital customers
• To what extent are common costs falling?Common costs
Legacy customers incremental costs
One interesting issue is the extent to which the branch network is become a legacy customer incremental cost
and not a shared or common cost.
www.srmeconomics.co.uk
REGULATORS HAVE (SOMETIMES) CONFLICTING OBJECTIVES WHILE WANTING CONSUMERS TO OBTAIN A FAIR DEAL
This demonstrates how crucial it is to understand behavioural and regulatory economics
Are consumers getting a good
deal?
Competition
FairnessProtection
Innovation
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www.srmeconomics.co.uk
Q2. Do online customers get the discounts they should receive?
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There is mixed evidence of consumers receiving digital banking discounts
Evidence for Evidence against
• Internet only accounts offered by some including First Direct, TSB and Tesco Bank, that offer customers significant benefits.
• For example, 5% cashback on the first £100 of contactless payments per month.
• Some evidence suggests that overdrafts are cheaper for Internet only banks. Costs of a £500 Overdraft for 30 days:
• £17.40 with Co-operative bank vs £7.34 with Smile• £87.52 with HSBC vs £83.05 with First Direct
• The entrance into the market of the four new internet only banks (Atom, Tandem, Monzo and Startling) will be interesting to observe for its impact.
• Main high street banks do not offer their customers separate internet banking directly. So even if the customer never uses the traditional services they are subsidising those who do.
• This may mean that 55% of LBG customers who have their banking needs meet digitally are subsidising the remaining 45%.
• However, it was (probably) profits on legacy customers than enabled banks to invest in digital platforms.
• There is an argument that high street banks have a social responsibility to charge the same price to all of their customers.
www.srmeconomics.co.uk19
Change in firms costs can be estimated overtime
(e.g. profitability analysis)
Customer surveys may also be used to measure
service
Customer service can be measured using complaints data
Q3. Is digital technology reducing firms cost or improving customer service?How can we measure these?
The CMA recentlyinvestigated retail bankingprofitability, and concludedassessment was toodifficult. We do not agreewith this assessment andwould advise lenders toundertake cohort levelanalysis of profitabilityincluding ‘legacy’ vs. ‘digital’customer profitability.
How can data analytics beused to measure customerservice and leadimprovements?
www.srmeconomics.co.uk
Q3: Applications of the data analytics to assess customer serviceWHAT IS THE ISSUE?
How well are banks and individual branches doing at allocating their customers into the correct type of current account and measuring service
improvements?
It is possible to segment the customers of the bank into groups based on
their observable characteristics using cluster analysis the characteristics
of interest could include;
Digital vs. legacy
Age
Income
Gender
Number of children
Any other characteristics of interest.
We can then compare these clustered groups with the type of current
accounts the individuals in each of the groups hold.
WHY IS THIS USEFUL?
Using the entire population as a benchmark we can calculate the average proportion of people in each group with the same type of current account, if the
branches are allocating people to account types based on the observable then this proportion should be high.
Then breaking the sample down by branch we can identify branches that are doing less well at up selling account types to the target consume and also
track service feedback.
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www.srmeconomics.co.uk
Summary of key points and conclusions
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• Digital banking is already very significant in terms of scale and growth rates.
• Some customers feel excluded by the digital revolution, which may be due to knowledge, confidence, resources or infrastructure. In other words, not just the responsibility of lenders.
• Digital banking services should result in lower prices although pace of price reduction hampered by legacy costs.
• Currently digital only products are not offered by the high street banks.
• The entrance into the industry of new Internet only banks may force the high street banks to re think this.
• The cross-subsidisation that banks have traditionally employed may become more difficult/less viable.
• Technology should both increase the quality of the product/service as well as reducing firms’ costs.
