Regulation and Resolution: The Future of Banking?

Banker signing paper

From this side of the Atlantic, the European Union (EU) can seem like a weird thing—most of us aren’t exactly sure when it started, how far it stretches or even what it exactly is. What we do know is that it’s a case study in constant evolution: It dates back to at least the ’50s, when six nations formed the European Coal and Steel Community and, later, the European Economic Community. However, the current European Union actually takes its name and primary structure from the Maastricht Treaty of 1993. The monetary union, the source of the Euro, was born in 1999; the constitutional basis for the EU, the Treaty of Lisbon, arrived 10 years later; and countries are still joining (Croatia became a member only last year).

Of course, as a unified entity, the EU still seems a little bit strange. But the potential for superpower status is clearly there, which may be one reason why it was awarded the Nobel Peace Prize in 2012.

And then we get to March 2014. That’s when, after protracted negotiations, the last piece of the puzzle fell into place for an all-purpose European banking authority that will, at least by design, be better equipped to handle industry crashes, especially the kind that might have a domino effect. Most importantly, the entity has the regulatory authority to restructure, sell off or even shut down failing banks.

The move is a direct response to recent disasters that had catastrophic consequences for many institutions. Even entire nations have been similarly affected, most famously when a series bank failures and attempted bailouts virtually bankrupted Ireland and sparked major scandals. And whenever this happened, of course, other organizations and governments had to step into the breach, forcing taxpayers in one country to pay for the mistakes of financial services corporations in others.


To its credit, the new entity is designed to look forward rather than just back. The European Central Bank (ECB) has already been doing due diligence on larger financial services institutions to look for potential minefields. It won’t be a huge surprise if it does find problems. Meanwhile, the Resolution Board, as it’s called, has a two-pronged mandate.

First, it takes the power of supervision away from local regulators, who might be too close to the corporations they’re supposed to be monitoring. (They might also turn a blind eye to avoid making national institutions look bad.)  More important, perhaps, is the other function, which entails setting up a fund that is empowered to take essentially unilateral action on lenders that are deemed to be in trouble. In these instances, the fund can order a restructuring, sale or even shutdown (in some cases there will be other steps necessary). The fund will have in its coffers $76 billion to conduct these rescues as needed, with the money to be raised through levies on the industry.

The intent, of course, is to protect taxpayers from having to foot the bill for bad decisions made by bank executives. It should also help send a message of stability to financial markets everywhere. These are laudable goals, surely, but will it work?

To be clear, the Resolution Board doesn’t even exist yet. It won’t launch until next year, and contributions to the fund will start the year after that. There are also objections being raised to the effect that the agreement doesn’t go far enough. Some argue that in order to be truly effective, the new entity should be completely independent, rather than tied to an industry authority like the ECB, which has its own connections to national interests. But for those who want strong regulation, it’s clearly a start.

That brings us back to these shores. As we all remember from recent history, the United States has had its share of crashing banks, taxpayer-funded bailouts and accusations of lax regulation. Is there anything for us to learn from what the European Union is doing?

 

Bribery, Corruption, Money Laundering: Banks in the Crosshairs, Part 1

Contributor Christine Moran

Contributor Christine Moran

This is Part 1 of a two-part series from FTI Consulting. Read the first part here.

The volume and pace of transactions in global financial markets – magnified and accelerated by new technologies – is mind-boggling. It has been estimated, for example, that every day there is $2.9 trillion worth of stocks, bonds and derivatives traded in U.S. financial markets.   It’s easy to see how this makes monitoring both client onboarding and financial transactions monumentally difficult.

For instance, in recent months an internal Vatican Bank investigation found that it had not been adequately vetting account holders, allowing criminals to launder money and transfer large sums via proxies. Last summer, German regulatory agency BaFin found Deutche Bank, with over €2 trillion in assets, laggard in reporting suspicious transactions to police due to inadequate internal controls.

Governments and regulatory bodies are well aware of the difficulty of policing transactional activity, as well as violations of international sanctions against countries with ties to terrorism, or with poor human rights records. Understaffed and underfunded, these bodies would like to shift their burden to the financial institutions, seeing that as the only way to keep ill-gotten money out of the financial system and to de-fund criminals and terrorists. And they are driving this agenda with a flurry of fines.

