September | 2014 | World Finance

Solvency II hangs over Europe’s head

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

Now 18 months from implementation, the EU’s Solvency II Directive has put the heat on Europe’s insurance sector, which is begrudgingly preparing for this massive game-changer. It will alter the way firms assess their own risk, heighten transparency requirements and enforce a minimum threshold for capital. After numerous delays and an arduous period of consultation, the regulation will enter into force on January 1, 2016, despite the final text not yet being made public. Essentially, Solvency II updates the approach taken to determine the capital insurers should hold against their risk profiles. It will introduce a common approach to prudential regulation based on economic principles for the measurement of assets and liabilities.

Key to the regulation are three pillars, each governing an aspect of the Solvency II requirements and approach, including: quantitative requirements; supervisor review; and market discipline. Pillar 1 sets a valuation standard for liabilities to policyholders and the capital requirements firms must meet. This includes two solvency requirements, the Minimum Capital Requirements (MCR) and the Solvency Capital Requirements (SCR). If the available capital lies between the SCR and the MCR, it is an early indicator to the supervisor and the insurance company that action needs to be taken. An insurance company can choose whether to calculate the SCR using a standard formula or whether to develop its own internal model to reflect specific risks. If an insurer’s resources fall below the MCR, the European Commission has stated that ‘ultimate supervisory action’ will be triggered. This means transferring an insurer’s liabilities to another insurer and withdrawing the firm’s licence or closing and liquidating the business.

Preparing for Solvency II

October 2013
Guidelines on preparing for Solvency II announced

April 2014
Technical specifications made public

January 2015
ORSA report 2014 must be completed and Pillar 1 model must be pre-approved by regulators

Mid-2015
Companies should do a dry-run of their Pillar 1 model

Throughout 2015
Continuous assessment of capital requirements and TPs. Annual report YE December 2014 must be produced

End 2015
Quarterly report must be produced

January 1 2016
Solvency II implementation

Pillar 2 deals with qualitative aspects of a company’s internal controls, risk management process and supervisory reviews. It includes the Own Risk Solvency Assessment (ORSA) and the Supervisory Review Process (SRP), which all firms have to produce. Crucially, the directive stipulates that if supervisors are dissatisfied with a company’s assessment of the risk-based capital or the quality of the risk management arrangements under the SRP they will have the power to impose higher capital requirements.

The last pillar is concerned with enhancing disclosure requirements to increase market transparency. The onus is on firms to interpret disclosure requirements, develop a strategy for disclosure, and educate key stakeholders on the potential impact of such reports.

Together, the pillars force the insurance industry to make forward planning for capital adequacy and risk management a key part of new strategic ventures. The embedding requirements mean all the above practices must become part of business as usual. This will affect hedging and reinsurance strategies, product development and pricing, underwriting and investment management, bridging the gap between current standards and those required for January 2016.

“There’s still a lot of work for firms preparing for Solvency II,” said David Kells, the head of KPMG’s Solvency II activities in an exclusive interview with World Finance.

“Preparations for Pillar 1 have settled down as most firms have set out standards for their capital requirements, are submitting dry-runs to regulators, and only a small list of uncertainties remain. Pillar 2 is slightly less progressed, but we know that everyone is frantically focusing on Pillar 3, where there is still a lot to do in order to get all the reporting requirements in place,” said Kells. He added that, because there is continuing uncertainty about the final wording of the regulation and how firms are interpreting it, “there is a degree of nervousness across the industry”.

Implementing the directive
Solvency II has been underway since before the financial crisis; the insurance industry should have come to terms with the requirements. Nevertheless, a prolonged approval process of the final directive, as well as lack of clarity on when the regulation would be implemented and how firms should proceed, has made Solvency II incredibly unpopular within the insurance industry. A recent survey from Grant Thornton showed only one third of respondents consider the directive an appropriate way to run their business. The aim of Solvency II is to align Europe’s insurance regimes, which is considered one of the most complicated sectors to understand. Essentially, it is supposed to be a move towards better regulatory management and risk oversight, with the overarching benefit being the increased transparency Pillar 3 will provide. And despite a majority of the industry being cynical towards the directive, 44 percent believe Solvency II is a ‘necessary evil’.

Potential issues
One of the key contention points is the capital requirement stipulated in Pillar 1. Because Solvency II is a risk-based system, capital requirements are aligned with the underlying risks of the company. This has created uncertainty as to how much capital insurers need to hold to meet long-term promises to policyholders, particularly because many insurers invest their assets. However, in November 2013, EU politicians agreed Solvency II requirements must reflect the fact insurers’ liabilities tend to be illiquid and long-term, meaning they should not need to sell assets before they mature, to comply with the new rules. Politicians also agreed to a 16-year phasing-in period.

Another key component is the firms’ own risk and solvency assessment (ORSA) in Pillar 2, which is basically a set of processes and procedures used to identify, assess, monitor, control and report internal and external long-term and short-term risks that an insurer faces or could face. These risks are used to determine the company’s capital requirement to ensure its solvency at all times.

“Basically, Pillar 2 is about formalising the risk processes that they already have in their head,” said Kells. “Assessing the firm’s tolerance for risk and reporting on this is something that most good firms have already had in place. This is just about locking it into the day-to-day work.”

To this end, almost two thirds of the industry has already begun implementation of its ORSA process, according to a recent Solvency II study by SunGard and insurance forum Leipzig. What is more concerning though is the fact that 30 percent of respondents have only begun preliminary considerations when it comes to ORSA. Given the sheer magnitude of the risk assessment process and that EU regulators expect firms to complete a full ORSA report in 2015, insurers should worry about their implementation schedules.

Pillar Three
There is an entire pillar of the directive that the majority of the industry seems to have forgotten. With most insurers focusing on the first two pillars, many have ignored the large-scale reporting requirements stipulated in Pillar 3, which includes public and private reporting components such as a massive solvency and financial condition report outlining a financial assessment of the insurer.

“With uncertainty about the implementation date, many insurers took their foot off the pedal and put Pillar 3 last in the queue. Now we’re seeing a rush to the end. But it’s important that firms be confident in their data, so they can do at least one dry-run before submission in 2015,” explained Kells.

According to a recent European Solvency II survey by Ernst & Young, three quarters of the industry are yet to meet most or all of the reporting requirements. Critically, only a quarter of insurers said they had already selected a system to meet these requirements, while two thirds said their existing data and systems were not designed to support longer-term ORSA assessments, forcing many firms to meet next year’s transitional reporting requirements manually.

“As companies become more realistic about their implementation readiness, it is clear that some are less prepared than they had expected. They have a long way to go in terms of reporting, data and IT readiness,” said Martin Bradley, Head of Global Risk and Regulation for Ernst & Young.

Insurers have blamed regulators for not providing sufficient support in the run-up to implementation of the new regime. The industry has found it hard to interpret regulatory requirements, and been unsatisfied with feedback from regulators on company-specific implementation. A lot of this comes down to regulators having insufficient staff to handle the significant supervision requirements, said Bradley. This is a common problem among European regulators, as the slew of financial regulation has made compliance heads a hot and hard-to-find commodity in recent years.

Volatility concerns
The lack of clarity aside, another concern looms over implementation of Solvency II, as the insurance industry becomes more transparent. The greatest change will be the requirement to provide markets with robust information on the entire firm and its financial condition. This annual report will give the public and regulators a unique insight into all aspects of insurers’ business and is aimed at assuring shareholders of the firm’s solvency.

Essentially, the onus is placed on the firm to design the information, which through public disclosure, will be available to regulators, analysts, rating agencies and shareholders. However, industry analysts have said the sheer amount of data may cause volatility in the insurance market and tackling this therefore needs to be a priority for complying firms.

“This new regime means that there’s a new machinery producing numbers and firms need to prepare themselves in order to manage this disclosure so they can give market analysts a heads up on what these numbers mean and have confidence in their own reporting. It’s important to have a robust explanation for this financial report in case numbers have changed significantly, so firms can gage against volatility,” explained Kells.

What’s more, the costs of Solvency II are mounting as more firms move through Pillar 3 and can see the end result of their efforts. With insurers on average using six departments in preparations for the directive, the costs of resource allocation have been extensive. According to the Grant Thornton survey, only six percent of respondents believe the costs are reasonable, while more than three quarters consider them disproportionate, arguing that the value added does not justify the expense.

According to Kells, estimates of final costs are hard to gauge, but tens, and even hundreds, of millions of pounds spent at the end of line would not be a surprising outcome for major insurance firms, he said. It is therefore unsurprising that a majority of the industry finds Solvency II a bitter pill to swallow. The process has not been made easier by a growing majority of firms suggesting the founding principles of the directive have been ruined by the implementation. Compounded by the uncertainty surrounding the interpretation of Solvency II, the industry is begrudgingly doing as they’ve been told – albeit at a snail’s pace.

A history of the Vatican Bank

Posted on September 5, 2014April 12, 2017 by Ashton Wenborn

Perhaps more than any other, the Vatican Bank should be expected to maintain the highest of moral standards in the way it conducts its business. However, despite its saintly links, the bank that acts on behalf of the Catholic Church has developed a reputation for corruption, scandal and mismanagement over the last few decades.

Murder, bribery, suspicious deaths, money laundering, and many other nefarious acts have been linked to the bank that is officially known as the Institute for Works of Religion (IOR).

However, when Pope Francis began his term as leader of the Catholic Church in early 2013, he made it clear that one of his goals was to reform the way the Vatican Bank is run, bringing about a series of reforms that would restore confidence and trust in the financial arm of the church. But seeing through the changes to such a secretive institution was always going to prove a difficult task, and one that has been unsuccessfully attempted previously.

Past scandals
Like the Catholic Church, the Vatican Bank has been steeped in mystery for much of the time it has been in operation. Founded in 1942 as a means to manage money on behalf of the Catholic Church, its main purpose was to ‘provide for the safekeeping and administration of movable and immovable property transferred or entrusted to it by physical or juridical persons and intended for works of religion or charity.’ It was plunged into disrepute in the late 1970s after many years of rumours about money laundering on behalf of the mafia.

When Pope John Paul I died in 1978 in apparently mysterious circumstances, many conspiracy theories suggested it might have had something to do with his desire to clean up the affairs of the Vatican Bank. The scandal intensified a few years later, when in the early 1980s a bank that it had a majority stake in called Banco Ambrosiano hit the news for all the wrong reasons.

Its leaders were accused of transferring money out of the country into shady overseas banks, as well as being linked to an illegal masonic loge known as Propaganda Due (P2), which had ties to the mafia. Banco Ambrosiano was investigated and its Chairman, Roberto Calvi, was arrested, trialled, and sentenced to four years in prison. After being released on appeal, Calvi fled Italy, before being discovered hanging under London’s Blackfriars Bridge shortly after. It marked a dark period in the history of the Catholic Church, leading to the scandal forming the basis for the plot of the third instalment of the Godfather trilogy.

Pope Francis

After the shocking resignation of Pope Benedict XVI in February 2013, the Catholic Church set about a frantic search for a new leader after what had been a deeply troubling few years. Child abuse scandals had been in the headlines for all of Benedict’s reign, but there had also been plenty of trouble with the Vatican’s financial affairs. Argentinian Cardinal Jorge Mario Bergoglio was selected as the church’s first non-European leader in 1,272 years, becoming Pope Francis I. Born in Buenos Aires in 1936, he has been praised for his dedication to modernising the church and attempts to restore
its reputation.

Ettore Gotti Tedeschi

As the Vatican Bank sought to draw a line under the corruption scandals of the past, it installed a series of directors to oversee reform. Italian economist and banker Ettore Gotti Tedeschi was installed in 2009 as the head of the IOR, alongside other directors that included banker Paolo Cipriani. It was hoped that they would install a series of reforms at the bank, but they were both soon embroiled in scandals themselves. Tedeschi was investigated in 2010 or money laundering, although no charges were brought. In May 2012 he was replaced after a vote of no confidence, while Cipriani followed in July 2013.

Ernst von Freyberg

The Vatican Bank replaced Tedeschi in June 2012 with Ernst von Freyberg, initially to serve as an interim leader, before appointing him as President of the Board of Superintendents in February 2013. Born in Geneva in 1958, the German banker founded the finance house Von Freyberg in 1991, before a series of senior management roles at German firms. He quickly set about opening up the Vatican Bank and making it more transparent, as well as adopting a zero tolerance approach to suspicious activities. However, by July Jean-Baptiste de Franssu had replaced him, with little explanation as to why.