CONTACTRam Mahendran7 Stratford PlaceLondonW1C 1AY
M:+44 (0)788 095 2305E:[email protected]
© 2016 SRM ECONOMICS LIMITED
Retail banking market investigation
Eversheds: Digital Financial Services
1 November 2016
Colin Garland
Director, Remedies, Business and Financial
Analysis
Analysis
● Market structure
- Concentrated markets, but with some recent new entry
● Pricing, quality and innovation
- Pricing complex and difficult to compare
- Substantial gains from switching available
- Evidence of innovation, but less so for SME customers
● New entry and barriers to entry and expansion
- Weak customer response
- Strong product linkages
● Customer engagement
● Banks incentives to compete
Findings
● Adverse effect on competition
in the provision of
- PCAs
- BCAs
- SME lending
● Features:
- Barriers to accessing and assessing
information
- Barriers to switching
- Low levels of customer engagement
- Incumbency advantages
- Product linkages
- Information asymmetries
● AECs linked
- Products
- Geographic market
Our remedies package
Open standards
● “Of all the measures we have considered as part of this investigation, the timely
development and implementation of an open API banking standard has the greatest
potential to transform competition in retail banking markets. We believe that it will
significantly increase competition between banks by making it much easier for both
personal customers and SMEs to compare what is offered by different banks and by
paving the way to the development of new business models offering innovative
services to customers.
● “We are requiring the largest retail banks in both GB and NI to develop and adopt an
API banking standard so as to share information to a specified timetable and we are
requiring it to be an open standard so as to enable it to be widely accessible. This
will enable intermediaries to access information about bank services, prices and
service quality. Customers who are satisfied about privacy and security safeguards,
and are willing to give consent, will be able to share their own transaction data with
trusted intermediaries, which can then offer advice tailored to the individual
customer. This will make it easier for customers to identify the best products for their
needs.”
(a) set up an entity (the Implementation Entity) that will be tasked with agreeing,
implementing and maintaining open and common banking standards
(b) appoint a suitably qualified, independent person (the Implementation Trustee), to
act as chair of the Implementation Entity with responsibility for the delivery of the
project’s objectives
(c) use their best endeavours to achieve the objectives of the project within the timetable
agreed with the CMA
(d) agree to be bound by the decisions of the Implementation Trustee
(e) release and make available through an open API by 31 March 2017, and thereafter
maintain as open data, specified reference and product information
(f) agree with the IT open standards for APIs with full read and write functionality and
make available through them PCA and BCA transaction data sets, to be released no
later than the transposition deadline of the second Payment Services Directive
(PSD2) ie by 13 January 2018
Required the leading banks in
GB and NI to
Remedy interactions with Open
banking
● Nesta challenge prize: to provide for the creation of tools to
enable comparison of SME banking services, including BCAs and
lending products
● Service quality metrics: to provide for common basis of
comparison between banks service quality
● Development of SME loan price comparison and eligibility tool:
to provide indicative information on SME loans
● BCA opening: reduce friction in account opening and switching
● Transaction history: reduce friction in account switching
Implementation of recommendations made to HMT, FCA and BEIS
Open Data
(Reference
and Product
Data)
CMA Orders
made
Prompts & Alerts
– providers
cooperate with
behavioural trials
Development of
comparison
service for SMEs
(NESTA)
MMC
CASS
switching:
Awareness
and
confidence
Firm overdraft decision to
customer prior to switching
account provider
Publication of
SME lending
prices
CASS
Governance
CASS
RedirectionTransaction
history for
customers
Overdraft
alerts with
grace
periods
Development
SME loan
comparison and
eligibility tool
BCA
opening
procedures
Service
quality
metrics: core
measures
Remedy reliant or impacted upon the Open API remedy.
Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18
Remedy package - timeline
What does success look like?
● Not just about more switching
● New money management tools
● Greater rivalry
● New business models
● Greater customer satisfaction
● Greater awareness of, satisfaction with and confidence in CASS
Thank you
Blockchain
1 November 2016
Andrew Henderson
Partner
Eversheds LLP |
• What is Blockchain?
• The DAO attack
• How is Blockchain regulated?
• How should Blockchain be regulated?
Agenda
Eversheds LLP | 02/11/2016 |
The third party intermediary system
What is Distributed Ledger Technology (“DLT”)?
The DLT system
Seller
Intermediary
Buyer
Node
Node
Node
Node
Node Node
Node
Node
Node
Node
Buyer
Seller
Eversheds LLP |
• What is a smart contract?
