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Insurance which works for you is something that yet to be invented

The FCA case study page 17:

Rob, 44, lives is a large detached house in the countryside, with his wife and his 2 children. Rob is now a wedding photographer, after previously being an aerospace engineer.
Rob only recently changed professions, as three years ago his contract as an aerospace engineer came to a sudden end. Unfortunately, this happened just after he had committed to buying a new house, a house which was a significant step up from his previous home (£150,000 more than the current property at the time). He was out of work and without an income for a year, so his financial situation was impacted,
also affecting his mental health and relationship.
The loss of income did not impact on the house purchase as Rob and his wife had a large savings pot and did not have any outstanding debts. However, it did impact on their lifestyle, as they had to avoid some of the previous luxuries they had been used to.
Rob sees himself as very financially savvy and does tend to shop around for financial products. However, he hasn’t reviewed his mortgage, current account or his car insurance for some time, as he feels he already has the best deals.

In October 2017 Rob’s property was damaged by a storm. The storm caused considerable damage to his large electric gates. Rob contacted his home insurance provider to make a claim.

The initial call hander he spoke to informed him that the repairs to his gates would be covered by his policy. Rob sent a claim for the cost of restoring the gates to the insurer when he was then informed that they would not cover the costs, as the gates were classed as fencing which is  not included under the policy. He later realised that this was mentioned in the small print of the policy documents.

If you want to replace the insurer, instead of paying the premium for the insurance companies, make a monthly provision. In case something goes wrong, you can always trust yourself.

Nice research – An estimated 2.6 million UK consumers have bought cryptoassets at some point, new FCA research reveals.

It is nice, since it comes from independent organization. Some highlights from the research:

The FCA commissioned research to gain insight into the size of the market and identify
potential harm. Through a nationally representative survey of 2,132 UK consumers and 31 in-depth interviews, this research provided invaluable insights into the size of the market and where potential harms could be found. It concluded that the size of the market was relatively small with 3% of consumers having ever bought cryptoassets, spending on average £200. It also showed that awareness of cryptoassets among the general population was low.

The FCA chose to use the term ‘cryptocurrency’ throughout the research. This
term is more widely used in public domain than the broader ‘cryptoasset’ term it tend to prefer. The FCA also use ‘exchange’ to represent ‘cryptoasset trading platforms’, given
‘exchange’ is widely understood and used by consumers.

Most cryptocurrency owners appear to understand the lack of regulatory protections and demonstrate some awareness of the technology underpinning cryptocurrencies. Also, they acknowledge that prices are highly volatile and may fall.

Consumers appear increasingly aware of cryptocurrencies, as 27% had never heard of
cryptocurrencies this year, compared with 58% in our survey last year. The number of
consumers aware of cryptocurrencies has significantly increased. A possible explanation
for this increase in awareness may relate to the increased media presence. Bitcoin was
the most recognised cryptocurrency and, whilst Libra does not yet exist as a  cryptocurrency, 22% had heard of Libra. The list of cryptocurrencies included unlaunched ones (Libra), to capture awareness of potential cryptocurrency players.

When asked why they bought cryptocurrencies, 47% said they bought cryptocurrencies
‘as a gamble that could make or lose money’ compared with 31% in the 2019 consumer
research (noting this year’s survey was online whilst last years was face to face) as one
of the main reasons.

More people are first hearing about cryptocurrencies through the media, with ‘traditional media’ being the place where people are most likely to have first heard about cryptocurrencies.

Over 25% use cryptocurrencies to purchase goods and services, nearly half have never done anything with them, suggesting people purchase them with the hope of making a return.
In general, cryptocurrency holders expect to hold them for long periods of time.

According to the research, we can conclude that Cryptoassets, at the moment, are more like gold or commodity, rather than a currency (place to store value rather than a currency like EUR/GBP/USD).

 

Modernizing is always the best practice

3,476,141 non-professionals were monthly subscribers to data for NYSE-listed securities in the fourth quarter of 2019. These users generally are retail investors, obtaining data by requesting quotes from their brokers.

National Best Bid and Offer (NBBO) is a regulation by the United States Securities and Exchange Commission that requires brokers to execute customer trades at the best available (lowest) ask price when buying securities, and the best available (highest) bid price when selling securities, as governed by Regulation NMS.