Jean-Baptiste de Franssu

The most recent person appointed to take the Vatican Bank forward is Frenchmanand former Invesco CEO Jean-Baptiste de Franssu. The sudden and unexpected announcement that von Freyberg would be replaced with Franssu in July has merely added to the sense that the job is a poisoned chalice that few are capable of seeing through. Whether Franssu has what it takes to steady the ship and restore faith in the Vatican Bank remains to be seen, but it is certainly a concern that concerns have already been raised over the fact that his son currently works for the organisation charged with investigating the IOR’s affairs.

The aftermath of the scandal rumbled on long after Calvi was found dead. Repeated attempts to prosecute individuals supposedly responsible proved unsuccessful. Bishop Paul Marcinkus, who led the Vatican Bank between 1971 and 1989, avoided prosecution, despite overseeing the darkest period in its history. Others included businessman Flavio Carboni, who was linked to the P2 lodge and mafia boss Pippo Calò. Both Carboni and Calò have been tried a number of times for the murder of Calvi, each time being cleared. They remain prominent figures in Italian business and politics, despite the controversies that have surrounded them.

History repeating itself
While the scandals of 30 years ago are yet to be fully put to bed, new ones have emerged in recent years that have sent the Vatican Bank back into the murky spotlight of before. In 2009 the bank was being investigated by authorities over money-laundering worth €180m. More allegations followed against then IOR President Ettore Gotti Tedeschi, leading to a police investigation, although charges were never brought.

Further allegations then emerged over money laundering – which led to US investment bank JP Morgan closing one of the Vatican Bank’s accounts – after it failed to provide sufficient information about the sources of the €1.8bn deposits. In response, Pope Francis established a new Pontifical Commission to study potential reforms for the bank, which later led to four senior cardinals being sacked.

Shortly before the shocking and unprecedented resignation of Pope Benedict XVI in February 2013, the Vatican Bank appointed a new President in Ernst von Freyberg as Tedeschi’s replacement. Tedeschi had been in the role just three years, but it was a period beset with scandal. He was eventually forced to step down in 2012 when a no-confidence vote among the board of directors was held, due to him failing “to fulfil the primary functions of his office.” However, after his departure, Tedeschi claimed that it was his push for greater transparency at the bank that led to his ousting, and specifically his looking into the accounts that were ‘non-religious’.

Von Freyberg, on the other hand, joined the IOR as a representative of an untainted new leadership that would help to transform its reputation. He called for a “zero tolerance” attitude to any transactions that were deemed suspicious, investigating all cases of potential tax evasion and money laundering. He also aimed to make the IOR much more transparent than it had ever been, opening it up to international regulatory standards.

Giuseppe Calo (right on screen) appears by video link from a prison in central Italy during the trial of the alleged murderer of Roberto Calvi, 23 years after his body was found in London

Out with the old, in with the new
After Pope Francis took the reins of the Catholic Church there were many rumours that he would look to shake up the way it managed its finances. Rumours coming from the church hinted that changes were afoot for much of his first year in charge. They became true when Pope Francis made his first change in February, appointing Australian Cardinal George Pell as the Prefect for the Secretariat for the Economy, a newly created department that would oversee the annual budget of the Holy See and the Vatican.

Shortly after his appointment, Cardinal Pell told reporters there needed to be considerable work on reforming the Vatican’s financial arm. “There needs to be changes in the economic area – not just with the so-called Vatican Bank – but more generally there is work there to be done [and] a need to ensure that things are being properly done.” Other, bigger changes took a few more months to be announced. In somewhat dramatic fashion in June, Pope Francis began by sacking all five members of the board of the Financial Intelligence Authority, which regulates the Vatican’s finances. The entirely Italian board had been due to head up the regulator until 2016, but Pope Francis decided that a new batch of board members, from across the globe, would help to give it new impetus. New members included Juan Zarate, a former national security adviser to President George Bush, and Singaporean civil servant Joseph Pillay.

Vatican Bank in figures

Loans and receivables securities:

€250.9m

Debt securities

Available for sale securities:

€13.9m

Equity securities

Held to maturity securities:

€574.8m

Debt securities

Other assets held by IOR:

€86.5m

Other assets

However, despite von Freyberg’s best efforts, his time in charge came to an abrupt – and surprising – end in July, with the news that he was being replaced by Frenchman Jean-Baptiste Franssu as IOR president. The 51-year old de Franssu immediately claimed that “Catholic, ethical investment” would be the focus of the bank in the future. However, Franssu was quickly accused of having a conflict of interest, when it emerged that the Promontory Financial Group had hired his son a few months before, which was in the midst of conducting an investigation into the bank’s operations and its relationships with clients.

Obstacles to change
How successful the new leadership of the IOR is in restoring the reputation of the bank remains to be seen. Certainly the words emanating from Pope Francis and his new appointees are encouraging, but it has proven difficult in the past to translate well-meaning words into meaningful actions. Author Philip Willan, whose book The Last Supper looked into the murder of Calvi and the scandals surrounding the IOR, told our sister publication European CEO magazine earlier this year that the bank needed to undergo some serious reforms, and that Pope Francis was serious about ensuring they were carried out. “I think Pope Francis has a sincere desire to turn the page on an embarrassing past and reform the way in which the Catholic Church handles money.”

However, he added that getting any meaningful reforms passed was likely to be difficult, with many people opposed to much change. “I don’t doubt, though, that there are powerful forces ranged against the reformists. The recent scandals show how a habit of flouting the law had become deeply ingrained among senior Vatican bureaucrats and their friends, something I examine in the last two chapters of the latest version of my book on the Calvi case.”

The scandals of the past reflect how corruption had infiltrated all aspects of Italy’s political and business class, and that meant a reluctance to pursue proper reforms. “The scandals show how even without the excuse of an ideological war against communism, Vatican officials continued to exchange favours with members of Italy’s political and business elite, simple greed supplanting ideology. It is remarkable how defendants from the Calvi murder trial, Flavio Carboni and Ernesto Diotallevi, have continued to have business contacts with people associated with the Vatican,” says Willan. “Paolo Oliverio, a financial consultant to the Camilliani, a religious order dedicated to the service of the sick, was arrested last year on suspicion of laundering money for the Calabrian mafia – Europe’s biggest cocaine traffickers. He is reported to have been in contact with both Carboni and Diotallevi, as well as their offspring. Carboni has also been shown to have cultivated contacts with members of Silvio Berlusconi’s inner circle in recent years, despite having been on trial for murder. A thorough reform of the church’s business culture will not be either easy or quick, but I think Pope Francis and his team are serious about pursuing it.”

Silvano Vittor, Roberto Calvi’s former driver and bodyguard, who was charged with his murder

As populations multiply, governments must tackle urbanisation

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

Global demographics are shifting rapidly. As populations continue to multiply on every continent, people are turning to the supposed prosperity of their nation’s super cities. These migratory patterns are pushing some urban areas beyond breaking point. Today, 54 percent of the world’s population lives in an urbanised area (see Fig. 1). By 2050, that number is expected to leap another 12 percent, accounting for some six billion people. Projections indicate another 2.5 billion people would join the globe’s megacities as a result of that expansion – with close to 90 percent of that increase in developing nations across Africa and Southeast Asia.

Fresh research conducted by the United Nations’ Department of Economic and Social Affairs indicates at least a third of population growth in the next thirty years will be in India, China and Nigeria. Many areas within these nations are already starting to buckle under infrastructural demands that have become nigh impossible to meet. Much-needed transportation links, energy development, healthcare provisions and local schools are all operating under capacity, fuelling urban deprivation.

Yet the single greatest issue facing the world’s impending urbanisation relates to housing. Because governments are failing to adequately plan for rampant urban growth, hundreds of millions of people are being relegated to lives of penury. At present, some 1.6 billion people have been forced to take refuge in substandard urban housing; worse still, over 100 million people are now homeless. Without adequate housing, cities are swiftly transforming from thriving economic hubs into sprawling capitals of deprivation. With those underserved populations set to expand in coming decades, both municipal and federal governments are racing to upgrade their housing stocks before up-and-coming megacities burst at the seams. Some answers to the problem are more viable than others.

Where the Pyramids at Giza once stood alone in the open desert, shoddy high-rise housing and an unauthorised cemetery now encroach

Planning is vital
One perceived solution is to relax planning standards. However, that practice may be a self-inflicted shot in the foot for many developing countries. Indian megacity New Delhi is an apt example. Home to 25 million people – more than the entire population of nearby Australia – Delhi has long struggled to meet the needs of its burgeoning population. Much like the city of London, Delhi boasts a thriving real estate sector. Yet evidence suggests the homes trading hands across the city don’t meet the financial limitations of those who need them most.

Meanwhile, affordable housing initiatives are floundering as a result of divisive party politics. In 2009, for example, Delhi’s municipal government sanctioned the immediate construction of 65,000 new affordable houses. Five years on, less than a third of those homes have been built. Critics have slated the municipal government for refusing to utilise federal subsidies and imposing bureaucratic policies on land acquisition. Despite the government’s paralysis, Delhi’s population continues to swell; city officials have recently started to overlook illegal construction projects.

Over the last decade, a combination of relaxed and unenforced planning policies has deteriorated the structural quality of Delhi’s architecture. Shoddy tenement blocks litter the city’s outskirts – without stringent regulatory oversight these poorly planned towers are endangering the city’s low-income households. In June, five children and five adults died in the suburb of Inderlok after a four-story building buckled under the weight of its tenants. In other developing urban areas, poorly regulated building plans are causing even bigger problems.

Construction taking place around the Opera House in Oslo

Boasting a population of 18.5 million, the Egyptian capital of Cairo is one of the globe’s top 10 biggest metropolitan areas. It’s also one of the developing world’s most dangerous urban environments. In the last 20 years, collapsed housing has been responsible for nearly 30,000 injuries and 1,500 deaths. Last year alone, 468 real estate developments collapsed. With affordable housing options disappearing, the Ministry of Housing has responded by giving the thumbs up to virtually every building project that crosses its desk. As a result, the cultural legacy of one of the globe’s oldest civilisations is rapidly dissipating. Where the Pyramids at Giza once stood alone in the open desert, shoddy high-rise housing and an unauthorised cemetery now encroach. Lax planning rules are causing both loss of life and loss of heritage; municipalities must find new housing solutions. The simplest option may be to discourage people from moving to the big city in the first place.

Reduce, reuse, recycle
Developed nations are struggling to come to terms with increasing levels of urbanisation, too. Within the next 15 years, London’s population is anticipated to reach 10 million – and with the city’s high real estate prices soaring by more than 20 percent every year, fears of an impending housing shortage are well-founded. To meet demand, the city needs an annual 63,000 new homes. At present, just a third of those homes are materialising. Yet municipalities and the UK government are already exploring creative incentives to make up for that shortfall. One proposal being lobbied is the construction of tens of thousands of new suburban properties specially designed for pensioners. By introducing tax breaks for downsizing, the government hopes to free up to 100,000 under-occupied homes for young families across London.

Last year, local councils were given the power to charge a 50 percent tax on the city’s 80,000 empty properties to encourage owners to use the buildings. Likewise, in June the UK Treasury announced it was streamlining the rollout of some 50,000 new London homes by building on unused brown land sites. Without compromising building standards, this drive to redevelop underused property is slowly tackling population growth; however, a government’s greatest weapon in the war on agglomeration is regional investment.

Source: CIA World Factbook. Notes: 2013 figures

Controversy surrounds the £16bn HS2 project. Designed to link eight of the UK’s largest cities, the high-speed rail line is supposed to prevent the need for businesses and their workers to migrate down to the nation’s commercial capital, rebalancing the UK’s economy between north and south.

Yet the perceived benefits may not fulfil their promise if similar investment is not made to maintain the regional industry of those cities. For lessons on how to do so, Westminster would do well to look to the Nordic states. Over the last decade, Norway has been particularly active in discouraging the further urbanisation of Oslo, which already houses over a quarter of the country’s population. Each year, the government now invests hundreds of millions to subsidise 12 ‘centres of expertise’ in less populated areas of the country.

These have allowed rural communities to attract aspiring workers away from Oslo with high-yield, world-class enterprises such as micro and nanotechnology, deep-sea engineering, aquaculture and cancer research. Consequently, not only does Norway now boast one of the highest employment rates in Europe, but it also maintains a manageable rate of urbanisation.

Constructing a solution
The world is becoming smaller every day. Twenty years ago, there were only ten megacities in the world that housed no more than 10 million inhabitants apiece. By 2030, forecasts indicate the number of global megacities will have shot up to 41. Yet without the implementation of adequate urban planning measures, these rampantly expanding agglomeration zones will only serve to widen the global poverty divide. A severe lack of local amenities and affordable housing are letting cities down and slowing the economic development of would-be global leaders – and if municipal governments should ever hope to validate growth with prosperity, they have got to facilitate some form of long-term strategy.