IF [Entity #564445] sends [10 widgets] that [meet at least standard XYZ] THEN release [[£1.00] for each of those widgets] to User/Account #590235234
• The risks of using smart contracts:• Perverse outcomes
• The difficulty of coding “reasonableness”
• The increasing importance of smart contract technology
Smart Contracts
Eversheds LLP |
When it goes wrong: the DAO attack
ETH
Node
Node
Node
Node
Node
Node
Node
Node
Member
Idea
MemberMember
Eversheds LLP |
• The current position:• Operating a blockchain is not yet specifically regulated
• Potential regulation:• Anti-money laundering
• Draft Investigatory Powers Bill
• Data protection
• Prospectus requirement
• Payment services
DLT: The regulatory position
Eversheds LLP |
• The options:a) DLT is used by existing market participants/infrastructures
to improve their internal processes
b) DLT is aimed at changing/replacing the current set up of market participants and market infrastructures
c) A median situation, which would fall somewhere in-between situation a) and b)
d) A status quo situation where the existing set up of the securities markets would prevail
ESMA’s Discussion Paper: DLT Applied to Securities Markets
Eversheds LLP |
Benefits:
1.Clearing and settlement
2.Record of ownership and safekeeping of assets
3.Reporting and oversight
4.Counterparty risk
5.Efficient collateral management
6.Availability
7.Security
8.Cost
ESMA’s regulatory response – How to decide?
Challenges and risks:
1.Cyber risk, fraud and money laundering
2.Operational risks
3.Market volatility, interconnectedness and new pockets of risks
4.Fair competition and orderly markets
5.Technological issues
6. Governance and privacy issues
7. Regulatory and legal issues
Eversheds LLP |
Other issues to consider when deploying DLT include:
−Permissioned vs permissionless blockchain
−Conflicts of laws issues
−Resource costs
−Correcting mistakes
−The actual need for blockchain
Other challenges
Eversheds LLP |
- Blockchain – a system based on DLT
- Blockchain 1.0 – currency, the deployment of cryptocurrencies in application related to cash, such as currency transfer, remittance, and digital payment systems
- Blockchain 2.0 – contracts, the entire slate of economic, market, and financial applications using the blockchain that are more extensive than simple cash transactions: stocks, bonds, futures, loans, mortgages, titles, smart property, and smart contracts
- Blockchain 3.0 – blockchain applications beyond currency, finance and markets, particularly in the areas of government, health, science, literacy, culture and art
- Chameleon hash - a type of padlock between units in a blockchain that allows an administrator with the key to unlock and edit them, allowing for the correction of errors on the blockchain
Glossary – simplified definitions of FinTech terminology
Eversheds LLP |
- Distributed autonomous organisation (DAO) – a hub that disperses ETH
to startups and projects. Backers of The DAO receive voting rights which can
be used to help determine the future direction of the organization and which
projects will actually get funded following a voting period
- Distributed Ledger Technology (DLT) – the software that creates a
distributed ledger, which is essentially a record of electronic transactions,
very similar to accounting ledgers, but which is maintained by a shared or
‘distributed’ network of participants (called ‘nodes’) and not by a centralized
entity, meaning that there is no central validation system
- Ethereum (ETH) – a form of cryptocurrency, like bitcoin, which embeds
smart contract technology
- Node – see definition of DLT
Glossary – simplified definitions of FinTech terminology
Eversheds LLP |
- Permissioned / permissionless blockchain – a permissioned blockchain is only accessible to certain invited participants whereas a permissionlessblockchain does not have a block on who can access the blockchain
- Sidechain – a separate blockchain that is tied to the original but does not interact with it until it has completed its own set of transactions that are then added to the primary chain as just the one result.
- Smart contracts – pieces of software, not contracts in the legal sense, that extend blockchains’ utility from simply keeping a record of financial transaction entries to automatically implementing terms of multiparty agreements
- Smart property: encoding every asset to the blockchain with a unique identifier such that the asset can be tracked, controlled, and exchanged on the blockchain. This means that all manner of tangible assets (houses, cars) and digital assets could be registered and transacted on the blockchain.
Glossary – simplified definitions of FinTech terminology
Questions?
eversheds.com©2015 Eversheds LLPEversheds LLP is a limited liability partnership
For more information contact:
Andrew Henderson
+44 20 7919 0898 [email protected]
Eversheds LLP1 Wood StreetLondonEC2V 7WS
Fintech
M&A trends
Colin Farquhar | November 2016
Fintech – M&A trends4949 © 2016 Deloitte LLP | Private and Confidential
Fintech overview
What is Fintech?
