This Report Will Investigate A
This report will investigate a range of issues all within the international context of financial regulations. The report will be sectioned into 3 areas of discussion, situated in the core of the report.
The first section will assess the two main drivers of a banking crisis, how the use of these drivers could benefit the financial industry and how IFRS could support these matters while evaluating benefits and challenges of this regulation.
The second discussion will explore the growing industry of FinTech, detailing the advantages of this modern technology. In addition to this, the use and views of FinTech in various countries will be investigated and how international countries could develop their own solutions to FinTech’s risks.
The third section will consider an EU financial regulation which has many uses, similarities/differences to MIFID II. This section will focus on explaining the concerns the EU ETF market faces due to PRIIP compliance.
Several professionals argue that the drivers of a banking crisis include lack of transparency and disclosure (Rosengren, 1999). Transparency allows for sharper communication, increases public assurance and consciousness of risks as disclosure assists in stabilisation in international financial markets, by distributing information on financial data and financial risks (PwC, 2018). A strong advantage is that firms facing bankruptcy and signs of failure are urged to discontinue, through supervision of regular admission of firm activities, financial data and rising risks (Rosengren, 1999). To simplify the use of these procedures, the International Accounting Standards Committee introduced the ‘International Financial Reporting Standards’ with the aim of providing transparency and disclosure through a mutual financial language allowing simpler financial statements for the currently adapted 90 countries (IFRS, 2018), enabling flexible and equal trading minus bureaucracy complications such as differing documentations, legislation and standards. Another key benefit of IFRS is that small-time investors sense equivalence through interaction with larger investors by sharing international reporting standards (Lombardo, 2018). While IFRS has been successful, a vital strain upon IFRS is the US, which is the world’s biggest economy (Smith, 2018), refusing compliance with IFRS due to various reasons, a statement by the Office of the Chief Accountant, SEC specified, “Investors do not believe that high-quality standards should be compromised for the sake of uniformity.” (Michael, 2018) Countries compliant to IFRS face several implications from US’s non-compliance. A particular impact being; IFRS identifies profits and losses in less time, indicating IFRS is steadier than GAAP. A main prevention is the adaptation from GAAP to IFRS involves extensive costs, estimating a cost of $8 billion for US firms (Michael, 2018).
FinTech is “a multi-billion-dollar industry” (CNBC, 2018) and is advancing universally, short for ‘Financial Technology’ – FinTech has the purpose of providing a broad variety of financial services to support firms and consumers in handling financial procedures through technology. The investments into FinTech companies over the years 2012-2018 highlights the success it has gained on an international scale. Appendix 1 demonstrates 2018’s second quarter excelling previous quarters (2012-2018) in which around 450 investments into FinTech companies were estimated over $31.7 billion (KPMG International, 2018). A publication issued by the Australian government reports an important benefit of FinTech explaining how it reduces factors of market failure such as asymmetric information (Australian Government, 2016)
due to the use of big data analytics – a technological procedure of investigating complicated information and thorough analysis of concealed data to deliver accurate and transparent product information directing consumers towards an informed decision (Yan et al. 2015). Another fact linked to Fintech; is the fall in use of cash while digital payment and banking usage intensify. The UK’s adaptation to FinTech is visible through statistics as 126 million contactless payments occurred via mobile in 2017 – approximately £975 million worth of payments (Finextra Research, 2018). It is also reported, in 2015, that 4 in 10 adults (37%) use online banking (The Financial Capability Strategy for Scotland, 2016). The question that remains; can FinTech be trusted in mobile devices? Many banks in Asia use mobiles to their advantage as an “authentication tool” (Skinner, 2016) by requiring both mobile and bank card present to confirm customer identity. The hidden technique in this enables the bank to trace the geolocation of the user through “mobile transmitting masts” which indicate if the customer is in possession of the mobile (Skinner, 2016). The majority of the UK is embracing the industry changes however, the issues remain. Fintech firms were also significantly affected by the EU’s General Data Protection (GDPR) regulation as firms faced criteria’s involving further expenses, time, training and materials to ensure compliance (Global Banking & Finance Review, 2018).
PRIIPS, KID & MifID II
‘Packaged Retail and Insurance based Investment Products’ is a regulation introduced on 1st of January 2018 by the European Commission, having the purpose of regulating EU markets through providing support to investors by fully recognising characteristics such as potential risks, costs and performance (FCA, 2015). The main result that PRIIPS desires to achieve is to provide adequate information, in the form of a 3 page ‘KID’ – Key Information Document, to investors allowing them to make an “informed investment decision” while the main advantage of this is to allow clients to carefully compare products to make sure they have made the right decision (HSBC Private Bank, n.d.). MIFID II and PRIIPS are two separate regulations focusing on diverse areas in the financial industry – they still share a number of similarities. One of the similarities is; both regulations “require pre-sale disclosure” prior to a product transaction in which a KID is presented or under MIFID II – an ex-ante disclosure. A critical difference is; PRIIPS enable the investor to make an informed decision based on the KID and the information it entails. However, MIFID II, allows investors to benefit from pre-sale information additional to permitting investors access to continuous financial evaluations (Bates, 2017). A challenge triggered by PRIIP regulation is influential on the EU ETF (Exchanged Traded Fund) market. “The five largest US-domiciled ETFs alone are bigger than the entire European ETF market.” (Riedl, 2018) However, the US does not comply with PRIIP as it requires a KID to provide comparable information for EU investors who are a minority in the US ETF markets (Riedl, 2018). Therefore, EU is unable to operate in US ETF markets due to PRIIP regulations, in particular, ‘SPY’ – the world’s largest ETF market (Vannucci, 2018). Bloomberg’s Intelligence Analyst, Eric Balhunas, claimed: “This could actually be a blessing in disguise.” (Vannucci, 2018) Emphasising that other functioning EU ETF markets have been neglected for US markets. Bloomberg analysts state MIFID II will encourage EU ETF’s as “Bloomberg Intelligence estimating retail investors turning to the securities could help assets more than double to about $2 trillion in five years.” (Vannucci, 2018) Conclusion
This report has found significant information focusing heavily on EU financial regulations, which is important as EU regulations can impact on an international scale, this is shown through particular examples of how these regulations had impacted or how the EU was impacted by the reactions of countries outside of the EU region. It also assesses how the EU benefited but was also disadvantaged by the introduction of PRIIP. Another topic of interest in this report is the merging of financial services and technology, highlighting how the advancing industry, FinTech, is able to provide such accessible services regardless of how confidential they are such as online banking.
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