Relaxed building standards are not a viable option. Up-and-coming megacities have little choice but to pursue the recovery of unused or under-occupied space in the name of affordable housing. Long-term sustainable growth, on the other hand, can only be secured by encouraging regional development outside urban hubs. The world is changing, and urbanisation cannot be stifled. Yet if municipalities care for the welfare of their citizens, investment must be made to discourage further agglomeration and promote regional growth. The clock is ticking.

Investors flock to Ireland’s infrastructure projects

Posted on September 5, 2014September 3, 2014 by Ashton Wenborn

‘Cautious’ is a word often used to describe investor behaviour in the years immediately following the 2008 global financial crisis, as uncertainty over proposed regulation, as well as high public sector debt, rippled through the financial markets – all while banks tried to repair their balance sheets. As the project finance world underwent a sea change in active players, the financial industry has adapted to new market conditions, and is now in good shape to help meet the purported ‘funding gap’ in the long-term infrastructure finance sector.

With institutional investors beginning to play a more significant role in the funding of projects, as they look for stable returns to match their long-term liabilities, the challenge now lies in marrying the capabilities of the banks, public sector and other investors – a task that many market players have taken on with vigour.

Meeting infrastructure needs
Infrastructure – a key catalyst for growth, triggering further investment and job creation – is a policy direction particularly suitable for those countries facing weak GDP prospects, low interest rates, and burgeoning infrastructure needs.

The OECD forecasts that development in transportation will grow twice as fast as global GDP between now and 2030, and the European Commission estimates that infrastructure requirements in Europe will reach €1.5trn over the next eight years. As such, it is encouraging to see the emergence of institutional investor interest.

As well as being the first eurozone country to exit its bailout programme last December, [Ireland] has made a full return to the sovereign debt markets

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode. Project finance banks are making a comeback with higher levels of activity. With their expertise in advisory, origination, structuring and servicing, they remain core to raising funding but increased collaboration with institutional investors can be now be seen.

We can see this dynamic taking place in Ireland. Following severe setbacks to the country’s economy – including lowered sovereign credit ratings and a number of project cancellations – Ireland has received a significantly improved outlook from leading ratings agency Moody’s. As well as being the first eurozone country to exit its bailout programme last December, the country has made a full return to the sovereign debt markets with a successful – and oversubscribed – issuance of government bonds in January.

Although economic indicators suggest that the country remains some way from pre-crisis levels of activity, the fiscal constraints from its bank bailout are now abating and the government has given infrastructure development renewed focus, with PPPs being a key delivery tool. Concrete government measures are encouraging investors. As part of a €2.25bn stimulus package announced in June 2012, the Irish Government introduced a €1.4bn PPP programme, with the first phase supported by the European Investment Bank (EIB), the National Pensions Reserve Fund (NPRF) and local Irish banks.

Connection in key
Furthermore, the most recent project to reach financial close has seen the renewed presence of international banks in the Republic. This was the N17/N18 motorway project – a 57km standard dual-carriageway route between Gort and Tuam – under a PPP contract with the Irish National Roads Authority, won by the Direct Route consortium comprising Marguerite Fund, InfraRed, Strabag, Sisk, Lagan, and Roadbridge.

A combination of bank lenders provided the senior debt – including Natixis, Bank of Ireland, Société Générale and the EIB. Natixis was the largest international commercial lender on the deal, bringing a €118m contribution to the total €331m financing. This funding was underpinned by the infrastructure debt partnership between Natixis and Ageas, a Belgium insurer – an innovative collaboration that will provide for the deployment of some €2bn investment into the infrastructure debt space through Natixis’ banking platform. The French banks also introduced other institutional investors to the deal, notably Aviva and ING Insurance.

Indeed, the interest received from international investors marks a significant milestone demonstrating the viability of hybrid bank and institutional investor funding solutions. Attracting international financing support is all the more crucial given Ireland’s banking sector remains one of the most concentrated in the world.

Much of this institutional interest is motivated by the low interest rate environment, which is driving investors to take more risk in their portfolios. Peripheral eurozone countries such as Ireland now represent key investment opportunities, offering better yield prospects while the economic recovery reinforces investment grade ratings.

The successful closing of this deal should aid investor confidence in other projects currently in procurement. Ireland’s healthy pipeline currently includes the Grange Gorman campus development, Primary Care centres and Courts buildings, Schools Bundles 4 and 5, as well as the N25 and M11 roads. Further cementing the sector’s buoyancy are the anticipated projects due to form part of the stimulus package’s second phase, expected later this year.

Although Ireland has struggled in the post-crisis environment – ratings agencies have said they will continue to monitor the country’s fiscal consolidation efforts related to its debt ratio, GDP growth and export levels – it has managed to meet each of its bailout conditions and been held up as a poster-country for recovery by institutions such as the EU.

Moody’s restored Ireland to investment grade in January – a move that was well overdue, according to many investors – and in May, Ireland’s long-term borrowing costs fell below the UK’s for the first time in six years. With such rapid progress – including Standard and Poor’s raising its sovereign credit rating for Ireland (from BBB+ to A-) in June – it makes sense that investors should be drawn to its infrastructure sector, especially while yields remain attractive, which is further encouraging international contractors and financial sponsors.

Banco Penta on the Chilean banking sector

Posted on September 4, 2014October 17, 2014 by Ashton Wenborn

The Chilean banking sector has played a key role in shoring up economic development in the country, but is there room for growth? World Finance speaks to Daniel Subelman and Marco Comparini to talk about progress in the region.

World Finance: Now Daniel, your bank was one of the first to focus on investments, not just acting as a financial middleman. Can you tell me why that decision was so important to your company’s success?

Daniel Subelman: Most banks in Chile, after an intense period of MNA activity, became major corporations, highly efficient, serving all types of clients across all products nationwide. But that scale came at a cost. They had to develop policies and processes to make them more standardised and rigid. Inevitably, that made them more slow and more bureaucratic. In 2004 Banco Penta was founded as a bank focused exclusively on high net-worth individuals, corporate clients and financial institutions, serving only brokerage, asset management, corporate finance, season trading and financing. What are the numbers after that? Well, the last three years, revenues have grown at the CAGR of 25 percent, that surprised even us, and a third of those revenues are fees, which for a bank is pretty unique. Most international banks would envy that. Profits have doubled every single year since then, our credit rating has increased two notches, we have issued four series of bonds and an impressive low spread. Finally but not last, we are here. That is another good sign. We received an award of Best Investment Bank Chile, 2014, as well as last year we received an award for the best MNA deal of the year in Chile also.

Profits have doubled every single year since then, our credit rating has increased two notches, we have issued four series of bonds and an impressive low spread

World Finance: Very interesting. Now Marco, the FUT financial mechanism that allows companies to defer their taxes has been removed. Can you tell me, how has the decision affected a company’s ability, or corporate’s, to really do their business?

Marco Comparini: Well first of all the Chilean tax reform has already been discussed in the congress. As far as we know, the FUT won’t be eliminated, but modified. It cannot be eliminated because it has been a very important financing source for Chilean companies. From a corporate side, the big change is in the corporate tax rate, because it will increase from 20 to s7 percent, which is a big change. Of course, that will have an impact, it’s obvious. Nevertheless, this information has already been in the market for at least two or three months, so I would say that it is already in place, it’s priced in. At the same time, I would say that the Chilean companies are in a very healthy situation. Therefore, they can cope with the increase in corporate tax rate.

World Finance: So we just heard about some of the opportunities that the banking sector offers, but of course we’ve had some more financial players, Marco, enter into the market, including Banco Santander. Can you tell me, the proliferation of competition, has the been good or bad for people like your self?

Marco Comparini: The competitiveness of the market has been pretty good for everybody, for the country. If you want to be a developed market, you have to have a developed financial system, and this is something that we believe that we have. A sign of that is the banking penetration in Chile, which is 80 percent, which is quite high if you compare it with some neighbours, like Peru and Colombia, they are in the 20s plus. Therefore, you can say that it’s a deep financial market, and very competitive. Nevertheless, when you analyse all the banks, you realise that you have to have a different strategy if you want to start with a new bank in Chile. So that’s the reason why in 2004 when we set up Banco Penta, we decided to do something unique, and we have had pretty good returns out of that, we’re very happy with the strategy, and we’re very proud of being the first investment bank in Chile.

World Finance: Now we just heard about how competition helps the marketplace, can you tell me Daniel about how the higher than expected inflation rate has impacted your ability, and others’ ability to operate in the current financial market that exists in Chile?

Daniel Subelman: Even though that’s completely true in most countries, in Chile we’re moving in the opposite direction. We’re coming from a relatively high inflation context, but we’re moving the other way. Inflation is going down, the economy is cooling down. However, in any case, in Chile we have the UF. The UF is an index that is pegged to the CBI. Every single month, it readjusts from the previous month’s CBI, and most fixed income securities in Chile are traded in real rates back to this index, which is the UF, similar to the TIPS in the US. So, banks when they build budgets can hedge the inflation risk having in the balance sheets in the assets’ UF. That’s the Chilean reality today, and that’s why we’re also pretty unique as a country, because it’s not very common in other countries to have this deep inflation real rates that can help you cover and hedge that risk.

World Finance: Now Marco, we just heard about how the financial community is on the up and up, but of course there’s always room to grow. How can the government improve the financial regulatory environment that you operate in to make it even easier?

Marco Comparini: Always there is room for improvements from a regulatory perspective. Nevertheless, according to what we have seen in the last five years in the international financial system, where we have seen the US and European banks in very difficult situations, during the same period of time we haven’t seen any single problem in any bank. That reinforces their authority, the way they are controlling the market. So I don’t see them doing any significant change, and I agree with them. The Chilean banking system is quite healthy, even though there was a big international crisis, we really coped with it.

The Chilean banking system is quite healthy, even though there was a big international crisis, we really coped with it

World Finance: Fascinating. Now, Daniel of course the Chilean economy has had some sluggish times of late. Can you tell me, does that make you worried at all about the future of the financial sector?

Daniel Subelman: We saw, in the second semester of last year, investment stop and decrease a lot, and I would say the second quarter of this year you started to see consumers reducing consumption. One clear sign of that, in May of this year the outstanding stock of commercial loans was reduced for the first month since February 2010, so more than four years. So yes, that’s a warning. However, there are some good things happening also. We have a huge lack of infrastructure and energy investment, and I can see political consensus to approve some of those projects, and the pipeline is big because of the lack I mentioned, and you will see investment there in the short term future. In addition to that, the slow economy in Chile and lower commodities prices in the market have made a weaker peso. We have a very open economy, so we have exporters who have been suffering, and a lot of pressure to make profits in a very strong currency, all exporters who sell in international markets. That part of the economy will benefit from a weaker peso. So the ones that survived a long period of strong Chilean peso became very strong, and very efficient. So now the margins will improve, and those sectors will benefit from that.

World Finance: Very interesting. Daniel, Marco, thank you so much for joining me today.

Both: Thank you.

Compliance overload: finance regulations are damaging free markets

Posted on September 4, 2014September 3, 2014 by Ashton Wenborn

It is no surprise that the move towards more onerous anti-money laundering and information exchange procedures has significantly increased transaction costs for everyone in the finance industry. The concerning new development is that the costs are beginning to outweigh the benefits and that regulation is hurting legitimate as well as illegitimate users of the financial system indiscriminately.

This is putting increasing pressure on financial centres that are struggling to comply and remain competitive in the current economic environment, which presents challenges to our perception of competition and free markets. In this respect, our liberal market economy is under pressure like never before and regulation is to blame.

For some time, the financial industry and the surrounding world has accepted the influx of regulation as a necessary consequence post-crisis, in order to ensure stable, transparent and sustainable financial markets that won’t crash and burn at the expense of tax payers. The primary focus has been to uncover illicit activities such as money laundering, tax evasion and fraud, by enforcing stricter reporting criteria, banning certain types of financial activity and boosting client protections.

Regulatory landscape
Regulators argue that this can provide enough insight and oversight to ensure that we never see a repeat of the magnitude of the financial crisis, which to a great extent was caused by irresponsible loan and product practices in the US and within other major international banks. The goal is also to bring in billions of dollars from untaxed money that is being hidden around the world and can seriously boost the high deficits seen in countries like the US.

£139.9bn

Bank deposits in Jersey, December 2013

However, very few people have dared voice that regulation can go too far and that not all the rules may be beneficial in the long run. Not to discount that regulation does an important job at keeping our markets safe and stable, research has now proven that the costs of compliance are seriously outweighing the benefits of financial regulation. At least that is the argument of Professors Richard Gordon and Andrew P Morris, who recently wrote the paper Moving Money: International Flows, Taxes, and Money Laundering, which offers a series of critical insight into the consequences of our current regulatory regime.