• Refers to new solutions which demonstrate an incremental or radical/ disruptive innovation or development of
applications, processes, products or business models in the financial services industry
Size of investment
• Global investment into Fintech increased from c.$3bn (2013) to over c.$12bn in 2014 and c.$20bn in 2015
• Geographical split of investment in 2015
− US is largest with c.$12bn
− Europe, c.$4.5bn, experiencing the highest growth with +215% year on year
− Asia investment was c.$4.5bn up from c.$900m from the prior year
• Q1 16 investment of c.$6.5bn
Fintech – M&A trends5050 © 2016 Deloitte LLP | Private and Confidential
Fintech growth drivers
Technological innovation
• Innovation has led to creativity and new approaches of delivering financial services
• Lower cost alternatives are developing through streamlining routine tasks and faster processing
Consumer adoption
• Consumers have shown a willingness to adopt technological advances
• Consumer expectations are being formed in non-financial areas
− Incumbent banks and insurers are struggling to keep up with changing consumer expectations
− “Expectation gap” that many Fintech participants are seeking to exploit and drive adoption
Regulation
• In the UK the FCA has been given a specific mandate to promote competition
− Project Innovate and the establishment of the Innovation Hub
• In the Payments sector, the PSR and the PSD2 is specific about removing barriers to competition
The Financial Crisis
• A dislocation of the financial system led to high commissions, opaque fees and inflated FX and interest spreads
• The crisis created an opportunity for Fintechs to create innovative solutions
Fintech – M&A trends5151 © 2016 Deloitte LLP | Private and Confidential
Aggregators
Insurance
Wealth
Banking
Capital markets
RegTech
Insurance/
Telematics
Online payments
and FX
Market Place
Lenders (MPLs)
Credit reference
Infrastructure
Fintech ecosystem
Fintech
High LowMedium
Globalisation
Maturity
Payments
Globalisation
Maturity
Data & analytics
Globalisation
Maturity
Financial software
market (“plumbing”)
Globalisation
Maturity
Platforms
Fintech – M&A trends5252 © 2016 Deloitte LLP | Private and Confidential
Payments
Overview
• The largest Fintech sector with the highest level of investment and maturity
• Payments encompasses:
− Infrastructure - well-established and large incumbent participants
− Online payments and FX - largest number of new participants and remains fragmented
M&A drivers
• Highly cash generative businesses
− Good forward visibility of earnings and strong historical growth
• Innovation in the online and contactless payments space
− For example, Bitcoin and NFC technologies are attracting investment
• Investment in Blockchain
− Is expected to increase operational efficiency by reducing intermediary chains
• Start-ups and the continuing requirement to invest in new technology
• Continuing regulatory scrutiny (PSD/PSD2, SEPA and IFR)
− The PSR is seeking to increase competition
− New regulation will separate schemes from processing, and open up access and ownership of infrastructure
Fintech – M&A trends5353 © 2016 Deloitte LLP | Private and Confidential
Data and Analytics
Overview
• Business models that rely on economies of scale and ability to collect a varied range of financial data
• Data and analytics feature significantly in the capital markets, credit referencing and insurance industries
M&A drivers
• Increased automation, reduced intermediation, time and costs in capital markets Fintech
− Blockchain is expected to be a high area of focus and investment in the future
• Increased growth in the credit referencing industry
− Access to credit information by existing providers is a barrier to entry
− The UK government is considering increasing access to credit data on SME borrowers
• Increased interest from Insurance corporates
− Improved distribution and underwriting methodologies
Fintech – M&A trends5454 © 2016 Deloitte LLP | Private and Confidential
Financial software
Overview
• The sector is dominated by large international technology companies who offer a range of solutions
M&A drivers
• Development of RegTech players
− Increased focus on regulatory compliance
− Investors may pursue initial investment opportunities
• Increased focus on a digital solution to the banking proposition
− The banking software market is highly fragmented and may be subject to future consolidation
− The digital proposition may attract future investment
• The influence of new insurance software
− B2B innovation (for example, broker software) but also customer-related elements (for example, Telematics)
Fintech – M&A trends5555 © 2016 Deloitte LLP | Private and Confidential
Platforms
Overview
• Varies depending on the market segment
• Personal and SME lending from established lenders has curtailed, leading to an increasing focus on MPL
M&A drivers
• The maturity and growth of crowdfunding and P2P businesses
− No barriers to entry and scale has resulted in subdued or even non-existent M&A
− Banks may form partnerships or acquire a platform to curtail erosion of their share of the SME lending market
• Investment in well-established wealth platform technology suppliers
− Organic growth in the advisor platform market
− Investment back books migrating to advisor platforms; and
− Further consolidation in the advisor platform market, alongside replacement of existing technology.
