Regulators Hold Industry Accountable

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Regulators Hold Industry Accountable

EU regulators are making it harder than ever for brokers to rip you off, it’s about time.

Is CySEC Losing Control?

A wave of new regulations is taking effect in the EU. Binary options brokers are going to find it harder than ever to operate without a license and to use loopholes in the laws to prevent traders from making withdrawals. Does this mean that CySEC is losing control? No, only that the effort to regulate a once unregulated industry has taken root and now been brought to a multi-national, pan EU level. The first such development was the addition of laws specifically pertaining to binary options and forex trading in the newest update to the MiFID. The latest is an announcement from the ESMA, the European Securities Markets Authority (a body overseeing trading markets throughout the EU), that all regulated brokers must stop offering any bonuses tied to extra trading.

What this means is that bonuses tied to trading volume are to be suspended. This includes any and all forms of deposit bonuses that come with turnover requirements. The reason is because of the psychological effect such bonuses have on traders, encouraging them to trade more, which is the very reason the brokers use them. Bonuses have long been the top tool for attracting, onboarding and retaining clients so the new law will surely have an impact on the brokers. Enforcement of the law will come down to the local regulators in each jurisdiction.

In response to mounting regulatory pressure the European Brokers Association, EUROBOA, has met for the second time to hammer out details of its agenda. At this meeting members unanimously agreed that there was need for brokers and platform providers to conform to a basic set of guidelines to avoid malpractices within the industry that are harmful to the customers, give binary options a bad name and to encourage cooperation with the regulators. At the meeting an industry code of conduct was also begun. The next step is to continue meeting with the regulators, both EU and local, to promote open lines of communication and foster good relations.

Anyoption has once again proven itself to be the leading broker in the EU. The company, through its parent Ourobouros Derivative Trading, has received a license from CySEC to offer portfolio management and investment advice to its clients. This is a huge step forward in binary trading as it is the first legal, and supposedly reliable, portfolio and investment services ever offered by a binary options brokers. Anyoption CEO Shay Datika says they are excited about the license and the new range of products they will be able to bring to the market. They will be different than the traditional binary trading and likely to spark a trend in the industry. Anyoption has also recently received regulation in South Africa making it the top choice for traders in that country.

The bonus is that once again binary options have become a little safer so that we can continue to trade without fear of losing our deposits, our profits and our sanity. The best part is that bonuses will likely not disappear completely. Bonuses not tied to trading volume, bonuses that do not require turnover before making withdrawals already exist at brokers like Marketsworld and elsewhere, all you have to do is look for them. They are a reward for trading volume, are paid only after you trade a certain amount and offered as a reward to clients instead of an incentive. I have no doubt we will be seeing more of these in the future.

U.K. Regulators Urged to Hold Firms and Individuals Accountable for “Unacceptable” Number of IT Failures

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The UK government’s Treasury Select Committee is raising the stakes on accountability for IT failures within the financial services industry, describing the current level and frequency of operational disruption and consumer harm as “unacceptable” in a report published on 28 October.

“With bank branches and cash machines disappearing, customers are increasingly expected to rely on online banking services. These services, however, have been significantly disrupted due to IT failures, harming customers left without access to their financial services,” according to the committee’s statement on the report. “While completely uninterrupted access to banking services is not achievable, prolonged IT failures should not be tolerated.”

Strong Demand for Accountability

Over the past year, UK regulators have been reexamining the current supervisory approaches to operational resilience with the goal of developing a framework that aligns better with the assumption that failures are bound to happen, and institutions need to be better prepared for when, not if, those adverse events occur. The committee’s report is the latest indication that operational resilience supervision is gearing up to become one of the largest regulatory and compliance obligations financial organizations face in the coming years. Although the committee does not have direct supervisory powers over the financial industry, it is influential in directing policy, and UK regulators are accountable to it in the exercise of their work.

While the role of regulators in supervising operational resilience is still developing, the committee has specific views on where the ongoing effort should be heading. For instance, it wants not just banks to be held more accountable but also individuals within the sector who are responsible for services compromised by IT outage and failure. The committee also extends its demand for accountability to regulators, who are the target of some of the strongest language in the report. For instance, the report states that regulators “must have teeth and be seen to have teeth” to ensure accountability for failures. The regulators are encouraged to use the tools at their disposal to hold individuals and firms to account for their role in IT failures and poor operational resilience and to apply their enforcement powers to ensure failures do not go unpunished.

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“If future incidents occur without sanction, Parliament should consider whether the regulators’ enforcement powers are fit for purpose,” the report states.

Additionally, the committee calls on regulators to:

  • Intervene to improve operational resilience and have the skills and experience necessary to do so – and, if necessary, raise a levy in order to have the appropriate funding.
  • Prevent the industry from setting tolerance for disruption so high that it leads to lax operational resilience.
  • Ensure banks cannot use the cost or difficulty of upgrades as excuses to not make vital upgrades to legacy systems.
  • Adopt proactive measures to protect customers from firms that may be cutting corners when implementing change programmes in response to time and costs pressures.
  • Bring within the regulatory perimeter systemically important cloud providers such as Microsoft, Google and Amazon, especially given the concentration risk they potentially present.