In a recent interview with World Finance, Geoff Cook, CEO of Jersey Finance, described the recent years regulatory developments, as “a tsunami of regulation, particularly for the banking and asset management sectors,” which have been hardest hit. Legislation such as the AML, FATCA and AIFMD all require a slew of resources and as part of compliance, billions of pieces of data are now floating around the world, at a staggering cost.

“Regulation has increased in recent years in order to ward off future problems and we have been an early adopter of these policies, because it is really in our best interest to comply. That said, we must consider the costs of regulation. Does it actually have the intended effect?” said Cook, adding that so far, regulation has had “no significance on crime prevention” and that such laws tend to impact clients most, as costs eventually end up on them, reducing gains from investments.

According to Gordon and Morris, this increase in regulation could have significant implications for economic growth, while providing little evidence of any real benefit from the new measures in terms of improved tax revenues or reduced illegitimate funds flows. Recently, US authorities rejoiced when estimates showed that FATCA would generate $880m in revenues a year, as a result of lost income from tax evasion.

Ironically, this is a drop in the ocean compared to the billions spent on FATCA compliance, and as the professors point out, this begs the question whether such regulation actually benefits the public and states enough, to warrant the implementation of such far-reaching regulation. Only a few people have dared question the regime, but surprisingly, the cost dynamic is now being reviewed by the G8 and G20, while the OECD has put out recommendations for the streamlining of data collection on a global basis, in order to limit the costs of transparency.

This has become particularly pertinent as it’s become apparent that developing countries with fledgling financial sectors and small regulators aren’t able to cope with the regulatory burden. “A consequence of all this has been that a lot of firms are pulling out of developing countries because its impossible to gauge the risks associated with doing business there and whether or not they’re actually complying. That could potentially stunt economic development in some parts of the world, which I think is quite problematic,” said Cook.

Research has now proven that the costs of compliance are seriously outweighing the benefits of financial regulation

Financial centres buckling
A key concern in this is that the mounting compliance costs are becoming too much for the world’s financial centres. Offshore entities like Jersey have been able to cope well with regulation, as it was an early adopter that engaged with regulators during the evaluation and consultation processes. Its own legislation already bared down hard on financial crimes and has since 1998, forced anyone with knowledge of tax evasion or illicit criminal activities to report such issues or otherwise find themselves legally liable. According to Cook, “the only sustainable strategy was to adopt regulation” and as such, Jersey Finance has seen a steady growth in compliance heads.

However, for others, compliance is less than easy, says Cook, and while fewer financial hubs might be good news for some, it’s damaging to the free markets and general competition in the financial sector.

“It is an inevitability that there will be fewer offshore jurisdictions in the future. Jersey can cope and absorb the costs of regulation, but smaller jurisdictions with less employees, smaller regulators and with a lacking legislation, will find it difficult to comply. Of course, that’s levelling the playing field for jurisdictions like Jersey, which has seen its costs increase significantly, while others haven’t invested in compliance up until now and therefore had an advantage.

“But this is problematic for overall competition,” said Cook. The professors even go so far as to argue that the regulatory burden being put on small financial hubs is unfair. “There are real issues of respect for sovereignty that must be addressed. Today’s international financial institution regulation is dominated by a few rich or large countries. If we live in a world where international relations require respect for the sovereignty of all jurisdictions, the shifting of costs from large, wealthy jurisdictions to small ones, is illegitimate,” said Gordon and Morriss.

Interestingly, a recent report on shell companies and secret bank accounts, tested the compliance of OECD countries in comparison to offshore hubs, and found that major regulatory issuers such as the US, were among the worst sinners in the world. Professor Sharman from Griffiths University proved that it was incredibly easy to circumvent prohibitions on banking secrecy, forming anonymous shell companies and secret bank accounts in 17 instances, of which 13 occurrences happened in OECD countries.

In the UK, it took a sole 45 minutes to establish a company without providing identification, issued with bearer shares (which have been almost universally outlawed because they confer completely anonymous ownership). Shockingly, the study concluded that G20 countries had much more lax regulation than tax havens did.

“In this respect, it is frustrating that the regulation doesn’t seem to discriminate between financial centres who already have strong measures in place, as opposed to those who have an obvious intake of illicit activities”, said Cook. “It is important to us to inform people about IFC’s because of the mounting concerns about tax evasion and money laundering, which we don’t want to be associated with. Regulation doesn’t discriminate between financial centres, but I think its necessary for it to do so, because we believe that we are better run than others”.

To this end, the professors noted that the best IFC’s already have very effective systems and skill sets in these areas and that they may well be able to adapt to the new regimes more rapidly and with fewer costs than their on-shore counterparts – who also face huge compliance costs. Still, the concern remains that regulation has fundamentally changed the face of financial business and in particular, is making it impossible for small IFCs entirely dependant on their tax haven status to continue attracting financial services.

With many developing countries using special economic zones as a driver for growth, and small Caribbean nations building the majority of their GDP from financial services, it is problematic that these nations could be forced to abandon the sector and thereby, economic development. More importantly, the impact this will have on overall competition should be a prime concern for a world that is largely built on liberal economic principles.

Should green bonds be regulated?

Posted on September 4, 2014September 3, 2014 by Ashton Wenborn

As discussions of mitigating climate change gather pace, so too do studies into the costs of not doing so. Support for the shift to a low-carbon economy has spread to consumers in all corners of the globe, and – predictably – investors have rushed to cash in on what new opportunities have emerged in the environmentally responsible investment space.

One report released earlier this year by the International Energy Agency puts the estimated costs of switching to low-carbon technologies through 2050 at $44trn, whereas another by the IPCC claims stabilising greenhouse gas emissions requires $13trn in investments before 2030. The headline figures at first appear unworkable, especially in an era of austerity and expansionary stimulus. However, with the appropriate mechanisms in place, there exists an opportunity for willing investors to prevent the damage from being done and take part in the turnaround.

“Institutional investors are increasingly concerned about sustainability issues and ESG issues,” says Sean Kidney, CEO and co-founder of the Climate Bonds Initiative (CBI). “An indicator of this is that investors representing some $42trn of assets under management are now members of the Principles for Responsible Investment, and investors representing $22.5trn are members of the Global Investor Coalition on Climate Change.”

The green bonds climate
The staggering costs – financial or otherwise – associated with climate change, and the alleviation thereof, have caused a spike in demand for environmentally responsible investments, not least in the green bonds market, which has grown by extraordinary degrees in recent years. Used to finance environmentally responsible projects, green bonds – or climate bonds – represent a vast share of the $100trn bond market and a significant step on the way to a low-carbon economy.

The consequences of investing in a bond that might not uphold the green end of the bargain serve only to compound exposure to dirty industries

Research from the non-profit CBI also predicts that the market for green bonds will reach $40bn this year, and expand by another $100bn the year after – far and above the $10.9bn issued in 2013, which was then three times the issuance of any year previous. Further estimates show the total value of climate-themed bonds outstanding to be $502.6bn, as of July 2014, again representing a sizeable increase on the $346bn total in March 2013.

Made up of close to 1,900 bonds from approximately 280 issuers, the sub-sector is dominated by investments in transport ($358.4bn), energy ($74.7bn) and finance ($50.1bn), with the rest spread thin across industry, agriculture, waste and water-related projects.

Beginning at a meagre $3bn in 2012, the market for the instrument has since exploded beyond all expectations, and so too has the capital allocated to suitably responsible projects. Beginning as a niche product, the sub sector in its current form, looks capable even of increasing the flow of capital to low-carbon development and shifting the focus away from fossil fuels among the investment community.

However, as demand for green bonds increases, the instrument’s legitimacy could well suffer and the intended environmental benefits wain, without the right measures in place to ensure the capital is correctly allocated. “The Green Bonds era has begun,” says CBI, and many analysts are inclined to agree that the market has migrated from its beginnings as a niche product and into the mainstream; though at what cost to its green credentials remains to be seen.

As is often the case with so-called environmentally responsible investments, there is a danger that the market could be subjected to ‘greenwashing’ as it grows in popularity. The concept – otherwise referred to as ‘green sheen’ – makes specific reference to parties guilty of marketing products or services as ‘green’ when in reality the environmental benefits are exaggerated or in some instances entirely fabricated. And while the market for green bonds is yet to be tarnished in this way, the risks will likely remain for as long as there is no consistent regulatory framework to keep issuers in check.

Guidelines published earlier this year by a consortium of major banking names, including Bank of America, Citigroup, JPMorgan and Crédit Agricole, make clear the properties and principles of green bonds, with a view to arriving at a unified governance framework. The Green Bond Principles (GBP) include guidelines for use of proceeds, process for project evaluation and selection, management of proceeds and reporting, though stop short of setting out concrete rules and punishments for failing to comply with the recommendations.

“The GBP are intended for broad use by the market,” according to the authors. “They provide issuers guidance on the key components involved in launching a credible Green Bond; they aid investors by ensuring availability of information necessary to evaluate the environmental impact of their Green Bond investments; and they assist underwriters by moving the market towards standard disclosures which will facilitate transactions.”

One key area that the GBP fail to address, however, is the much-talked-about issue of environmental targets, and whether issuers need necessarily comply with specific emissions targets before a bond is labeled green. Without clarifying this point, corporate issuers in particular could take it as license to push the parameters of what constitutes green and exploit what is fast emerging as a hot investment trend.

“We think that clear guidelines are needed as to “what is green”, to both make it easier for issuers and to allow investors to compare apples with apples,” says Kidney.

“Our investor board believes that an expert committee approach that brings together key people such as academics and relevant agencies in a sector to determine eligibility criteria is the way to do it – a science-based approach. That reduces the need to have the independent reviewers assess from scratch the environmental qualifications of the bond, and means they just have to confirm it complies with published standards – an important change to allow the market to scale up quickly, as it’ll allow many more reviewer to participate.”

Whereas originally the World Bank’s environmental department decided on green bond criteria and assigned the tag accordingly, the introduction of multiple issuers to the subsector has since given rise to discrepancies, without anything close to a governing authority to answer to. The circumstances here are indicative of a wholesale shift in the green bond market, away from agencies like the World Bank and closer to corporate and banking names, which are growing increasingly eager to join the party.

Corporate overhaul
Until 2013 the green bond space was populated exclusively by AAA-rated development banks, with the World Bank, European investment Bank, European Bank for Reconstruction and Development and the African Development Bank occupying a sizeable share of the market. Once corporate players caught wind of the investment trend, however, many more diverse names rushed to cash in on the green bond rush.

Beginning with EDF, Vasakronan and Bank of America Merrill Lynch, corporate names brought with them a number of changes to the green market, namely increased liquidity and demand. Whereas in 2012 the average bond size was $96m, the introduction of new market entrants pushed the average up to $430m only a year later. The increase in size has continued on since, and some multi-billion dollar issuances are large enough even to appear in general bond indices.

Michael Wilkins, Managing Director at S&P’s Ratings Services told Utility Week that he expects global corporate issuances to reach $20bn this year, double last year’s total and half the projected total for 2014. The figures also fall in line with corporate activity so far this year, in that corporate parties have issued $10.2bn in the first half of 2014, representing 55 percent of the total and comparing favourably with the $3bn equivalent figure last year.

In June, French energy company GDF Suez issued the largest green bond to date, indicating both the rate at which the market has grown and the prominent role European utilities are playing in the subsector’s development. At $3.4bn, the Suez issue dwarfs the previous record of $1.9bn, held by Electricite France, and reveals the appetite for environmentally responsible investment that exists today.

The introduction of new market players has also raised the question of whether voluntary standards are adequate enough a deterrent to protect against the credibility of green bonds, and whether they are in fact ‘green’. One potential solution is to threaten an interest rate spike, should an issuer fail to comply with standards, although most are agreed that the reputational costs of issuing a sub-standard green bond are enough of a deterrent at present to protect against non-compliance.

The vast majority of those investing in green bonds to date are doing so for legitimate reasons – often for the purpose of offsetting exposure to climate risks. As such, the consequences of investing in a bond that might not uphold the green end of the bargain serve only to compound exposure to dirty industries. Greenwashing, therefore, is an unviable strategy for most issuers, that is, until the subsector attracts investors interested only in boosting their surface-level green credentials.

It’s perhaps too much to say right now that the market for green bonds is in need of a regulatory overhaul. However, what is important for the sub sector is that issuers abide by a uniform framework and work together to ensure the legitimacy of green bonds is upheld.

Given that issuers are transparent about their assessment criteria, the emergence of green bonds looks a decisive step on the road to a low-carbon economy.

Regulator Ofgem needs to get a grip on UK energy firms

Posted on September 4, 2014September 3, 2014 by Ashton Wenborn

The importance of the global energy industry cannot be understated. As the world powers towards further industrialisation, the companies that provide the energy that makes it possible have become ever-more important. However, it’s fair to say the profits they make are staggering – and they face little in the way of actual competition.

