Year: 2019

Billionaire founder of opioid manufacturer convicted of bribery

Posted on by Max Tomlin

Founder of Insys Therapeutics John Kapoor has been found guilty of bribery in the first conviction of a pharmaceutical boss over the US opioid crisis.

Kapoor’s conviction is the first major criminal conviction in a crisis that has claimed the lives of over 400,000 people in twenty years

A Boston jury found that Kapoor and four colleagues conspired to bribe doctors to prescribe highly addictive opioid-based painkillers, often to patients who did not need them.

Kapoor himself was also found guilty of defrauding insurance companies in order to boost sales for the company’s fentanyl-based spray, Subsys. Fentanyl is a synthetic opioid that is 50 to 100 times stronger than morphine.

Subsys was initially approved for terminal cancer patients, but the court heard that the company pushed their product towards those with chronic, non-life threatening pain, widening their target market and potential revenue. As a result, sales of the drug rose from $14m in 2012 to almost $500m in 2017.  Prosecutors claimed that the company’s aggressive promotion strategy fuelled an addiction epidemic.

During the trial, the court was shown documents detailing bribes paid to doctors and the company’s profit gain as a result. In one particular example, Insys paid almost $260,000 to two New York doctors in exchange for them writing more than $6m worth of Subsys prescriptions in 2014.

The company also organised so-called educational seminars, for which doctors were paid more than $1m to give presentations on the necessity of Subsys, the court heard. These events took place in costly New York restaurants, and were followed by company sales reps taking doctors to strip clubs and bars.

Prosecutors said that Kapoor and other Insys executives were motivated by greed, and paid little regard to potential harm to patients. “These patients were used. Their pain was exploited,” US attorney Nathaniel Yeager told the court.

Kapoor, who was arrested in 2017 on the same day that Donald Trump declared the opioid crisis a national emergency, now faces up to 20 years in prison. The 75-year-old, whose net worth was estimated to be $1.8bn by Forbes in 2018, plans to appeal the verdict.

Kapoor’s conviction is the first major criminal conviction in a crisis that has claimed the lives of over 400,000 people in the last twenty years. The addiction epidemic began as a result of overprescription of opioid-based drugs such as OxyContin for chronic pain conditions, fuelled by aggressive marketing tactics from large pharmaceutical firms. When doctors began to scale back on prescribing, those already hooked on the highly addictive painkillers looked to the illegal drugs market for a new fix.

Legal pressure has been mounting for some time on these pharmaceutical firms to face the music for their actions in effectively promoting opioid addiction. While some companies have received substantial fines as a result of civil cases, lawmakers have argued that these are not enough to make a dent in the firms’ huge profit margins, and criminal prosecutions are needed for the so-called “drug dealers in Armani suits”.

Kapoor’s conviction sets an important legal precedent and will allow prosecutors to pursue criminal action against other executives for their role in bringing about the opioid crisis.

Jordan Islamic Bank is focusing on inclusivity to drive prosperity in the country

Posted on by Max Tomlin

When it comes to improving the general wellbeing of society, while promoting economic growth, the value of financial inclusion can’t be overstated. Access to financial tools like bank accounts and credit cards allows people to work towards economic goals, save for emergencies and borrow funds to help overcome challenges. According to the World Bank’s 2017 Global Findex Database report, 515 million adults opened a bank account of some kind between 2014 and 2017. This means that 69 percent of the world’s adults currently have a bank account, up from 62 percent in 2014 and 51 percent in 2011.

Access to financial tools allows people to work towards economic goals, save for emergencies and borrow funds to help overcome challenges

Between 2014 and 2017, Jordan has made significant progress in terms of financial inclusion. According to the report, 42.5 percent of adults in Jordan now have a bank account, a remarkable increase from the 24.6 percent seen in 2014.

Raising this percentage even further is one of the key pillars of Jordan Islamic Bank’s (JIB’s) future growth plan, according to Musa Shihadeh, CEO and General Manager of JIB. Improving financial inclusion has been a goal of JIB’s for several years now, which it has worked towards by participating in events, hosting workshops and making its services easier to access. Now, the bank is specifically targeting young people, women and SMEs to improve financial inclusion among these demographics.

Providing tools
Primarily, JIB is focusing on providing these groups with easier access to financial services, encouraging them to use these services and ensuring they are of the highest quality. “JIB is strongly committed to achieving these goals, which include improving the geographical spread of our offices and branches to make them more accessible, and also taking advantage of new technology to make accessing finance easier,” Shihadeh told World Finance. “We are doing this while also ensuring that the products we develop meet the needs of everyone in society. Creating an environment that supports companies of all sizes is a lot of hard work, though entirely possible.”

For JIB, the idea that financial services should have a positive impact on the world has been the driving force behind many of its recent decisions. Between its financial inclusion efforts and sustainability initiatives, the organisation is keen to become a leader in social responsibility, all the while meeting the economic needs of Jordan’s population.

Several of JIB’s recent initiatives have been centred on the goal of financial inclusion. Workshops, training courses and the publication of many thought leadership articles have all had the goal of fostering further financial inclusion in Jordan. JIB has also developed a relationship with Jordan’s major trade unions, which represent engineers, doctors, nurses, pharmacists and agricultural engineers, to help spread information about the bank’s financial products. These messages have specifically targeted young people and women in order to provide them with the information needed to make good financial choices while they train for these professions.

Ensuring customers achieve the best outcome possible is very important to JIB. “In addition to the innovation of new financial products, we must also ensure consumer protection regulations are in place to guarantee the fair and transparent treatment of customers,” Shihadeh explained.