• D2C wealth platform innovators as targets for incumbents looking to leverage technology
− Given current scale, innovators are likely to attract venture capital more so than traditional private equity.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
© 2016 Deloitte LLP. All rights reserved.
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.
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Coffee break
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e-Signatures for Financial Institutions
1 November 2016
Craig RogersPartnerTechnology & OutsourcingEversheds LLP
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Eversheds LLP | 02/11/2016 |Eversheds LLP | 02/11/2016 |
−e-signatures – what’s the big deal?
−What is an e-signature?
−Benefits of e-signatures
−The legal landscape
−e-signatures in the FS Sector
−Selecting an e-signature platform
−Future Developments
Overview – Electronic Signatures
60
e-signaturesWhat’s the big deal?
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Eversheds LLP | 02/11/2016 |Eversheds LLP | 02/11/2016 |
Sources: IMRG Capgemini e-Retail Sales Index 2016, Adyen Mobile Payments Index 2015,
https://acrobat.adobe.com/us/en/documents/esignatures.html www.docusign.co.uk
1 in 4 victim of current account Fraud - Uswitch
The rise of the ‘Digital Economy’
- Nearly 1/3 of shopping now done online
- 44% of UK online payments made with mobile devices
- Online services: Banks, insurers, retailers, telcos, airlines, utilities
- Consumer contracts being created with the click of a mouse
- Government services and interactions (HMRC, DVLA, Local Gov)
- Companies looking to streamline contacting process
- clients
- suppliers
- employees
Proliferation of e-signature providers
- Adobe – 6 billion transactions per annum
- Docusign – over 100 million customers in 188 countries
e-Signatures - what’s the big deal?
62
e-signaturesWhat is an e-signature?
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Sources: Regulation (EU) No910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market, repealing Directive 1999/93/EC (“eIDAS”), Bassano v Toft [2014] EWHC 377 (QB), Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd and another [2012] EWCA Civ 265
What is an e-signature?
Electronic Signature: “data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign”.
Most users do not realise that they are signing contracts electronically by:
• chip & pin or contactless transactions;• ticking “I accept” or “submit” online;• signing their name at the end of an email; or• biometric signatures: e.g. fingerprint recognition
Solution will vary depending on nature & value of the transaction, regulatory environment and risk profile.
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What are the benefits of e-signatures?
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- Flexibility: parties can select the e-signature platform which best suits their authentication requirements.
- Enhanced security: contracts executed by e-signature (and overlaid with authentication tools) are theoretically more secure than paper-contracts
- Traceability: signatures are traceable and auditable; workflow tools enable companies to track the status of contracts in real-time
- Integration: e-signature solutions can be integrated with existing CRM, ERP, accounting, HR and document management systems to provide end-to-end workflow management
- Ease of use: execution processes are technology neutral, intuitive and culturally accepted by the digital generation
Sources: Department for Business Innovation and Skills, Guide on Electronic Signatures, September 2014
Possible benefits
- Efficiency: electronic contracts can be circulated, signed, authenticated and loaded quickly, on any device
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E-signatures and the legal landscape
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In 1999 the EU, Australia and the US amongst the first to codify electronic signatures:
• Validity of e-signatures for conclusion of contracts
• Admissibility as evidence in legal proceedings
• Enforceability “a contract cannot be denied legal effect solely on the grounds that it is in electronic form”.
EU – Directive 1999/93/EC framework on electronic signatures
UK - The Electronic Communications Act 2000 (ECA) and the Electronic Signatures Regulations 2002 (ESR)
Australia – Australian Electronic Transactions Act 1999
United States - US Electronic Signatures in Global and National Commerce Act (ESIGN), 30 June 2000 and US Uniform Electronic Transactions Act (UETA) July 1999
.
The Legal Landscape (Legacy)
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Source: https://acrobat.adobe.com/content/dam/doc-cloud/en/pdfs/acrobat-sign-and-approve-where-are-esignatures-accepted.pdf
The Legal Landscape
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• the European Directive established a two-tier process for “simple” and “advanced” e-signatures which introduced uncertainty as to the legal effect of the poorer sibling;
• the legislation was subordinate to existing local legislation and requirements for specific legal instruments (e.g. property transfers).