Nowhere is this more apparent than in the UK, where the so-called ‘Big Six’ energy companies have carved out a nice big market for themselves that allows them to charge customers whatever they want. While most British people have, over the years, accepted their fate of ever-increasing energy prices, it became a huge bone of contention as households were tightening their belts at the height of the financial crisis.

Capped action
Last year, politicians began rounding on these energy companies, making threats of capping prices while also ordering firms to give back some of the profits they had made through apparently dishonest methods. The ‘Big Six’ – EDF Energy, REW Npower, SSE, Eon, British Gas and Scottish Power – reacted forcefully, claiming that they were merely pricing the market in response to global trends. However, the public didn’t seem to buy it, feeling that a cartel of firms had been formed that could charge whatever it wanted.

Opposition leader Ed Miliband earlier this year repeated his threat to freeze prices for the first two years of a potential Labour government in 2015, as a result of profit increases that had soared in recent years, despite the economic downturn and rising prices for consumers. Between 2009 and 2012, the industry saw retail earnings jump from £233m to £1.1bn, according to the UK’s energy regulator Ofgem. According to the regulator, the average annual household bill for gas and electricity is currently £1,315, a significant jump from the sub-£1,000 before 2009.

1.7m

Consumer complaints to the Big Six, 2014 Q1

Other criticisms included the way in which firms collected money, as well as paying out refunds. Indeed, in February 2014, the firms were told by regulator Ofgem to pay back £400m it had accumulated from closed accounts. In another move, Ofgem set out new rules that its Chief Executive Andrew Wright told politicians was designed to break the companies’ “stranglehold” on the market. The rule changes included companies being required to give more information about the cost of trading electricity from the generator business and the disparity between it and what consumers pay.

Announcing the reforms, Wright said he hoped it would spur greater competition in the UK’s energy industry. “These reforms give independent suppliers, generators and new entrants to the market, both the visibility of prices and opportunities to trade that they need to compete with the largest energy suppliers.”

Wider impact
The issue of corporate social responsibility (CSR) has become increasingly important for major energy firms in recent years. Ensuring that both firms act in a responsible way has been frequently discussed over the years. In late 2012, Ofgem released plans that it hoped would lead to a “simpler, clearer, and fairer energy market for consumers”. However, little has been done to actually clamp down on the way firms charge consumers.

The reforms Ofgem announced earlier this year were widely panned as being inadequate, and in August a number of industry experts laid much of the blame for the high prices at the door of the regulators. The criticism came as part of the 18-month long investigation currently being conducted by the UK’s Competition and Markets Authority (CMA) into competition in the energy sector, which had been requested by Ofgem.

A statement submitted by five former regulators called Ofgem’s attempts at regulating the market since 2008 as a possible reason for higher customer costs. “Regulatory interventions to promote more consumer engagement can increase customer and supplier transactions costs, leading to lower customer benefits including via higher prices, and weaker rather than stronger competition. Regulatory interventions can also affect suppliers’ ability to compete as well as their incentives to do so,” the statement said.

One of the former regulators, Stephen Littlechild, told The Sunday Telegraph newspaper, “I am not taking a view as to whether profits are the right level or not, all I’m saying is they have gone up consistently since Ofgem started intervening in the market. I’m not aware of anything else that could have caused it. The only thing causing higher profits is the restriction on competition [Ofgem] has imposed.”

Some of things Ofgem were being criticised for were there cutting of certain tariffs, which the regulator claimed was an attempt to simplify the way customers paid for energy. One of the consequences, however, was that cheaper tariffs previously offered were withdrawn, resulting in higher average prices. However, in response, Ofgem rejected the criticisms, citing the tough stance they’ve taken against energy firms for breaking any rules. “There certainly has been tight enough regulation. One of the chief examples of that is that when energy companies have broken the rules we have taken tough action against them. We have levied more than £100m in fines and redress on energy companies since April 2010, so compliance is something we take very seriously.”

Cause and effect
How this plays out remains to be seen, but Ofgem certainly needs to address the rising cost of energy in the UK. While the criticisms levelled at energy companies in the UK could well be valid, they do neglect the fact that these private companies have a duty to their shareholders first, and the wider public second. At the same time, it’s not just consumers who are impacted by energy companies, but also the wider communities in which the firms generate their power. Thankfully, many of these firms are starting to take serious the impact that they have on the communities that they serve, while also looking at ways in which they can reduce costs to customers and provide them with greater choice.

Many are investing heavily in new CSR initiatives, and all are complying with Ofgem and the government’s Energy Companies Obligation (ECO) scheme that was set out in early 2013. The ECO was designed to ensure that companies are legally bound to deliver energy efficiency measures to domestic users, helping to build a more sustainable energy market. It works alongside the Green Deal, a similar initiative aimed at helping the construction industry design more energy efficient buildings.

Most firms trumpet their commitment to these initiatives, and have detailed CSR pages on their websites and in their annual reports. However, while the work many are doing is admirable, some of it might need to be taken with a pinch of salt.

Measuring the work energy firms do for communities is difficult. One noted example is the scandal-hit US firm Enron, which was well known for publishing lengthy environmental and social reports into all the work it was doing to give back to communities. However, while much of this was laudable, the company was also deceiving shareholders about its profits; a scandal that ultimately led to it collapsing in 2001, with many of its senior executives being sent to prison in disgrace.

There is certainly no suggestion that any of the ‘Big Six’ energy companies in the UK are operating in a similar way. However, if their commitment to CSR is to be truly tested, it must be done by a robust and meaningful set of regulations by a strong body like Ofgem. Hopefully, the review by the CMA into competition in the energy sector will result in a level playing field for the industry where proper competition is encouraged and firms are not free to set prices as and how they choose.

Pacific Gas and Electric hit by $1.4bn penalty following 2010 explosion

Posted on September 4, 2014 by Ashton Wenborn

Four years after a natural gas explosion left a residential neighbourhood in California in ruins, killing eight people and seriously injuring dozens of others, the Pacific Gas & Electric Company has been hit with a $1.4bn penalty for suspected safety violations.

It is the largest safety penalty proposed by local regulator, the California Public Utilities Commission. But according to two administrative law judges, PG&E committed 3,798 violations of state and federal laws, rules, standards and regulations in connection with its pipeline.

The pipeline exploded in the San Bruno area in September 2010. The blast was so powerful that it dug a 22m-long crater and sent a 1.3-ton section of pipe flying across the neighbourhood. The ensuing blaze destroyed about 50 houses and lead to a mass evacuation of the area, while authorities and PG&E fought to contain the blast. It took more than 95 minutes for the utility company to isolate the break and shut off the gas, raising concerns about the care and maintenance of underground pipelines.

The settlement resolves claims by BP that Halliburton was to blame for the spill

So far, the firm has spent hundreds of millions of dollars settling claims by the victims and their families and contributing to recovery efforts in San Bruno.

“We are accountable and fully accept that a penalty of some kind is appropriate,” the company said in a statement. “However, we have respectfully asked that the commission ensure that the penalty is reasonable and proportionate and takes into consideration the company’s investments and actions to promote safety.”

Deepwater Horizon settlement
In related news, US federal authorities have secured $1.1bn from energy company Halliburton, which is looking to settle lawsuits stemming from the worst oil spill in US history. The settlement resolves most of the legal claims that Halliburton is facing over its role in the 2010 oil spill in the Gulf of Mexico.

Halliburton, which poured the cement on the well that was at the centre of the spill, is one of three companies blamed for the accident. BP, which owned the Macando well, has paid billions to businesses and individuals harmed by the spill, while Transocean, which operated the rig that was pumping oil out of the well, has also paid out big bucks.

The Deepwater Horizon oil rig exploded on April 20, 2010, killing 11 people and sending millions of gallons of oil into the Gulf. The well wasn’t successfully capped until three months after the explosion, causing extensive environmental damage.

The settlement resolves claims by BP that Halliburton was to blame for the spill.

So far, BP has agreed to pay $4.5bn in government penalties and has set up a $20bn trust fund to provide compensation for those harmed in the disaster. Similarly, Halliburton said it will pay the $1.1bn into a trust fund in three instalments over the next two years.

Following the Macondo accident, US offshore drilling safety regulation has been tightened significantly, setting unprecedented demands for rig safety and maintenance. Now that fracking and gas use is booming, broad-reaching probes into on-shore energy activities have followed.

Lekki Free Zone set to transform Nigeria’s fortunes

Posted on September 4, 2014 by Ashton Wenborn

With an abundance of resources and a growing trade economy, Africa needs ports, planes and infrastructure. Countries like Nigeria, the continent’s tiger-economy – leaping forward thanks to its manufacturing and oil and gas industries – are fighting hard to capitalise on their growth but are being hindered by a lack of basic logistical investment. Now, Nigeria’s leaders and foreign investors are changing all of that – one free trade zone at a time. The model, based on China’s success story, has seen the formation of free trade zones across the country, with the biggest and most crucial one located adjacently to the country’s commercial capital, Lagos.

The Lekki Free Zone is an ambitious project with the potential to transform Nigeria’s economy, but it is still very much in development. The key focus now is to make the zone viable for business and more importantly, to set up an unprecedented suite of infrastructure that will make any logistics veteran giddy. Potentially, Lekki’s deep-sea port will be one of the most advanced in the world, and the area’s sheer size will provide for warehouses storing millions and millions of trade wares. This is all in addition to a nearby refinery, which will ensure that the zone also becomes a hub for energy exports. All this is part of a national programme. The Nigerian Enterprises Promotional Agency has set out to create a slew of free trade zones all over the country, in the hopes that Nigeria can repeat China’s story, and become the leading economy of its region. The Chinese model – which first came into force in 1988 – saw the creation of several special economic zones that employed more flexible economic policies and government measures, in order to foster growth and foreign direct investment within those areas.

Nigeria statistics

Consumer price index

147.4 July 2013

158.6 July 2014

This later led to the expansive growth of economic hubs such as Shenzhen, Shanghai and Guangzhou, which have greatly contributed to China’s double-digit surges in GDP on an annual basis. With Nigeria’s GDP stumbling at five to six percent growth in recent years (see Fig. 1), its authorities are eager to move forward and light a fire under the country’s industries.

Incentives in West Africa
As such, Nigeria’s free trade zones are set to start industrial development, improve the local economy and generate employment and technological knowledge, through incentives such as a 100 percent tax holiday, custom duties and levies, foreign ownership of investments, no restrictions on the hire of foreign employees and a complete waiver on import and export licences. Lekki specifically will have four areas covering 16,500 hectares, with each phase dedicated to specific industries and types of business. Crucially, the overarching and all-encompassing focus and basis of the zone is facilitating logistics, says Chairman Olusegun Jawando of the Lekki Free Zone Development Company in an exclusive interview with World Finance.

“We are currently in the initial stages of development, with phase one’s roads and infrastructure already in place; the refinery in phase two up and running; and we’ve started construction on the deep sea port. The next step is to develop an infrastructure throughout Lekki. Electricity in Nigeria is very epileptic and we cannot allow that to happen in the zone, which is why we are developing an independent power supply. We’ll be working on ensuring the supply of water, telecommunications and increasing the road network in and around Lekki, because all industries coming here will require these things,” explains Jawando.

Lekki deep sea port

Facts and figures:

The port can handle the largest vessels in the world, including Majestic Maersk, which at 396 metres long is the world’s largest ship
The approach channel will be 16.5 metres deep, making it the deepest in West Africa
It will cover an area of 90 hectares with room for expansion in future
It will be capable of holding three container berths and one dry bulk berth
It can handle four million tonnes of cargo
It will create over 162,000 jobs in the area

The hope is that this will foster a strong trade, manufacturing and logistics sector, driven by the local light industries and energy exports. This is why the development company has established a massive land area for warehouses that can house the millions of goods set to come in and out of Lekki through its deep-sea port and the new international airport built within the zone.

In particular, Lekki’s deep-sea port has been dubbed the port of West Africa, being the deepest and one of the largest harbours on the continent. The project itself comes at a pricy $1.35bn, funded by the federal government, state government, and private investors (see Fig. 2). But in return, the port will create over 162,000 jobs and help to facilitate decongestion at Nigeria’s other ports, built initially to handle 60,000 tonnes, but which are now handling over 100,000 tonnes of cargo.

According to the Lekki Port LFTZ Enterprise, the port is designed to accommodate the largest vessels in the world and is expected to cover an area of 90 hectares with room for expansion, making it able to handle four million tonnes of cargo. Within 45 years, the government plans to see a $345bn payoff on the port, making it highly profitable. As part of the bargain, authorities have agreed to invest in significant road improvements to and from the zone. “We expect that about 25 percent of Lekki’s revenue stream will come from logistics,” says Jawando. “Nigeria is pivotal in West Africa and other countries are dependent on our industries and exports (see Fig. 3). Lekki will facilitate this and strengthen our links within the region”.