Contributor Peter Brooke

Contributor Peter Brooke

U.S. enforcement authorities, flexing their regulatory muscles, recently have imposed fines for sanctions breaches on Lloyds Banking Group ($350 million), Barclays ($298 million), and Standard Chartered ($327 million).  In the UK, the Financial Services Authority imposed a fine of £5.6 million on RBS for similar transgressions.

The U.S. Department of Justice and the Securities Exchange Commission are using the Bank Secrecy and Foreign Corrupt Practices acts to demand greater due diligence from all parties involved in transactions, holding them responsible for both sins of commission (such as facilitating money laundering or committing sanctions breaches) and omission (failing to implement sufficiently strong internal controls against either or both). In short, governments are making it clear that they will not tolerate what they deem to be reckless conduct on the part of financial institutions, or what they see as a weak commitment to abiding by international rules regarding sanctions and money laundering.

Financial institutions argue that the expectation that they can act as a branch of law enforcement is unreasonable. They cannot, they say, monitor every transaction or client with 100 percent certainty or make their businesses risk-free. They say the investment they must make in people, processes and technology to attempt to comply with regulations and avoid being implicated in financial crime places a massive strain on their resources. And, they point out, there is a limited pool of experienced people they can draw upon to lead, manage and run anti-money laundering and sanctions compliance programs.

In this debate, financial institutions are bound to lose. They have no choice but to get smarter about both client and transactional risk, and do more about them.

This will require top-level leadership, and a risk-based approach to mitigating financial and transactional risk. In part two of this article, we will discuss how financial institutions can do this.

 

Peter Brooke and Christine Moran are Managing Directors in the Governance, Risk and Regulation team at FTI Consulting, based in London.

Peter Brooke is an experienced Risk and Regulation Consultant at FTI Consulting, based in London. With a unique blend of in-house and consulting experience, Mr Brooke has worked in financial services for more than 24 years.

As a highly experienced Group Head of Compliance, Christine Moran is an energetic consultant at FTI Consulting. Based in London, Ms. Moran has a highly collaborative, grounded and commercial approach. She has a proven track record of building enhanced and effective compliance and regulatory risk arrangements in both retail and institutional businesses.

What We’re Reading: Mobile Banking, Google Glass and Regulation

Below are interesting stories the Banking.com staff has been reading over the past week. What have you been reading? Let us know in the comments section below or Tweet @bankingdotcom.

 

  • Google Glass Dazzles Reporter. Will Bankers Feel the Same?

American Banker

Some of the mobile app features banks already offer, including augmented reality (read: PNC’s ATM Finder app), account information lookups, and geolocation, could eventually be incorporated into Google Glass. The project was first announced last year. It was later offered to coders at the company’s developer conference, Google I/O. On a recent Google Hangout, tech blogger Robert Scoble said that at least one bank overseas is already creating a version of its mobile banking app that will work on Glass.
Read more

  • Mobile Banking Activity Rises in May

American Banker

Along with temperatures in most parts of the country, mobile banking activity continued to increase in May. The overall value of American Banker’s Mobile Banking Intensity Index was 73.8 for that month, a significant increase over April’s value of 70.4. Many of the bankers surveyed for the index said adoption of mobile banking continues to grow as more customers become comfortable with it. The MBII is a diffusion index; For context, readings above 50 in a diffusion index indicate expansion and readings below 50 point to contraction.

Read more

  • Is Mobile Guidance on the Way?

Bank Info Security

U.S. banking institutions should be bracing now for new mobile banking and payments security guidelines from regulators or updates to existing guidance, a growing number of banking leaders and mobile experts are concluding. Recent discussions among regulators and banking leaders about mobile risks, as well as the issuance of papers related to mobile best practices, suggest some type of security update related to mobile is on the way. Doug Johnson, vice president of risk management policy for the American Bankers Association, says the timing for more mobile guidance is right, and banking regulatory agencies are using different vehicles to push security recommendations.

Read more

  • Building Trust and Innovation through Digital Banking

Bank Systems & Technology

With online and mobile banking continuing to make deep inroads into consumers’ lives, it is time for banks to rethink how they attract and retain customers. Creating relationships with digital customers is critical if banks want to differentiate their brands and boost loyalty. Increasingly, banks can identify and mine a wealth of information about their customers – from social media and a variety of other digital sources – to make connections and draw insights that previously remained in silos or were unknown. By harnessing the power of digital channels, banks can move away from reactive, transaction-based customer relationships, towards a more personalized and proactive experience.