However…
• the EU and the US model required states or member states to adopt the legislation (in Europe this created a fractured legislative landscape);
• the legislation (in the interests of being technology neutral) did not stipulate what it regarded as an “electronic signature” but defined them by a set of qualifying criteria;
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The position in the European Union changed on 1 July 2016
Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions
- eIDAS directly enforceable and will replace existing Directive
- Designed to build consistent framework for secure electronic authentication by defining mutually recognised, pan-EU rules:
• electronic signatures (simple, advanced and qualified)
• electronic identification schemes (low, substantial, high)
• electronic seals (simple, advanced and qualified)
• trust services (simple, advanced and qualified)
• electronic time stamps (simple and qualified)
• electronic documents (simple)
• website authentication (qualified)
• etc.
Source: Regulation (EU) No 910/2014 of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market, repealing Directive 1999/93/EC
The *New* Legal Landscape
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Under eIDAS, e-signatures can be “simple”, “advanced” or “qualified”.
Qualified e-signature – “legal effect of a handwritten signature”
Advanced e-signatures for high value / strategic agreements:
• identify the signatory with a high degree of certainty;
• limit the risk of 3rd party interference or fraud; and
• limit the risk of subsequent amendment or revocation
Qualified e-signatures:
• mandate the use of “qualified signature creation device” to create secure cryptographic keys (PKI);
• issued by TSPs (Certification Authorities);
• used to validate the authenticity of the signature.
• recognition in other Member States.
TSPs must be registered with local supervisory body.
Advanced & Qualified e-Signatures
• Source: eIDAS articles 25, 26 and 28
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• deeds, wills and trust documents;
• enduring powers of attorney;
• guarantees;*
• transfers of title in intellectual property;
• certain real estate agreements;
• marriage, birth, divorce and death certificates;
• other official documents required to be submitted in paper form (although this is expected to change under eIDAS); and
• agreements which stipulate that they can only be signed or varied by agreement “in writing and signed by hand”.
Sources: Consumer Credit (Agreements) Regulations 2010
Statute of Frauds Act 1677
* but see Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd and another [2011] EWHC 56 (Comm)
Copyright, Designs and Patents Act 1988
Law of Property (Miscellaneous Provisions) Act 1989
Law of Property Act 1925
Limits on some documents in some jurisdictions
Barriers to Adoption
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Use of e-Signatures by Financial Institutions
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- Agreements with suppliers
• corporate travel
• outsourced service providers
• IT & Telecoms service providers
• employment & recruitment agencies
• marketing, PR and advertising agencies
• providers of market data (Bloomberg, Reuters, etc)
• professional advisers (auditors, accountants, law firms)
- NDAs
- Contracts of employment
- Real estate agreements*
- Internal Approvals: auditable, traceable approvals w/ managed workflow
- Regulatory Reporting: e.g. FCA Reporting via Gabriel & Connect**
- And the rest: catering, security, cleaning, utilities, office equipment and supplies, building maintenance, gardening….
* noting current limitations of UK Land Registry
** FCA/PRA new firm applications must be made in hard copy
Financial Institutions
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- Online banking
• savings
• payments
• unsecured loans*
- E-Commerce (issuer-acquirer-merchant)
- Payments (chip & pin, biometric)
- Application forms
• existing customer / new product;
• new customers (KYC and AML on-line without need to visit branch)
- General Insurance (car, home, contents, pet, health, travel)
- Life Cover, Income Protection, Landlords
- Electronic share trading
- Employee share plans
- Other savings and investment products
“any instruction for which the individual or entity providing that instruction is required to both identify themselves and communicate their intention to be bound, electronically”
Retail Banking and Insurance
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- SWIFT Interbank Messaging:
• Binding* payment instructions via secure message interchange platform
• 10,000 members, 210 countries, $5 trillion wholesale payments per day
• but SWIFT hack exposed vulnerabilities
- Trade Execution via Electronic Platform:
• Shares, debt and equities
• Derivatives (futures, options, swaps, etc)
• Commodities
• FOREX
Examples:
Over-the-Counter trades executed between counterparties using broker/dealer or 3rd
party electronic platform; dual-factor authentication on log-in and session limit; confirmation of instruction by “e-signature”; trade verified/confirmed by platform, cleared by central clearing party.
e.g. BAML Instinct or MarkitServe under ISDA rules.