On physics, there are unavoidable limitations due to the speed of light—and the speed of fiber optic cable.  This means that, as long as users are not all in the exact same location—which they are not—information cannot reach all users at exactly the same time.  As a result, the NBBO at one location will vary slightly from the NBBO at another location.

Today, hundreds of firms are located in different locations.  Some buy NMS market data, some aggregate proprietary data.  Some get their data over fiber.  Some get their data over microwave towers.  Anyhow, you get the point. There is no one NBBO in a world where markets are quoting and trading in nanoseconds.

According to Director Brett Redfearn, today, the best-priced offer for a higher-priced stock in NMS market data may be 100 shares for $400.50, while the exchange proprietary data feeds may have a 20-share offer at $400.45.  If a retail investor places a 20-share buy order and it is executed at $400.48, the executing venue is entitled to report that the retail investor received two cents for price improvement.  This is true even though an odd-lot quote on the exchange proprietary data feeds was readily available at a price that was three cents better than the “price-improved” execution supposedly provided to the retail investor.

The SEC have hard work ahead, plenty of responsibilities, and they are doing it for us, in order to keep our funds safe. The future for sure will be different and modernize. Maybe, blockchain technology can assist, once it will become faster, only god knows. Hopefully, we get better prices in the future.

Is trading history simply information about an economic transaction with no expressive value or maybe it is time for more smart contracts?

Some people might say, “Of course it’s different: trading history is not protected expression; it is simply information about an economic transaction with no expressive value.” However, economic transactions offer a window into a person’s deepest thoughts and core values. Our purchases and sales of securities, particularly when aggregated together, are a rich form of value expression. They might express a view of how markets work, a determination on the efficiency of markets, expectations about the future, or even a moral philosophy. Investors’ trades may flow from a carefully crafted trading strategy based on a person’s education, careful data analysis, intuition, or market experience. People may trade to express their belief about how a company, industry, or nation will perform in the short- or long-term. People might sell stock because they fear a recession is coming or buy stock because they anticipate that the election of a particular candidate or party will bring a period of economic prosperity. An investor might buy shares of a movie company because she is sure a particular movie will be popular, shares of a technology company because he/she believes the company’s engineers are geniuses, or the shares of a cellphone provider because he/she believes a strategic merger is on the horizon.

According to SEC commissioner, Hester M. Peirce’s statement, we should not risk our freedom and privacy. If history is any guide, unauthorized access to, or disclosure of, the information contained in the Consolidated Audit Trail (CAT) is almost certainly just a matter of time.

Given these risks, the commissioner advise to eliminate the CAT, and if the Commission believes the program needs further improvement, it could enhance the current rules. The current regime provides the information needed, and incremental improvements to reduce delays and errors could make the commission investigations more efficient without sacrificing Americans’ liberty and privacy.

What if people will use smart contracts to buy shares and other securities? How will the SEC follow them? Does the SEC wants us to use smart contracts to get more privacy?

When the future is not connected to reality

On April 20th, the day prior to the last day of trading and expiration of the May futures contract for WTI, the price of the May futures contract fell from $17.73 per barrel at the market open to a closing settlement price of negative $37.63 per barrel.  In the last 20 minutes of trading, buying was scarce as the price dropped approximately $40 per barrel. As a result of this unprecedented collapse, the price of the May crude oil futures contract became disconnected from the price of crude oil in the physical market and other derivative instruments.

According to the CFTC, The WTI contract is a key benchmark in the energy and financial markets. Businesses use the contract to manage their risks arising from energy prices.  The contract also is used by financial market participants to manage inflationary and other risks correlated to energy prices.  The extreme divergence between the price of the WTI futures contract and prices in the physical market particularly affected the market.

According to the Energy Information Administration, the “extreme market events” just prior to the expiration of the May WTI futures contract were caused by a variety of factors, including “the inability of contract holders to find other market participants to sell the futures contracts,” and the “scarcity and high cost of available crude oil storage,” which forced market participants who were unable to take delivery to pay counterparties to take their contract—in essence, negative prices.

Do we need contracts who disconnected from its underline commodity? do we have too much financial innovation and we went too far? the CFTC will provide more answers soon, stay tune.