Read more

  • What Banks Need To Know About IFCPA

Bank Systems & Technology

In fact, starting July 1, Section 1244 of the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA) represents a significant expansion of activities and entities potentially subject to sanctions, including key Iranian industries such as energy, shipping, shipbuilding and automotive. This latest round of regulations not only presents several challenges to U.S. banks, but also greatly expands extra-territorial reach. The broadened mandates state the president reserves the right to impose sanctions on anyone who knowingly sells, supplies or transfers significant goods or services used in connection to the energy, shipping, automotive and shipbuilding industries, along with a ban on shipments of precious metals and other materials such as coal and graphite.

Read more

  • 21-Year-Old Raises Largest Seed Round In Silicon Valley History — $25 Million — For Mysterious Payments App

Business Insider

Twenty-one-year-old Lucas Duplan just raised more millions than his age. The first-time entrepreneur and recent Stanford graduate (he finished a computer science degree in three years) has been working on a mobile payment app for the past two years. He’s now been awarded $25 million from a long list of Silicon Valley investors which includes Andreessen Horowitz, Peter Thiel, Accel Partners’ Jim Breyer, Intel, Intuit, former Facebook COO Owen Van Natta, Salesforce CEO Marc Benioff, the founders of Qualcomm and VMware, and many others. The kicker: The app hasn’t launched yet and it isn’t going to for a few more months. Duplan’s 50-person team raised the entire $25 million – the largest seed round in Silicon Valley history – on a mere working prototype and a beta test at Stanford University.

Read more

  • Survey Finds ‘Impressive’ Interest In Mobile Picture Pay Solutions

Credit Union Journal

Mobile Picture Pay, a new service that lets end-users take pictures of bills to make payments, showed “impressive” results in April, according to a new study from Malauzai Software, Inc. Malauzai, a provider of mobile banking SmartApps, said data from its Monkey Insights service for April and based on 94 banks and CUs encompassing 1.1-million log-ins for 85,000 registered mobile banking users, found: With Mobile Picture Pay, 5% of active end-users have used the feature in the first 90 days of launch. End-users are making 1.57 Picture Pay payments per month. The average payment size for Picture Pay is $151, about 40% less than standard bill pay.

Read more

  • Paid via Card, Workers Feel Sting of Fees

New York Times

A growing number of American workers are confronting a frustrating predicament on payday: to get their wages, they must first pay a fee. For these largely hourly workers, paper paychecks and even direct deposit have been replaced by prepaid cards issued by their employers. But in the overwhelming majority of cases, using the card involves a fee. These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account, according to interviews with consumer lawyers, employees, and state and federal regulators.

Read more

 

Social Media Regulation – Part I: Adapting to New Policies

This is Part I of a two part post on American Banker’s “Banking Regulatory Update: New Social Media Rules” webinar. You can view Part II here.

Last week, the Banking.com team sat in on American Banker’s webinar, “Banking Regulatory Update: New Social Media Rules,” which detailed the current policies around social media use by financial institutions. Moderated by American Banker’s own Penny Crosman, the panel of presenters included:

With content ranging from how to establish a corporate social media policy, general best practices for social media, and analyzing the FFIEC guidance  and call for feedback on social media regulation, we wanted to take a deeper dive on the content and connect with some of the experts ourselves. We first spoke with webinar moderator, Penny Crosman, editor in chief of Bank Technology News and technology editor of American Banker.

 

Q: What social media policies have you seen banks and credit unions using that you think are effective?

Most of the social media policies I know of are dry, legalistic, and boilerplate. The policies drafted by large banks and Wall Street firms seem to be draconian – many don’t allow employees to even access social media sites (except for a few people who work in customer service and marketing). One reason for this is SEC rules that require banks to archive all emails – messages stored on social networks are difficult for a bank to monitor and store. The employees of these companies sometimes use their personal smartphones and tablets to access the sites. I know of Wall Street executives who have Twitter streams under aliases and protect their streams from being viewed by any but their close friends. Commonwealth Bank of Australia last year came out with a harsh policy that insisted that employees report “inappropriate or disparaging content and information stored or posted by others (including non-employees) in the social media environment” or risk being fired. These are examples of going overboard. Banks and credit unions need to find a way to comply with the necessary rules, yet encourage natural, positive engagement on social media. Citi, for one is finding success using software to identify and catch potential rule violations and route those to its legal group, while encouraging its customer services people to maintain friendly and helpful conversations with customers on Twitter and Facebook. I think more banks will turn to software to handle policy compliance, rather than expecting employees to keep all the rules in their heads.