Exchange Traded Instruments – exchange acts as counterparty and trade executed on platform under Exchange rules; counterparty risk managed by exchange; secure-registration/login and commit/execute; confirmation of instruction by “e-signature”; trade verified/confirmed by exchange; central counterparty clearing.
e.g. LSE SETS, NASDAQ PHLX
Corporate and Investment Banking
Sources: *WS Tankship II BV v The Kwangju Bank Ltd and another [2011] EWHC 3103
https://www.ffiec.gov/press/PDF/Cybersecurity_of_IMWPN.pdf www.lseg.com; http://www.markit.com/Product/MarkitSERV; www.bofaml.com
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Case Study
London Market Group – Insurance Placing Platform
Electronic placing platform that enables brokers and insurers to quote, negotiate and bind business digitally
• Little change in London Market since 1688
• Modernise process for Placing of Contracts for Insurable Risks
• Single interface reduces costs for members of multiple platforms
• Speed, integrity, certainty, auditability & transparency
• Improved productivity, simplify data input and analytics
• First risk bound on 12 July 2016 (Terrorism cover)
• to follow:
• Financial Institutions, PI, D&O and Marine
Source: https://www.londonmarketgroup.co.uk/
Commercial Insurance
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Selecting an e-signature platform
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The largest providers of e-signature services (by market share):
Source:Forrester Research, Inc.
Selecting a Platform
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Some suppliers offer “on-premise” solutions, but most are cloud based.
Platforms may be compatible with mobile devices, offer custom branding, integration with existing CRM systems.
Importance of detailed due diligence in vendor selection:
• functionality and ease of use
• pricing plans and options
• performance and availability requirements
• integration and compatibility with existing CRM/ERP systems
• data privacy, data security and data residency requirements
• compliance with existing legislation (eIDAS and US ESIGN Act)*
• compliance with SYSC/Solvency II
• scalability and flexibility
• other applicable terms and conditions
Selecting a Platform
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Traditional legal principles apply to contracts concluded electronically.
Ensure that:
• processes enable incorporation of applicable terms;
• validate that signatories have delegated authority; and
• e-signatures are enforceable in all relevant jurisdictions.
Possible risks
• Contracts mistakenly or maliciously executed;
• Failures in security of
− physical IT assets;
− password management and control;
• Existing t&cs may not permit e-signatures; and
• Signing authority rules / internal governance may preclude e-sign
Remember…
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Future developments
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Digital Passports
The FCA is working with Government departments and industry bodies to develop suitable regulation and infrastructure for digital identities and e-verification.
Simplify AML and KYC process.
Land Registry Pilot for re-mortgages using Gov.uk Verify service
Biometrics
Finger-print recognition (unique and unbreakable?)
HSBC/First Direct and Barclays launch voice-recognition service
• Replaces password / memorable dates for contact centre security
Facial Recognition, Iris Scanners to follow
Future Developments
Sources: FCA Feedback Statement (March 2016): Regulatory barriers to innovation in digital and mobile solutionswww.gov.uk/verifyhttps://blog.kaspersky.com/fingerprints-sensors-security/10951/http://www.hsbc.co.uk/1/2/contact-and-support/banking-made-easy/voice-idhttps://www.home.barclays/news.html
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Questions?
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eversheds.com
©2015 Eversheds LLPEversheds LLP is a limited liability partnership
eversheds.com
©2015 Eversheds LLPEversheds LLP is a limited liability partnership
For more information contact:
Craig Rogers
Partner IT & [email protected]: 0207 919 0707
Eversheds LLP1 Wood StreetLondonEC2V 7WS
WealthKernel
• Provider automated wealth management solutions to institutional clients (B2B) and independent financial advisors (IFAs)
• Our platform revolutionizes how smaller clients receive financial advice by reducing the cost of service and limiting compliance risk while providing the reassurance of personal service
• WealthKernel is a member of the FCA Project innovate
• Backed by Seedcamp
• Team:
o Yannick Brunner (CCO& COO)
o Joe Campbell (CTO)
o Karan Shanmugarajah (CEO & CIO)
Robo-advice
• What is it
• Why now
o It is no longer profitable to give face-to-face investment advice to clients with less than £250k in investable assets
o Higher costs driven by increased compliance and staff costs
o Lower revenue as a result of making fees more transparent to customers
o Change in customer behaviour (more control & digital)
“One in 10 advisers look to go robo”
– Financial Times/ Harrison Spence
“Only 4% of adults aged over 55 would consider using a robo-advice
service if it did not have any human interaction involved” – Old Mutual/YouGov
Robo Is Only Half The Solution
• Robo-advisors can solve many of the problems: reducing compliance costs, scaling smaller customers, digital presence, etc.