Who do you favour insurers or insured?

According to the FCA, most SME (small medium entities) insurance policies are focused on property damage (and only have basic cover for business interruption (BI) as a consequence of property damage) so, at least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic.

Some customers’ policies also cover for BI from other causes (for example in relation to infectious/notifiable diseases, non-damage denial of access and public authority closures/restrictions) and may in some cases provide cover. Whether there is cover for the business interruption related to the pandemic crisis will depend on a number of factors including the policy’s wording. The range of wordings and types of coverage are sufficiently broad in the BI market that it is difficult to determine at a general level the degree to which any one individual customer may be able to claim.

There are BI policies where firms have determined an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. Firms still need to do more work to agree, process and pay these claims as promptly as possible in all cases, including using interim payments where appropriate.

However, in relation to other policies, firms may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover.

The issues around BI policies are complex and there are significant differences in policy wording between policies and across firms. These complexities have the potential to create ongoing uncertainty for a lengthy period.

It is clear that decisive action is appropriate given the severity of the potential consequences for customers in the current coronavirus emergency.

In this context, FCA will work actively and promptly to seek to resolve issues causing uncertainty over BI coverage, to provide greater clarity for parties and help ensure there is not undue delay to payments where there are valid claims.

The FCA intend to do this by seeking to bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some BI insurance policy wordings where there remains unresolved uncertainty. The FCA is  working to identify a sample of cases representative of all the most frequently used policy wordings that are giving rise to uncertainty, where it would be appropriate for them to bring such proceedings.

Who will side insurers (except their fully paid lawyers)? should they be protected? did they sell unreasonable policies? who will side SME? time will tell.

Signaling? you may need a licence

You should signal where needed, but some signals may require a licence and regulation.

The Financial Conduct Authority (FCA) has commenced proceedings in the High Court against 24HR Trading Academy Ltd (24HTA). 

The FCA alleges that from 2017 onwards, 24HTA and/or its director, Mr Maricar, have been advising on investments and arranging deals in investments without FCA authorisation, and engaging in financial promotions without being an authorised person or having the promotions approved by an authorised person. The FCA alleges alternatively that Mr Maricar has been knowingly concerned in 24HTA’s contraventions.

24HTA/Mr Maricar had been transmitting ‘trading signals’ and making other investment recommendations to clients via WhatsApp and other social media platforms. Clients were told that if they followed these trading instructions, they would make significant profits.

In addition, consumers were induced to sign up with a ‘partnered’ broker to place their trades. 24HTA/Mr Maricar would receive sign up and other commissions from the brokerages in addition to the monthly payments from clients for the signals.

The FCA is seeking final orders including a declaration from the Court that the defendants carried on regulated activities without the required FCA authorisation and unlawfully made financial promotions as well as an order preventing them from carrying out these activities in the future.

 

Is someone may not fairly disclose about China?

China is challenging place, base on the following SEC statement you should carefully review your Chinese/emerging markets investments.

The PCAOB’s Inability to Inspect Audit Work Papers in China Continues

In many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies. This significant asymmetry holds true even though disclosures, price quotes and other investor-oriented information often are presented in substantially the same form as for U.S. domestic companies.

The PCAOB’s Inability to Inspect Audit Work Papers in China ContinuesInvestors and financial professionals should consider the potential risks related to the PCAOB’s lack of access to inspect PCAOB-registered accounting firms in China. Issuers should clearly disclose the resulting material risks. Auditors should have appropriate quality controls in place related to executing quality audits.

The Ability of U.S. Authorities to Bring Actions in Emerging Markets May Be Limited. Accountability, for issuers and gatekeepers, including individual accountability, is a key aspect of U.S. securities law. The SEC, U.S. Department of Justice (“DOJ”) and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Issuers should clearly disclose the related material risks.

Shareholders Have Limited Rights and Few Practical Remedies in Emerging Markets. Shareholder claims that are common in the United States, including class action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets. Issuers should clearly disclose any material limitations on shareholder rights.

It is important that investors, funds, financial professionals and index providers consider carefully the issues, risks and uncertainties associated with investing in emerging markets, including China, the world’s largest emerging market and second largest economy.

