Assessing MiFID’s facelift

MiFID I was largely successful in matching its original ambitions of moving towards a single European market in financial services, and removing the monopoly of regulated markets. However, the Directive fell down in a number of areas. Given the extended scope of products and activities covered by MiFID II, it is expected to have a significant impact on the European market in the years ahead.

FW moderates a discussion on MiFID II between Michael Thomas at Hogan Lovells, Kara Cauter at KPMG and Marius Floca at RBS.

TalkingPoint: Analysis of MiFID II

BNP humbled by US penalties

BY Matt Atkins

The long arm of the law caught up with BNP Paribas (BNPP) this week, as it was slapped with a $9bn fine by US authorities.

On 30 June, France's largest bank pleaded guilty to criminal charges related to allegations it breached US sanction laws between 2004 and 2012. The heavy financial penalty is the least of BNPP's worries, however – the bank has also been banned for 12 months from conducting certain US dollar transactions, a vital part of its global business. The temporary ban is expected to trigger a client exodus, and how the bank will staunch the flow is unclear.

Such strict penalties were warranted, say authorities, by BNPP's persistent violations, which continued even after US officials warned the bank of its obligations. BNPP failed to heed calls to police illicit money flows which saw it act as a "central bank" for the Sudan – a hotbed of militant activity and human rights abuses.

The bank admitted to establishing elaborate payment structures for its Sudanese clients, routing transactions through satellite banks to disguise their origin. Internal bank memos showed that BNP officials were aware of the humanitarian crisis in Sudan and the ties of its government with al Qaeda founder Osama bin Laden, but found the commercial draw of the country too great a temptation to resist.

The French bank also evaded sanctions against entities in Iran and Cuba, stripping information from wire transfers so they could pass through the US system without raising suspicion. BNPP's illicit Iranian transactions were carried out on behalf of its clients, including a petroleum firm based in Dubai that was a front for an Iranian petroleum company.

The penalties laid on the French financial institution are far grater than those faced by Credit Suisse earlier in the year, when it admitted aiding US clients evade taxes. "We deeply regret the past misconduct that led to this settlement," said BNP Chief Executive Officer Jean-Laurent Bonnafe. "We have announced today a comprehensive plan to strengthen our internal controls and processes."

No individuals at the bank have yet been charged. However, US authorities have not closed the case and BNPP can expect more fallout in the coming days and weeks.

News: BNP Paribas to pay $9bn to settle sanctions violations

US banks face new regime

On 18 February 2014, the Board of Governors of the Federal Reserve System approved a final rule implementing certain of the ‘enhanced prudential standards’ mandated by Section 165 of the Dodd-Frank Act. The Final Rule applies the enhanced prudential standards to US bank holding companies with $50bn or more in total consolidated assets and the US banking presence of foreign banking organisations (FBOs). The Final Rule is certainly an important new regulation for large US banking organisations. But it also represents a significant development for non-US banking organisations that have operations in the US.

FW spoke to Jeff Berman at Clifford Chance, Robin Maxwell at Linklaters and Brian D. Christiansen at Skadden, Arps, Slate, Meagher & Flom, about the new regime.

TalkingPoint: Enhanced prudential standards for banks in the US

Asset management set for change

BY Matt Atkins

The asset management industry will be radically altered in the next 15 years, says KPMG.

A new report, Investing in the Future, makes a number predictions including that, by 2030, client bases will be fundamentally different as Generation X approaches retirement; the number of players in the global market will halve in the next five years; and big tech firms will make headway into the sector. The report also stresses that asset managers are currently behind the curve on embracing new technology.

Current business models will prove woefully insufficient, according to Tom Brown, global head of investment at KPMG international. "We are on the verge of the biggest shake-up the industry has experienced; and the message to asset managers is clear – adapt to change or your business won't survive. The two biggest issues that need to be addressed are the changing client base and technology, and asset managers need to get to work on these areas now."

Technological investment will be critically import in the coming years says the report. The future needs of clients will be fundamentally different from today, with a growing demand for personalised information, education and advice. However, businesses are currently focusing on the wrong areas.

"Asset managers still have a long way to go to recognise and exploit big data and data analytics," says Ian Smith, financial services strategy partner with KPMG in the UK. "While IT is already attracting a significant amount of investment, it is not being channelled into the right areas. Many businesses are putting their efforts into trying to unpick the complex legacy of disparate systems and technologies while trying to make sure they provide the right level of control to meet increasingly stringent compliance. There is too little focus on building the architecture to meet the business needs of tomorrow."

The report also predicts a shift in the way customers buy investment products. Online purchases are expected to increase, while 'Trip Advisor type' websites will provide buyers with greater opportunities to conduct their own research.

Report: Investing in the Future

Regulatory costs rocket 60 percent

BY Richard Summerfield

Expenditure for regulatory bodies in the US, UK and Hong Kong has increased exponentially in recent years, according to a new report from Kinetic Partners.

Since the end of the 2006-2007 financial year, regulatory expenditure across all three regions has increased 59.4 percent, at an average of 8.075 percent each year, says Kinetic's ‘Global Enforcement Review 2014’ report. This increase may be a result of the pressure placed on regulatory agencies to enhance scrutiny of the financial services sector following the financial crisis of 2008.

Kinetic’s research found that for the 2012-2013 financial year, the US Securities and Exchange Commission (SEC), the UK Financial Conduct Authority (FCA) and the Securities and Futures Commission of Hong Kong (SFC) had a combined expenditure of approximately $2.4bn.  This was over $900m more than the nearly $1.5bn total expenditure of the organisations before the onset of the financial crisis in 2006/07. In the report Julian Korek, Kinetic Partners’ chief executive officer, noted that the “disparity between expenditure and headcount could be indicative of a focus by the regulators to improve market surveillance by developing innovative technologies and hiring more experienced, specialised staff. For our clients across the banking, asset management and insurance sectors, we are seeing a mirroring of this investment in systems to monitor and report on transactions”.

According to Kinetic’s research the biggest increase in growth in expenditure between the SEC, the FCA and the SFC came in Hong Kong, where the SFC’s spending has increased by 120.2 percent in the last seven years. SFC spending rose from $69.25m during the 2006-2007 fiscal year to $152.50m by the end of the 2012-2013 fiscal year. Despite making smaller increases in spending than Hong Kong's regulatory body, the SEC and the FCA have both still made sizeable increases in spending since the onset of the financial crisis. The last seven years have borne witness to a 61.9 percent spending increase at the SEC and a 48.4 percent increase at the FCA.

Report: Global Enforcement Review 2014