Creating new development
The hope is that Lekki will become a nerve centre for distribution for the Lagos area and nearby sub-regions. The current international airport in Lagos is extremely congested, and for many travellers, it’s common knowledge that the trip to and from the city can easily take three hours on muddy, chaotic roads. By establishing an airport in Lekki, the current hassle related to Lagos will be eliminated and by firstly focusing on the transport of cargo, Lekki will effectively become a major manufacturing and development zone.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

“Logistics are important for the light industries in and around the Lagos area”, says Jawando. “There’s a lot of electronic manufacturers for household equipment such as washing machines and air conditioners, as well as manufacturers of leather goods. Lekki is also going to be a centre for oil and gas as we establish tank farms [oil depots] throughout zone two – this is crucial because there are currently only two other tank farms in Nigeria and they are seriously overrun, so there is high demand for these kinds of facilities. We know that with the sheer scale of the deep sea port, the development of another airport and the massive infrastructure within zone, we’ll be able to generate exports and improve the local economic base”.

With Nigeria’s growth dropping to an above average of five to six percent in recent years and Lagos’ population growing increasingly dense, development projects that can boost growth and supply the Lagos region with various products are much needed. In this respect, the Lekki Free Zone would help support the 15 to 20 million population in Lagos and its surroundings. At the moment, Nigeria’s industry is dominated by elementary industries, and not the manufacturing and secondary industries that typically foster long-term growth in developed countries.

Despite a surge in resource exports, Nigeria’s government restrictions on foreign investment as well as sabotage in oil fields such as the Niger Delta, has scared off several major corporations like Chevron and Royal Dutch Shell, which are currently divesting their Nigerian assets.

What’s more, broad-based issues with lacking infrastructure and security in the country, has made it hard to attract foreign corporations to set up shop in Nigeria. A key problem is the lack of a stable electrical supply in the country, as well as the road and rail networks being sparse and poor. All these things make it extremely challenging for production and manufacturing firms to establish their businesses in the country, as such industries are typically very dependent on the supply of energy and a strong infrastructure that can secure the import and export of necessary parts and products.

After the initial opening up of Nigeria’s economy in the mid-2000s, these are the key problems that have somewhat stunted its growth, not to mention the constant concerns of growing extremism in the country.

Essentially, this is why special economic zones such as Lekki are being established in the hopes that they will radically transform the economy. There are, however, also concerns that Chinese involvement in the project may leave the zone too dependent on volatile foreign income, and in particular, force Nigerian actors to only deal with China and not the broad spectre of markets. In this respect, attracting FDI is crucial, says Jawando, but not all.

“It is necessary to have a balance between domestic and foreign investment in the zone, because we can’t rely entirely on foreign money,” says Jawando, referring to the surge and ebb of investment flows that other developing economies have thrived on and later suffered from. “Domestic firms are used to the local challenges, but are also restricted by them, which makes them less competitive when compared to foreign actors. So it’s important that we also foster a sustainable domestic development that can support the economy”.

A Chinese connection
Nevertheless, the Lekki Free Zone Development Company has been marketing the zone and its business potential aggressively. In particular, the area has garnered interest from Chinese and Turkish players – the former undoubtedly thanks to the billion-dollar joint venture with the Chinese, which is partly backing the development company and any works within the zone. In this respect, Nigeria, like so many other African countries, is receiving a growing amount of FDI from China, which has been bolstering its hold on African economies and their resources.

China’s government has long been keen on fostering strong relations with Nigeria, as its dependency on oil continues to grow and pushes the demand for new sources. To this end, partnerships between the two countries on a business or governmental scale are considered mutually beneficial with Nigeria’s 177 million population, providing a ready market for Chinese goods and firm’s gaining access to the Bida basin in Niger State for oil and gas exploration.

This has, however, also prompted concern that China’s interests in Nigeria could develop into regular land grabbing, as has been a growing problem in East African states such as Angola. China’s hold on the growing economy of Nigeria was recently cemented when Beijing issued a $1.1bn low-interest loan to the Nigerian government in order to build much-needed infrastructure across the country. As is, Chinese companies are already building roads across Nigeria in contracts worth $1.7bn.

Such improvements to infrastructure and the growing interest from particularly Chinese actors, has begun a ripple effect among potential Lekki investors. According to Jawando, feedback on the Lekki project has been strong and having attended a slew of trade shows and exhibitions, the zone has managed to attract several manufacturing and logistics players who are eager to set up shop in Lekki. Whether it will be a success and live up to the Chinese experiences, remains to be seen, but crucially, the zone could be a major Nigerian breadwinner in just three years, when its infrastructure and self-sufficient power plant is set to be up to par.

Diversify to succeed: Bank of the West promotes international investment

Posted on September 3, 2014September 4, 2014 by Ashton Wenborn

In a broad-based and growing global economy, investors often miss out on the opportunity to realise the advantages of global diversification within their portfolios. This is in part due to the perception that a domestic-focused approach provides less risk. In fact, the opposite is often true. Historical analysis reveals that when compared to a domestic-only strategy, portfolios with global holdings have typically, over time, earned higher returns for the same level of risk or produced less risk for the same level of return.

Although past performance does not guarantee future results, this may suggest that investors should assess their diversification strategies and, where appropriate, adjust their allocations to achieve an optimum level of non-domiciled holdings while looking for investments that will provide low correlations with their domestic holdings.

Since 2000, more than half of global GDP growth was driven by emerging markets, led by the BRIC nations, producing double-digit growth rates. Investors who were positioned in these emerging countries – as well as other countries – were rewarded over those who were exclusively in US equities or only invested in advanced countries. In a study by investment managers Gerstein Fisher (see Fig. 1) covering 1999 to 2013, a globally diversified portfolio outperformed a US-only portfolio in 96 percent of rolling three-year periods, with a total outperformance of 35 percentage points over 13 years.

Since 2000, more than half of global GDP growth was driven by emerging markets, led by the BRIC nations, producing double-digit growth rates

Aligning a global economy
Although growth in the BRICs has slowed, many emerging and developing countries are poised for growth rates that may surpass advanced economies. According to the IMF in April 2014, global growth is projected to be 3.6 percent in 2014 and 3.9 percent in 2015, with China projected to grow at more than seven percent and India more than five percent. Several developing countries are poised for growth above the average. Through global diversification, investors may best capture value across the entire economy and may realise better risk-adjusted returns.

While the data provides a sound rationale for global diversification, investors have been reluctant to adopt strategies that align portfolio allocation with market capitalisation. Currently, US equities comprise approximately 49 percent of the global market, so investors may consider having 49 percent of their portfolio in US equities and 51 percent in non-US equities.

However, studies show that few investors would be comfortable with those allocations due to a range of factors, including a preference for domestic equities, familiarity with local issues driving market performance, and access to information on global investments, as well as regulatory constraints.

For example, according to a 2012 study US investors maintained an allocation to US stocks that was approximately 1.7 times the weighted market cap of US stocks, while investors in the UK maintained a relative home bias of about 6.25 times the market cap of UK stocks.

It’s important to recognise that market cap is only one consideration for diversification and, historically, investors would have obtained substantial diversification benefits from allocations that varied considerably from current market-proportional portfolio. Specifically, looking at short-term performance in the past decade, there are periods of time where allocating 20 percent of an equity portfolio to non-US stocks would have captured about 85 percent of the maximum possible benefit.

Therefore, our recommendation is that investors carefully consider how global diversification may support their underlying investment strategy and, where suitable, gradually increase the percentage of their portfolio allocated to international equity. If an investor has no international exposure, setting a target of 10 percent may be an appropriate goal. For someone with 15 percent in international, we suggest 20 percent or more where appropriate, while looking specifically to strengthen the risk/return characteristics of the portfolio.

In particular, those countries with a low correlation with the investor’s domestic economy can often be more beneficial in maximising the value of diversification. Countries in the EU for instance, typically have a much higher correlation to the US than most other countries, so the positive effects of diversification may be better achieved with investments in countries like Mexico, Brazil and Taiwan, where the correlation to the US economy is lower.

One common misconception is that investment in multinational companies – particularly US-based multinationals – can provide global diversification coverage. But a closer look at the international footprint of Standard and Poor’s 500 companies shows that the majority of their business remains in developed countries, so correlation remains high.

Finding the right market placement
Once an investor sets an allocation, it can be a challenge to determine which countries, sectors and products to consider. Fortunately, there are many financial products that make global diversification easier than ever. Investors can often achieve their global coverage objectives with just one strategic fund. For example, a single Exchange Traded Fund (ETF) can track a fully diversified international index and provide broad international exposure.

For more focused coverage of the largest, most financially developed countries consider an ETF that tracks a developed-markets ex-US index. Pair this with emerging-markets ETF to broaden international holdings and drive diversification. There are many other options, but the point is that achieving global goals can be relatively simple, low-cost, and targeted.

As investors can select from investments in more than 50 countries, one of the questions I frequently address is how to distinguish the three international market categories: advanced, emerging and frontier markets. Advanced markets include US, the EU and Japan, which tend to provide lower risk and more consistent returns. The emerging market includes countries that are in the process of establishing a more mature marketplace. This sector can encompass greater risk, along with the potential for greater rewards.

The frontier market essentially consists of companies and investments in nations that are less developed than emerging market countries, many of which do not have their own stock exchange. As of April 2013, Morgan Stanley has a list of 34 nations that it classifies in this market, including Croatia, Tunisia, Vietnam and Jamaica.

Historically, frontier markets have categorically been the riskiest markets in the world in
which to invest.

In tracking international markets for more than a decade, one of the most significant trends is the wealth of information and data now available to investors, advisors and financial professionals. But I think it’s important for us to distinguish direct reporting and analysis – where sources are on the ground – versus second hand interpretation of data. Much like I would place greater value on information on US markets from US analysts, I rely more heavily on professionals working in the regions or countries we are tracking.

In the Bank of the West Investment Advisory & Management group, we communicate regularly with our portfolio managers and banking partners around the world to compare information and shape strategies. These are often very focused discussions on whether forecasts and projections are aligned with the realities of the local economy and how financial, political and other forces can quickly reshape the economic situation.

One of the key lessons from working in this arena is the importance of actively managing international holdings – as tactical timing can be paramount in finding momentum that may carry specific markets downward, even as global growth accelerates or a regional economy is growing.

For example, as we look at emerging market countries, a real divergence has developed that requires careful attention. Some countries or regions, like China, are growing at or above seven percent while others like Latin America are closer to three percent, and still others like Brazil are facing recessionary pressures. So it can be particularly helpful to develop information sources that provide the level of market detail required to assess performance and recalibrate holdings as needed.

For investors who are interested in creating a globally diverse portfolio as well as those who are expanding their share of international holdings, small adjustments in allocation may produce significant benefits in terms of lower risk and higher returns.

For further information tel: +303.202.5428, or email: wade.balliet@bankofhtewest.com

Bank of the West heightens cyber security measures to protect clients

Posted on September 3, 2014September 1, 2014 by Ashton Wenborn

Cyber criminals are becoming increasingly creative and have diversified their attack strategies significantly in recent years. For more than a decade, complex and sophisticated cybercrime organisations have focused on infiltrating the online platforms of financial institutions. When those organisations responded by implementing stronger authentication controls, cyber criminals broadened their hunting ground and began attacking corporations across all industries. Companies that have antiquated or insufficient cyber security controls have been left exposed.

Small businesses are particularly vulnerable; a 2013 study by Symantec revealed that half of all targeted online attacks were aimed at businesses with fewer than 2,500 employees. But large, multinational corporations face equally serious risks and cannot afford to be complacent. The customer data breach experienced by Target last December affected up to 110 million people and resulted in significant reputational damage, profit loss, and high-profile resignations.

Following the breach, Target’s profits were down 46 percent from the same period a year earlier. Factoring in the costs of reimbursement, reissuing millions of cards, legal fees and credit monitoring for customers, one estimate totalled Target’s losses as up to $420m. The episode serves as important proof point that sophisticated criminals are able to infiltrate systems and wreak havoc in some of the world’s largest corporations.

Counting the costs
This marks an important change. In the past, security breaches didn’t necessarily have a significant or even fatal impact on a company’s reputation or bottom line. Today, there is increasing recognition by C-suite executives that cyber security is a major corporate risk they can’t afford to downplay. Cybercrime costs businesses an estimated $445bn yearly – almost one percent of global income – according to the Center for Strategic and International Studies, a Washington think tank.