BigTechs concerns privacy, concentration risk and other

BigTech firms are large technology companies with extensive established customer networks. Some BigTech firms use their platforms to facilitate provision of financial services.

The below as been quoted from Steven Maijoor (Chair of the European Securities and Markets Authority (ESMA)) speech:

BigTechs have the potential to win market share in financial services because they enjoy
competitive advantages such as economies of scale, vast customer networks, access to cheap funding and proprietary data that powers personalised services.

BigTech firms may use data to offer tailored services. This is a familiar idea from other lines of business. For instance, you may receive online advertising for a holiday destination based on your searches for local hotels, your social media posts or recent holiday-related online purchases.

A risk, however, is that even if competition in certain financial services increases at first, it may later suffer as BigTechs grow market share. Switching provider may be less convenient if financial services are integrated with other lines of business. In other words, BigTechs may, after successful entry and growth, achieve a ‘gatekeeping’ position. And they may use personal data to extract more surplus from consumers through segmented pricing.

Privacy and data rights are a major concern, especially in light of the apparently illicit use of personal data by some firms in recent years. A single firm may be able to learn and infer a huge amount about people’s lives and personal circumstances. Integrating financial services into online platforms increases even further the sensitivity of such information.

Although financial inclusion may be a benefit in some cases, there is a risk of exclusion in others. For example, reduced information asymmetry between provider and client for products such as insurance or credit may reduce prices for some consumers, but exclude others altogether. And people less inclined to use digital technology may lose out. Finally, a business model operating across economic sectors may raise concentration risk. An operational incident that originates in one platform service offered by a BigTech firm could have a large impact on other lines of business, including financial services.

Understanding the money laundering needs via informal/formal stakeholders public speeches

It was interesting to read the following speech of Therese Chambers, Director of Retail and Regulatory Investigations.

Crypto businesses may want to consider the following when proving services via a UK entity:

Under the MLRs, any firm undertaking one of the specified cryptoasset activities is required to satisfy the FCA when they arrive at our authorisations team that they have:

Risk assessment: to identify where the risks of money laundering lies in their business and establish policies and procedures to tackle them.

Customer Due Diligence (CDD): as there is a zero threshold for all activity in this sector, all transactions, whether occasional or part of an ongoing business relationship, will need to be subject to CDD. This means identifying the customer and verifying their identity on the basis of reliable and independent documentation or information. As cryptoasset activities are online, then they will need to establish the veracity of the information provided to ensure the person on the other side of the screen is who they claim to be. We expect that many will apply similar approaches to e-money and challenger banks who often deploy new technologies such as video/photo identification via mobile.

Transaction monitoring: cryptoasset firms will need to monitor the transactions that they execute on behalf of their customers to identify any potential suspicious or unusual transactions that indicate a risk of money laundering. While we know of several services that offer blockchain analytics software which can help with this task, we will still require that firms have the right processes in place to evaluate transactions. This is because all FCA regulation is underpinned by the notion that you can outsource work but not responsibility.

Record keeping: the MLRs require all firms to retain documents and information used as part of CDD and transaction monitoring for a period of 5 years after the end of a business relationship, but they do not need to be kept for longer than 10 years since the start of that relationship.

Suspicious Activity Report (SAR) reporting: where a firm identifies suspicious activity that they have reasonable ground to suspect is the proceeds of crime then they need to make a SAR and send it to the National Crime Agency (NCA).

When a firm arrives at the FCA’s gateway looking to apply for registration, we believe that a ‘good’ application will clearly demonstrate to our authorisations team that they have robust systems and controls to cover each of these areas. But fundamentally, we are looking for more than just whether the firm has the right policies and procedures, we need to be satisfied that the firm take seriously their responsibilities to prevent their business being used to launder the proceeds of crime.

The FCA’s crypotasset AML regime is still in its infancy, as it only came into effect on the 10 January 2020. We are expecting several key challenges. First, this is largely a market that is new to regulation, and since the premise of the technology comes from a libertarian strand of ideology which eschews identity checks and advocates digital privacy, so we are expecting compliance with AML regulation will be met with resistance. But we are keen to work with the industry to ensure our AML standards are met in this market, particularly since this sector is closely integrated with traditional financial services.