Q: Do you think banks and credit unions are quickly learning how to adapt to these regulations?

Banks and their compliance departments are keeping a close eye on these regulations and are sure to have their own policies in place when the FFIEC publishes its final rules. They are already used to complying with the many existing consumer protection laws the FFIEC cites in its guidance. What some of them may end up doing is freezing all social media activity until they get their policies finalized and employee training conducted.

Q: What would you recommend as the first step for banks to develop social media policies and practices?

I think the logical first step would be to canvass all current social media activity – review all social media pages the bank maintains and ask employees what they’re doing on their own. The second step would be to hire or consult with a good lawyer who can parse out which aspects of the rules apply to the bank’s activities and help create a policy that would enable compliance.

Q: How do you think upcoming Facebook payments capabilities will affect banks’ interactions with social networks?

I think banks may eventually get involved with payments over social networks, but they may be the last to the party, largely because of the regulations they need to be careful of, such as the Electronic Funds Transfer Act. There are also security issues with social media payments, as social passwords are pretty easy to game. Authentication will be tricky and important. I expect banks will be very cautious about this.

 

Interested in hearing more? Check out Part II with our interview with Carl Pry, Senior Director, Treliant Risk Advisors who spoke to us about how he counsels financial institutions on their social media activities.

 

Social Media Regulation – Part II: Creating Your Social Media Policy

This is Part II of a two part post on American Banker’s “Banking Regulatory Update: New Social Media Rules” webinar. You can view Part I here.

Last week, the Banking.com team sat in on American Banker’s webinar, “Banking Regulatory Update: New Social Media Rules,” which detailed the current policies around social media use by financial institutions. Moderated by American Banker’s own Penny Crosman, the panel of presenters included:

Much of the content of the webinar dissected the implications of the FFIEC’s proposed guidance and how financial institutions can comply. As regulators are looking for feedback on the guidelines by March 23, we spoke to Carl Pry, Senior Director, Treliant Risk Advisors, to hear how FIs are currently reacting to the guidance.

 

Q: What have you seen as the number one risk management issue for financial institutions on social? Can you elaborate on a way to avoid this situation?

The most critical risk management issue for banks regarding social media is the lack of awareness and oversight. Many institutions are taking a wait-and-see approach when it comes to social media, to their detriment. Institutions that don’t address this issue in the present are missing an opportunity to connect with a demographic we all want to reach: the young and technologically capable. But the risk comes when taking a hands-off approach results in the illusion that the institution is simply not participating in social media. Chances are that you are – your employees are – using social media every day. Without a clear social media policy and procedures, without guidelines on what can and cannot be said, you may be violating certain laws and regulations without even knowing it.

Avoiding this situation means getting ahead of the curve by formulating and implementing clear company-wide policies and procedures addressing social media. They should be comprehensive and deal with both company and employee usage of social media. Also, set clear guidelines for consumers and your customers who utilized your bank’s social media sites, as well.

Q: Do you think banks and credit unions should use Twitter and Facebook as customer service channels at all? Why?

Absolutely, although within limits. These are channels your customers are already using in their everyday lives, so why ignore them? They have the advantage of providing more immediate responses than snail mail, that’s for sure. But be aware of the limitations of social media, such as the 140-character limit of Twitter. Can you say what you want to say within 140 characters? For customer service usage, also understand what different social media sites do. You might not want to broadcast specific responses to the masses. Know the way these channels operate and coordinate your responses accordingly.

Q: Do you have any tips for HR policies or training for employees using social media?

Most importantly, make clear to employees what the parameters of usage are. Not how much time they spend on social media, but content of postings. If an employee is posting anything on behalf of the bank, make sure it is subject to the same control and review mechanisms you’d employ for any other sort of communication (such as email). But also be clear as to the expectations of employees posting things on their own accounts regarding their employment or the institution’s products and services. They should know the limits of what not to say, and that if they discuss the bank’s business, all appropriate legal and compliance requirements likely apply.

 

To hear more, check out Part I and our interview with Penny Crosman, editor in chief of Bank Technology News and technology editor of American Banker who shared her thoughts on banks adapting to new guidelines and regulation.