• However robo-advisors are not the entire solution, humans play an important role in adding emotional value
Trends
• Technology / digital
• Continued fee pressure (wealth & asset managers)
• Incumbents are starting to look at robo-advice 1.0 solutions
• Robo-advice 2.0
• Robo is not just for the mass affluent, HNW are also big fans
• PSD2/ Openbanking (Aggregator- AISP)
• Deep tech (A.I., Machine Learning, etc)
FCA
• Project Innovate
o What is it
o Why it exists
o Our experience
• Regulatory Sandbox
o What is it
o Why it exists
o Why we didn’t go through it
Thank You
+44(0) 793.967.2701
Google Campus London
4th Floor, 4-5 Bonhill St.
London, UK EC2A 4BX
Social Media and Financial Services
November 2016
Andrew Terry
Partner, IP & Media Group
−what is social media?
−reputation management
−social media and advertising
−the FCA approach
−the ASA approach
−common pitfalls
What we will cover
−a “conversation” vs “one-way traffic”
−wide ranging• social and business networking sites
• e.g. Facebook, LinkedIn, Google +
• blogs: a “web log”• e.g. Twitter, BlogSpot, Square Space
• digital media sharing• e.g. YouTube, Instagram, Pinterest
−but much overlap and changes rapidly
What is social media?
−as another means of corporate communication
−be aware of the risks
−adopt internal policies
−with thoughtfulness and due care
−engage “whole heartedly”
−devote adequate resources
−complement established marketing
How to approach social media use
Comments made to the Institute of Directors, 1991
Doing a “Ratner”
“We also do cut-glass sherry decanters complete with six
glasses on a silver-plated tray that your butler can serve you drinks on, all for £4.95. People say, 'How can you sell this for
such a low price?' I say, because it's total crap.”
Ratner earrings were "cheaper than an
M&S prawn sandwich but probably wouldn't
last as long".
• Leads to $500 million reduction in value
Misjudging the public mood
“Cheerio prince”
− Horse meat was found in products sold by Tesco, Asda, Aldi and Findus in 2013.
− Caused a consumer backlash across Europe and calls for a class action by some consumer groups.
Tesco fail to adjust scheduled media plan
“Hit the hay”
The legal tools
Reputation Management
PR Strategy
Litigation Strategy
Print Media
Broadcast Media
Protection from
Harassment Act
Website Operators’ Terms and Conditions
IPSO and BBC
Editorial Guidelines
Defamation / Malicious Falsehood
Privacy
Social Media
−published March 2015
−applies specifically to financial promotions
−example of a non-promotional communication
FCA Guidance on Social Media and Customer Communications
−A1 “to see our current UK equity fund range, go to www.firmXYZ.co.uk”
−A2 “to see our range of credit cards, go to www.firmXYZ.co.uk”
−B1 “to see our top-performing UK equity fund, go to www.firmXYZ.co.uk”
−B2 “to see our range of 0% balance transfer cards, go to www.firmXYZ.co.uk”
Risk warnings
FCA Guidance
Clear, fair, not misleading
FCA Guidance
Stand alone compliance
FCA Guidance
Sharing or forwarding communications
FCA Guidance
−should be prepared with a sense of responsibility and should reflect the spirit, not merely the letter of the law
−should be legal, decent, honest and truthful
−must be obviously identifiable as marketing communications
−must not contain anything that is likely to cause serious or wide-spread offence or cause distress
ASA issues
−stand-alone compliance
−user generated content
−comparative advertising
−business or personal
−using third party names
−puffery
Common pitfalls in social media advertising
Questions?
eversheds.com©2015 Eversheds LLPEversheds LLP is a limited liability partnership
eversheds.com©2016 Eversheds LLPEversheds LLP is a limited liability partnership
Andrew Terry
[email protected] Tel: 0207 919 4828
1 Wood StreetLondonEC2V 7WS