Direct losses are only one component of this staggering number. Companies must pay substantial recovery and opportunity costs following a cyber attack, potentially losing customers and facing the possibility of lawsuits over lack of controls or due diligence.

The forecast isn’t getting any brighter, with both the likelihood and financial toll of cyber attacks continuing to mount. PwC ’s Global State of Information Security Survey – polling 9,600 senior executives across 115 countries in 2013 – cited the number of detected information security incidents increasing 25 percent in the past 12 months. The same respondents claimed the financial costs of those incidents rose 18 percent, with large liabilities increasing faster than smaller losses.

Six steps to preventing cybercrime

Behaviour monitoring tools:
A bank’s back office behaviour monitoring controls are not always visible to customers but help protect businesses from loss on a daily basis.

Fraud prevention products:
A comprehensive suite of fraud prevention products and features is essential to safeguarding against payments fraud. For example, Bank of the West’s Positive Pay solution uses payee line matching to protect client accounts against check fraud.

Fraud education:
Education and training are essential to generating awareness and compliance with fraud-preventing measures across all levels of an organisation.

Malware protection:
Installing a dedicated, actively managed firewall and setting up robust detection tools is critical to preventing fraud.

Dual Control:
Requiring a second approver for large financial transactions or sensitive administrative functions is critical. Using out-of-band authentication via a different network adds a layer of security to ensure transactions are legitimate.

Employee protection:
Cash vault and armoured car services can mitigate exposure to employees handling and transporting large amounts of cash unprotected.

The good news is that more companies are paying attention to these escalating risks. In June, The Wall Street Journal reported that 1,517 companies that traded on the NYSE or Nasdaq “listed some version of the words cyber security, hacking, hackers, cyber attacks or data breach as a business risk in securities filings… That is up from 1,288 in all of 2013 and 879 in 2012.” In turn, the PwC security survey reported information security budgets rising 51 percent in 2013 to an average of $4.3m.

What exactly are businesses today guarding against? What tactics are cyber criminals using to initiate fraud? Once upon a time, business was conducted and deals were closed with handshakes. Today, with the majority of business and financial transactions taking place online and by email, cyber criminals are focusing on business email and communication systems, compromising them when robust processes are not in place to verify the legitimacy of transactions.

Specific industries – including agriculture, municipalities, aviation, and more – are being targeted one at a time by what we call masquerading. This social engineering tactic can involve cyber criminals cloning company email systems and using social media channels to learn about internal relationships and the activities of company executives so they can make fraudulent requests look legitimate to unsuspecting company employees. We are also seeing cyber criminals pretending to be vendors so they can fraudulently obtain funds, or setting up email addresses that closely resemble customers’ to make requests look authentic.

Widespread attacks
We have also seen a significant evolution in malware. Historically, it was used to attack banking websites, but now we are seeing fit-for-purpose malware attacking specific point-of-sale systems and software used in a particular vertical. Criminals scan the internet for software they know is vulnerable and stage attacks on companies of all sizes across an entire industry. Recent targets have included restaurants, taxi services, and construction, to name a few. The sophistication of malware continues to increase. In addition to stealing user names and passwords, the malware is sometimes able to assume control of a company’s computer system in order to execute fraudulent transactions from a company’s own computers.

Ransomware and distributed denial-of-service (DDoS) attacks are additional tools criminals use to encrypt company data or flood sites with traffic and extort a payment. Ransomware attacks skyrocketed 500 percent in 2013, and criminals are increasingly using DDoS attacks to distract companies’ IT staff while stealing funds or intellectual property. This can take a severe toll on a company’s operations, leading to compromised customer service, reputational damage, and lost revenues.

Unfortunately there is no silver bullet to preventing fraud. As the internet continues to evolve and expand, the attack space available to criminals is only getting bigger. The presence of additional devices allows more options for perpetrating fraud. Above all, businesses need to stay aware of cybercrime trends and existing scams, and put in place robust business processes, approvals and controls to verify the legitimacy of all transactions. Financial institutions in particular need to partner with their customers to help educate on the increasing threat of cyber attacks and the prevention strategies they should implement.

As a relationship-focused bank, Bank of the West takes a holistic approach to fraud prevention, partnering with commercial clients to help educate and safeguard them against fraud. Obtaining information as quickly as possible for clients is paramount in this effort.

By maintaining open lines of communication with law enforcement organisations, we have effective information sharing mechanisms in place so we can stay aware of known risks, alert our customers, and modify our processes as needed.

We use direct communications and social media to keep our clients informed about the latest security-related news and fraud prevention best practices, including updates on the Heartbleed virus and wire fraud prevention strategies in recent months. Speaking with our clients about security also hands us important feedback that we have used to modify and strengthen our products and back office controls.

Our goal is to keep our clients strong and financially viable so we can growth alongside them over the long term. In today’s business landscape, where technology and the cybercrime tactics continue to evolve at lightning speeds, we view fraud prevention as critical to every company’s competitiveness – and its survival.

Brazil struggles in its quest to become energy powerhouse

Posted on September 3, 2014September 3, 2014 by Ashton Wenborn

In 2007 Brazil made a remarkable discovery. An estimated 50 billion barrels of oil trapped under a thick layer of salt was found 300 miles off the coast of Rio de Janeiro. The oil had been there since Africa and South America started drifting apart 100 million years ago, and confirmed years of agonising research by Brazilian authorities. The president at the time, Luiz Inácio Lula da Silva, described the find as a “winning lottery ticket” and thanked God for the bounty of oil that he believed would transform the country into an energy superpower.

Da Silva was not alone in thinking this as the find sent shockwaves through the energy industry. It was a discovery that many believed could transform Brazil into a major oil exporter like Saudi Arabia or Venezuela. Industry analysts said the find was the third biggest in the world and the Correio Braziliense newspaper ran with the front page headline ‘God is Brazilian’. The discovery of pre-salt oil, so called because it lies deep beneath the sea under a layer of salt, was made by Petrobras. Executives of the half state-owned company boasted that their massive find could help them surpass Apple as the world’s most profitable publically traded company.

The discovery was followed by an arms race. Giants in the energy sector clamoured to secure exploration rights from the government; international companies all wanted to plunge hydraulic drills into the ocean and tap into the massive oil reserves that had, until then, eluded Brazil.

Value of brazilian oil exports

$3.649bn

2009

$3.991bn

2010

$5.442bn

2011

$5.946bn

2012

$5.878bn

2013

$5.563bn

2014

$5.563bn

2015

$5.724bn

2016

$6.005bn

2017

Source: International Monetary Fund

Open for business
In the 1960s Petrobras had a monopoly in the Campos and Santos basins – areas in the South Atlantic Ocean believed to hold vast oil reserves. Despite being the only company there, Petrobras managed to produce just 600,000 barrels per day (bpd). This monopoly came to an end in 1997. Brazil passed an amendment on energy regulation that year which opened the region to foreign competition for the first time. Over 50 companies including Royal Dutch Shell, Chevron, Repsol, BP and El Paso have since joined the race to start drilling in the region. But the ‘monstrous’ discovery in 2007 has so far failed to transform Brazil. Oil production that went from negligible to 2.7 million bpd in 30 years has stagnated. The potential of the find is yet to be exploited and it remains nothing more than ‘potential’.

Petrobras told World Finance it has “no doubt that the future of oil and gas in Brazil is promising”, but other firms disagree. Foreign companies have started to look elsewhere as government control, regulatory uncertainty and sky-high production costs pour cold water on Brazil’s dream of becoming an energy super state. Maersk is one of the first big companies to reduce its interest in the region. On July 8 the Danish conglomerate wrote off a $1.7bn investment in the Campos basin. The part-withdrawal from the area was evidence that the hype of oil in Brazil had failed to live up to expectations. Maersk reduced its ownership in the Polvo oil field – located in the Campos basin – by 40 percent after citing “adverse impacts”.

Soaring development costs and a plummeting oil value were also pressing issues that culminated in their huge write off. CEO Nils Anderson described his company’s “unsatisfactory” flip-flop in a statement: “The investment was made at a time when the outlook for the oil industry and oil prices were more positive than today and we had growth ambitions for our Brazilian oil business. We have now adapted our strategy to the situation we see today, but it is of course clearly unsatisfactory.”

Maersk bought stakes in the Campos basin for $2.4bn from SK Energy of South Korea in 2011. The move cleared the path for the company to become a dominant player tapping into Brazil’s deep-sea bounty. But analysts were bearish on the price of oil and, as there was considerable exploratory work to do, making worthwhile profits became untenable. Maersk says it will now invest in other global energy sites, but the move is the tip of the iceberg in the protracted saga of Brazilian oil. International companies are seriously considering cutting their losses in the Campos and Santos regions and retreating to economically viable areas like Manitoba, Canada.

Deep-sea exploration
The pressing question is if whether other companies like BP, Anadarko and India’s IBV will follow suit and explore energy pastures new. Developing pre-salt wells costs billions and no one has found a new basin since 2008, but BP isn’t put off. They have committed long-term to the area that could take up to 40 years to be profitable, a BP spokesman told World Finance. Deep-sea drilling takes “20 to 40 years to come into fruition”, said the spokesman who stressed there are “macroeconomic uncertainties” to manage as well.

The potential financial losses at stake are high and BP is reliant on complex geophysical imaging to map the subsurface of the ocean. This process is used to build an image of rock formations under the seabed so an accurate picture of the drilling area can be obtained. “Cutting-edge seismic imaging is part of what we’re good at,” added the spokesman who conceded there is “no certainty” in making profits.

With oil increasingly hard to extract, Petrobras has fallen on hard times and is the most indebted oil producer in the world. This is partly down to politically sensitive legislation that allows Brazil to keep fuel prices low to balance its high inflation rate. The government has interfered in the price of fuel, say The Wall Street Journal, and this has stopped Petrobras from scaling heights it initially thought were a mere formality. In 2007 it was worth $287bn – more than Microsoft at the time. Now its market cap is a third of what it used to be. Oil production, once expected to surge, has stagnated and the sense of euphoria has turned to disappointment.

Brazil needs the oil in the Campos and Santos areas. Not just for the capital it pumps into the economy but because it’s the third largest energy consumer in the Americas. Oil reserves remain largely untapped which has forced Brazil to import more than it exports.

Gasoline and diesel now sell at 25 percent below import costs that has hurt Petrobras’ ability to supply demand. Brazil has increased its energy production, particularly in the procurement of oil and ethanol, and now ranks among the top 10 biggest energy producers in the world.

But it needs to crack the pre-salt layer on its continental shelf. Around 90 percent of its petroleum is offshore in ultra deep waters and drilling through the 2,000m pre-salt layer is expensive and hazardous due to the high risk of an oil spill. This year Petrobras announced an ambitious corporate spending venture to invest $221bn over four years to produce four billion bpd between 2020 and 2030.

It’s a gargantuan sum to invest in an area that has hitherto yielded little in the way of returns. The reserves they want to drill into have at least 50 billion barrels worth of crude oil, some analysts say it could be closer to 100 billion.

Volume aside, it remains to be seen if Brazil’s lottery ticket is a winner. If it is, it could go down as the most expensive lottery ticket in the world, but the allure of becoming South America’s next energy superpower is too tempting to pass up.

SGBL: Lebanese banking sector has remained strong in the face of adversity

Posted on September 3, 2014September 1, 2014 by Ashton Wenborn

Lebanon’s economy has shown a remarkable degree of resilience through a two-year period of political and social upheaval, demonstrating throughout that the banking sector is well equipped to overcome widespread complications and compete on a global basis. The challenge for the country’s banking industry today, however, is to expand upon what qualities it has already, boost the country’s lacklustre economy and assert its place in the global market for financial services.

“We, as Lebanese bankers, are quite proud of the resilience that the Lebanese banking sector has proven to have over the last 10 years – throughout which we’ve actually witnessed a series of domestic, regional and international shocks,” says Antoun Sehnaoui, Chairman and CEO of one of Lebanon’s leading banks, SGBL. World Finance spoke to Sehnaoui about the various ways in which the economy has changed of late, and what opportunities and challenges there are for those in the Lebanese banking sector.

Lebanon’s economy
Although the banking sector has withstood a number of challenges in recent times, the social and political unrest in the region has not come without consequence for Lebanon’s economy. For example, the services sector, of which tourism constitutes the biggest part, has suffered as a result and weighed heavily on the country’s economic wellbeing.

28%

increase in bank deposits in Lebanon in the last three years

The real estate sector, which represents something of a driving force for Lebanon, has also suffered for the same reasons. And whereas historically, residential demand among expats and investors has been strong, momentum has slowed over the past two years or so against a backdrop of regional turmoil. Still, real estate prices have remained more or less stable, and although there is evidence of some market correction, the country’s capital boasts some of the highest real estate prices in the region, both on a residential and commercial basis (see Fig. 1). To again underline the resilience of Lebanon’s housing sector, some recent statistics even go so far as to show that the sector as a whole is actually picking up.