What It Means for the Financial Industry

With the latest report, individuals most closely connected with operational resilience and involved in making key decisions over budgets and resources connected with IT change implementation are now on notice. This is particularly true for individuals who are in the scope of the Senior Managers Regime (SMR), the accountability and responsibility regime introduced after the financial crisis to hold individuals within the U.K. financial services sector accountable for conduct and prudential risks. It is worth noting that the committee recommends that the SMR be expanded to include Financial Market Infrastructure firms, such as payment systems.

Financial institutions need to make sure they can respond when an IT outage does occur, remembering the “three Cs” that make up an effective response plan:

  • Communication – provide clear, timely and accurate communication
  • Complaints – handle and respond to complaints effectively
  • Compensation – determine and pay out compensation quickly

Questions for Boards and Senior Management

Going forward, institutions should be prepared for increased regulatory scrutiny of their resilience practices. This includes being able to demonstrate that they have identified critical business services and functions and are monitoring and testing their resilience against worst-case scenarios. They should be prepared to provide assurances to regulators that they have set appropriate impact tolerances around the level of disruption they can absorb if their most important business services fail. Firms should also be prepared to show that they have implemented systems and processes that would allow them to continue to provide services in an extreme but plausible event.

The following questions should help stimulate a discussion on operational resilience at the board level and among the senior management team:

  • What is your organisation’s operational resilience response? How can you demonstrate that the end customer is central to the operational resilience response? In what ways is the topic of operational resilience viewed as a conduct risk as much as an IT or organisational issue? How consistently and accurately do you capture data and report on the impact of IT failures and outages on customers?
  • Which scenarios does the organisation use to determine and test its response to an operational resilience event? How can the organisation demonstrate the scenarios are extreme but plausible in the same way that financial stress tests examine the resilience of the organisation’s capital?
  • Do the scenarios include a customer and other stakeholder communication plan, identifying and responding promptly to complaints and resolving compensation claims? Does the organisation have the agility to efficiently mobilise an effective response within a short timeframe? How have the “three Cs” been tested and processes demonstrated to be effective?
  • Which legacy systems are critical to the institution’s services to customers and what is a realistic assessment of their vulnerabilities? What is the longer-term strategy for legacy systems, to upgrade or replace them?
  • How does the cost/benefit analysis, return on investment or business case for upgrading or replacing legacy systems demonstrate the level of urgency expected and the risk of disruption to customers?

Regulators: Hold Insurers Accountable For Annuity Sales Incentives

An insurance commissioners’ working group wants to hold insurers to a greater responsibility for agent compensation standards for annuity sales.

The Annuity Suitability Working Group is working through five questions in a bid to finalize an annuity sales model law that regulators have been working on for more than a year. On a Tuesday conference call, members debated Question 1:

What constitutes a material conflict of interest when recommending annuities?

Setting rules for carriers to better control conflicts related to bonuses, sales contests and trips might be the best solution, said Iowa Insurance Commissioner Doug Ommen, vice chairman of the working group.

But Dean Cameron, director of the Idaho Department of Insurance, needed some convincing.

“Everybody expects that the agent or the entity that is helping the consumer is going to get paid, is going to be compensated, and I don’t see that as a problem at all,” said Cameron, former chairman of the group. “Maybe they’re motivated by a trip, but rarely will they know where their standard is, or how close they are, until it gets to the end of the year.”

“I think the biggest problems are the impressions created when the sales quota or even the bonus is tied to a specific product,” Ommen explained. “The problems are those practices that may involve incentivizing specific products.”

Producers might not even be aware of some of those practices, but insurers are in the best position to eliminate them, he added.

Ommen stressed that he is not suggesting insurers infringe on the free market by, for example, setting comp rates as an industry.

‘An Obvious Conflict’

Regulators had no interest in a California suggestion, articulated in a comment letter, that all incentives, including commissions, be declared a “material conflict of interest.”

“The higher the commission, the higher the conflict of interest,” said Jodi S. Lerner, attorney for the California Department of Insurance. “If you’re going to get some exorbitant commission, it’s an obvious conflict.”

Last week, California Insurance Commissioner Ricardo Lara told InsuranceNewsNet that his department would push for a tough New York-style annuity sales standard if he feels the eventual NAIC model falls short.

“I definitely want us to get away from the idea that the mere fact that you’re being compensated means you’re not going to act in someone’s best interest,” said Lorrie Brouse, deputy commissioner and general counsel for the Tennessee Department of Commerce and Insurance.

“I do have a concern that we overregulate” to the point that no one wants to enter the marketplace, Brouse added.

The group is now chaired by Jillian Froment, who broke the conflict of interest discussion into three “buckets”: commissions, incentives and ownership interest.

Put Consumers First

Birny Birnbaum, executive director if the Center for Economic Justice, pushed for a pure best-interest standard that puts the consumer first.

“Commission-based compensation should be designed to reward producers for sales that remain in force – consistent with the investment nature of the annuity products – as opposed to compensation that rewards producers only for sales,” he wrote in a comment letter.

That means focusing on the insurers and the IMOs designing the compensation structures, he said during the conference call.

The working group will hold another 90-minute conference call Monday, then meet in person Aug. 3 for the National Association of Insurance Commissioners’ Summer Meeting in New York City.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected] . Follow him on Twitter @INNJohnH.

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