The conflict in Syria has seen a huge number of refugees cross the border into neighbouring Lebanon – 1.2 million at last count – which has caused a spike in demand for public services and infrastructure. The surge has weighed heavily on Lebanon’s economy, stretching the country’s public expenditure thin and raising its fiscal deficit. One study conducted by World Bank in September 2013 estimated Lebanon’s economic losses as a result of the Syria conflict would come to somewhere in the region of $8bn over the three-year period stemming 2012 through 2014.

On the other side of the coin, Lebanon has welcomed a number of wealthy Syrian households who have invested in housing and offices, thus boosting the national economy. “Aggregate demand was also driven by an uplift in consumption as the country’s population grew significantly,” says Sehnaoui. Still, the influx of Syrian workers into the labour market has dragged average wages down and boosted the unemployment rate among some Lebanese citizens.

Lebanese exports have also suffered at the hands of the Syria conflict, given that traditionally exports transit by land through Syria to Jordan, Iraq and the GCC – Lebanon’s primary export destination. As a result of the conflict, insurance costs and substitute routes via air or shipping have forced costs upwards and compromised Lebanon’s global competitiveness.

Policy preparations
“Unfortunately, little has been done to robustly support the Lebanese economy and pave the way for recovery. Given the size of the needs generated by Lebanon’s open border policy and the influx of refugees, international aid earmarked for Lebanon to date has not been sufficient to bring appropriate support, whether to the refugee populations or to the hosting country,” says Sehnaoui. “From a security viewpoint, the Lebanese authorities have been putting in huge efforts to maintain security across the country in order to maintain confidence, reassure tourists and mitigate investors’ concerns.”

Not content with the steps taken so far by policymakers, Sehnaoui believes there are a number of areas still in need of improvement. “The overall business environment in Lebanon requires more robust strategies as well as bold public initiatives and programmes to strengthen public finances and structural reforms to rationalise expenses and boost revenues through fiscal adjustments. In the medium term, the country should be looking ahead and aiming for sustainability, both at the level of growth and of fiscal balance.” The election of a new president should bolster the government’s reform programme however, setting the groundwork for improved governance, overturning the public deficit and rising debt, and restoring state finances back to a healthy complexion.

“On a positive note, at the banking sector level though, the Lebanese Central Bank has proven very judicious and efficient in setting up mechanisms, in cooperation with banks, to stimulate the economy by fuelling loans,” says Sehnaoui. “These initiatives have been encouraging investment in productive sectors and supporting consumption.”

Although some aspects of the economy have been hit hard by recent crises in the region, the Lebanese banking sector has come through relatively unscathed, regardless of a challenging economic environment. “Banque du Liban, Lebanon’s Central bank, has played a major role in monitoring the situation closely and setting the prudential mechanisms to keep the banking sector afloat and relatively immune,” says Sehnaoui. “International sanctions have been rigorously implemented and stringent AML regulations have been enforced across the sector. We believe that the Lebanese banking sector is not anymore exposed to Syrian risk, as all of the relevant risks have been adequately provisioned.”

Bank equity has been reinforced in line with Basel III requirements, although the local target ratio has been set at 12 percent by the end of 2015, as compared with the eight percent international standard. It is this strict enforcement of an ambitious regulatory framework that has garnered the attention of local and international depositors and investors. And indicative of the regime’s effectiveness is that in only the last three years bank deposits in Lebanon have increased by 28 percent.

Elsewhere, MENA markets still offer opportunities for those in the banking sector in that much of the population is unbanked or underserved, therefore leaving a lot of room for enterprising players to occupy a precious share of the market. In addition, there are practically no language barriers for Lebanese banks entering Arab countries or those on the African continent, which gives those in Lebanon a competitive edge ahead of rival players.

A number of further challenges still remain, not least technological advancement, which has impacted everything from retail customers to corporates, and demanded that banks invest in IT and R&D if they are to keep pace with the rate of change.

From a commercial and marketing perspective, banks in Lebanon have come up against far greater demands to remain competitive, namely continued innovation and technological progress. The global banking environment has also grown increasingly challenging for banks in that regulatory pressures have grown and issues such as money laundering, cybercrime, security and compliance have forced their way into the spotlight.

“Some of the challenges are stimuli for bringing about change and grabbing new opportunities,” says Sehnaoui. “Regarding Lebanon specifically, we believe that, against all odds, Lebanon is still perceived as a regional banking hub. Lebanese banking has long since gone regional and even global. Major banks have opened subsidiaries and branches in Europe, as well as in Turkey, Iraq, Jordan, the UAE. There is room for Lebanese banks to grow in the MENA region, thanks to their assets and strengths.”

Ripe for growth
Although the Lebanese banking market is ripe for growth, there are some, including Sehnaoui’s SGBL, that are seeking opportunities outside of Lebanon. As one of the country’s largest banks, SGBL boasts a retail network of 69 branches that span the entirety of the country, as well as a proven reputation in the business of SME and corporate finance. “Still, we believe there is room to grow on our primary internal market,” says Sehnaoui. “For instance, we are working on optimising our retail network coverage in Lebanon as new residential and commercial areas develop.”

The bank is currently keeping a watch on growth opportunities in Europe, in particular in the business of private banking and asset management. “We believe that there is room to develop cross-business between European investors and the Arab world, as well as between Arab investors and European markets,” says Sehnaoui. “SGBL’s ambition is to be such a matching platform for opportunities to meet and materialise.”

For the time being, SGBL has sizeable banking subsidiaries in both Jordan and Cyprus, and is currently working on strengthening its position in both markets. Jordan, for instance, is a burgeoning banking market that offers, aside from its domestic market, a way into the promising Iraqi market.

“As our banking business lines cover all of retail, SME and corporate, private banking and investment banking, our strategy is to continuously upgrade our offerings so as to answer the market’s needs, and better yet, create demand,” says Sehnaoui. “This approach underlies our business development initiatives both in Lebanon and abroad. It also encompasses SGBL’s non-banking business lines, one of which is insurance, which we are actively seeking to grow beyond Lebanese borders, in an area of the world that is severely under-insured.”

Nucleus Software’s technological solutions enhance financial services

Posted on September 3, 2014July 23, 2014 by Ashton Wenborn

IT companies have been working closely with financial services to deliver cost-effective and profitable solutions to the connected consumer, which predominantly started in India. World Finance spoke to Ravi Pratap Singh, President and Head of Global Product Management at Nucleus Software Exports Ltd, to discuss how in India, financial-related IT companies are playing an essential role in bringing these services to the masses. “These are exciting and challenging times for the Indian banking industry. India is definitely an important market in the global banking scenario. Customers are redefining the agenda, and excellent customer service has replaced financial stability as the primary reason for maintaining banking relationships.”

Such a monumental shift, however, requires a great deal of adaptability on the part of India’s financial services, and without the backing of capable IT companies, most would not be in the strong position they are today. “The growth trajectory in the Indian banking market has been different from mature markets of the world. A key role is being played by financial inclusion, which is enabled by growing trends of mobility and increasing adaptation of technology,” says Singh. “Nucleus Software’s product development strategy leverages technology as an enabler to enhance business value and operational experience for our customers.”

Spearheading international coverage
The company has been a leading player in the IT products and services sector for nearly three decades, and is internationally renowned for being one of the early pioneers to have cemented India’s high standing in the IT space. “Nucleus Software is committed to providing efficient and cutting edge software solutions for the banking and financial services industry across the globe. For over 27 years, we have been developing path-breaking IT products and solutions for retail and corporate banking, auto finance, Islamic lending, cards and cash management,” says Singh. “We are aware of not just the IT products and software solution requirements, but of the overall expectations of our customers and the changing dynamics of the technology environment.”

The company has been a leading player in the IT products and services sector for nearly three decades

Throughout the firm’s history it has established a network of international offices spanning nine countries, and today boasts an impressive track record of delivering results worldwide. “We are well equipped to serve customers globally through our sales presence across geographies including Europe, US, Asia and the Middle East. The company is an acknowledged market leader in IT products, and we are determined to expand this growth story through our unique people capabilities,” says Singh.

Not content with its already impressive customer base, the company is gearing up to expand to yet more countries in the near future, paying particular attention to those in major and emerging financial hubs. “Always a step ahead in this advancing industry, all our sales and marketing efforts are focused on taking our growth story to the next level through customer centricity, market penetration and new platform initiatives” says Singh.

“We are working continuously with our customers across the globe to understand their diverse needs and provide robust solutions that empower banks to stay ahead of the curve. The company’s robust portfolio of IT products and solutions in the global banking and financial services industry has been delivering value consistently over the last 27 years, and it offers a unique blend of domain and technology expertise to define the future of global banking industry.”

Although the market for financial services is carrying a great deal of momentum in India, the technological transformation is not necessarily specific to any one country, and IT services are proving crucial for firms across the globe. “Instant is the keyword here. Be it responses, decisions, information or options, today’s customers expect it immediately,” says Singh. “Factors such as trust, perceived service quality, perceived customer value, including functional value and emotional value, contribute to generating customer satisfaction.

“In the face of evolving customer behaviour and expectations, it has become imperative for banks to listen and understand the voice of the customer as input in shaping their strategies. Starting with the advent of the ATM, followed by phone, internet and mobile banking, the last couple of decades have been characterised by the emergence of anytime, anywhere banking.”

Cutting against the grain
IT adoption in the BFSI industry has matured by huge margins in recent years, and firms across the globe are now looking to IT solutions in order to differentiate themselves from their competitors. As a result, those in the industry are investing heavily in IT applications to better align business processes and improve internal efficiencies, as a host of key focus areas are driving the adoption of IT in the vertical.

“As customers become more sophisticated, globally banks have no choice but to revamp their technology platforms to meet changing demands. This means a surge in technology needs for banks. Right from tracking value based services to analytics, to customised, rationalised, simple and agile systems, to where customers spend their time (phone, tablet, voice) and how they interact. To gain a better contextual understanding of customer preferences for optimising channels based on the nature of the interaction and preference, financial institutions are looking at reaping the benefits of the all-channel experience. Financial institutions need technologies that can enable them to deliver innovative, tailored, touch-point banking services.”

Central to financial services in the digital age is mobile compatibility, which is particularly useful for connecting customers who might otherwise be unable to access a conventional branch network. “The adoption of mobile phones by end users is gaining traction, and banks must be ready to serve this requirement. Mobile devices are ideal channels for empowering sales and servicing teams on the street to deliver an instant service delivery experience to the customer, and banks are no longer looking at mobility as just another delivery channel,” says Singh.

“With a sharp rise in smart phones and increase in capability, mobility has already become a strategic channel for banking services. It is set to take virtual banking to the next level with more customers using the facility for banking services and demanding more from their device. Over the past three to five years, mobility applications are steadily being transformed from tactical applications to enterprise applications. Clearly, mobility is here to stay.”

The immediate challenges for financial firms, according to Nucleus Software, are various, but can be broken down broadly into five major areas. “Financial institutions of all shapes and sizes are going through a period of strategic transformation. These institutions are attending to a wide range of issues simultaneously – some more visible and fast moving, others more fundamental and long-term,” says Singh.

For one, banks will look to decentralise their distribution channels, either by disbanding or restructuring, as a greater proportion of customers take instead to internet or mobile solutions. Banks will become far more flexible in the future, compartmentalising their operating models and supporting them with flexible and configurable architectures, where each component operates independently, or at least loosely connected to industry hubs.

Nucleus Software also expects to see new service orientated architecture emerge in banking, including cloud computing, as firms seek to identify the most effective mechanisms for componentised, service-orientated IT. What’s more, the age of universal banking will soon come to an end, as basic banking activities will be split from riskier corporate and investment counterparts, and no longer share the same funding resources, liquidity and capital base.

Overall, banks will be looking to cut costs wherever possible, primarily by implementing longer-term sustainable cost reduction measures such as straight through processing, first-time resolution and self-service channels. Consequently, banks will be looking to further eliminate paper, automate processes and retire physical infrastructure to streamline their operating environments.

If those in the financial services industry are to enhance operational efficiencies and enable profitable growth, they must first realise the importance of an improved upon IT infrastructure in cutting costs and streamlining processes. It’s clear that IT companies will play a large part in the sector as it marches on into the digital age. The importance of companies much like Nucleus Software, therefore, should not be underestimated.

“Nucleus Software delivers value and end-to-end solutions, enabling its customers to get to the markets faster. We have extremely strong relationships with our customers. Going forward, we will continue working on expanding our base in new and select markets. The company comprises of an extremely passionate and diverse group of people who are working to bring cutting edge financial software products to the market.”