Sustainable strategies
Alongside financial inclusion, the bank is also focusing on the impact the organisation has on the environment. The bank has therefore made significant investments into sustainability and renewable energy initiatives. Shihadeh is currently pursuing alternative energy sources for its headquarters, primarily by installing solar cells on the roof of its branches and offices. “In July 2018, JIB celebrated the installation of our first power generator in Amman, which provides 85 percent of the electricity needed by the branches and offices in the middle region governorate,” Shihadeh told World Finance. “JIB has also obtained the licence to establish another power generation station in the north of the kingdom to cover the electricity consumption of our branches and offices in the north governorates. Its construction is currently in progress, and is expected to begin operating over the course of the next year.”

JIB’s recent environmental achievements are not limited to the company’s internal efforts. JIB has developed financing tools specifically designed for individuals and companies looking to purchase and install their own renewable power systems. It also provides a special financing deal for people purchasing hybrid and electric cars. What’s more, JIB has recently signed an agreement with the Central Bank of Jordan to offer special financing to SMEs installing their own renewable energy systems. Shihadeh said that JIB plans to continue to pursue more schemes like these in the coming years.

Underpinning all of these initiatives is JIB’s corporate social responsibility programme (CSR). According to Shihadeh, JIB is one of the region’s leading banks in terms of CSR: “JIB has a social responsibility committee that is formed by the board of directors, as well as a second committee at the executive management level, in a bid to drive our overall commitment to social responsibility.”

This focus on having a positive impact extends to all parts of JIB’s corporate governance. “JIB always endeavours to provide the best and highest-level Islamic banking services and products. It constantly seeks to innovate and develop new services that are compliant with the principles and teachings of the Islamic Sharia, too,” Shihadeh explained. “JIB’s corporate governance provides the best rules, regulations and procedures, which allows us to garner trust in the bank and its various activities.” The bank’s efforts towards strong corporate governance include transparently publishing its decisions, maintaining a positive relationship with shareholders and ensuring its internal control systems reach a high standard. “All legal steps are taken to encourage shareholders, including the smallest ones, to attend the ordinary and extraordinary meetings of the general assembly in order to discuss and vote, either in person or by proxy,” Shihadeh said. “The board of director’s members, the Sharia supervisory board, the external auditors and representatives of regulatory and official authorities also attend the annual meeting.”

JIB’s Sharia compliance is closely managed by the organisation. “The supervisory board is responsible for monitoring the organisation’s Sharia compliance both internally and externally, and is an active participant in shareholder relations,” Shihadeh explained.

The future of the bank’s CSR programme covers many different fields. As well as providing donations, sponsoring conferences and running workshops, JIB plans to continue to fund health and education initiatives, further support SMEs, implement more renewable energy programmes, and increase the coverage of financial inclusion.

Industry-leading products
Underpinning all of JIB’s social responsibility projects is its core banking business, with the organisation recently introducing a raft of new products and services. Mobile banking, signature bank cards and ATMs that accept cash deposits are some of the new services JIB has either introduced or is in the process of introducing. Increasing the reach of ATMs and branches is particularly important for JIB, since a lack of access to banking services is a common hindrance to financial inclusion.

“JIB installed 40 new ATMs during 2018, and has been replacing old models to form a network of 270 ATMs in total,” Shihadeh told World Finance. “JIB is also expanding its network by opening three to five new offices and branches, bringing the total network size to 107. This will enable us to bring our banking services closer to clients.” JIB is also expanding the opening hours of some of its branches, particularly during holiday periods. This expanded access is just another point in a long list of changes designed to make financial products and tools more easily accessible to a greater number of people.

All of JIB’s efforts are paying off, with the bank’s popularity rising fast. A 2018 survey found that JIB ranked second-highest of all the banks of Jordan in terms of preference for opening new accounts. “JIB is committed to serving society and providing a legitimate alternative to the banking needs of Jordan’s population, while doing more than just providing maximum returns to customers,” Shihadeh said. “JIB aims to strengthen Islamic values in business transactions and to exemplify the values of social unity, compassion and solidarity.”

In this regard, JIB’s plans for the future are ambitious, but eminently achievable. The bank intends to continue promoting financial inclusion to support Jordan’s economic development, the fight against poverty and the reduction of unemployment. JIB is also helping to support Jordan’s economy by investing in projects that increase productivity. As such, the bank is looking to sectors of Jordan’s economy that are currently underperforming due to a lack of financial access, since this is where JIB is capable of having the biggest impact. Between these efforts, JIB will continue to support all forms of sustainable development in Jordan.

Overall, this work embodies JIB’s values and commitment to being a positive economic force in both Jordan and the world. With a focus on financial inclusion, social good and creating positive change in the country, JIB is helping to push Jordan towards a more prosperous financial future.

Top 5 economic risk factors that must be considered

Posted on by Max Tomlin

No matter how resilient a country’s economy may be, there will always be risk factors that threaten to derail growth and could even plunge it into recession. Some of these risks, such as decline in national industry, have existed for centuries, whereas others, like cyber-attacks, are much newer phenomena. Some are easier to prepare for, through policy, infrastructure or technology, while others could strike with little warning, leaving severe and long-lasting marks.

As every country’s economy is different, some will be hit harder than others by various risks

As every country’s economy is different, some will be hit harder than others by various risks depending on the state of their industries and institutions. The best way of ascertaining which are the most significant threats, as well as how a country is preparing itself, is by conversing with decision makers across government, business and civil society. By being aware of the possible risk factors, and preparing as best they can, countries give themselves the greatest chance of bouncing back when a threat does come to fruition.

 

1 – Unemployment or underemployment
Joblessness is by far the greatest risk factor worldwide, and is named as the top potential cause for economic crisis in 31 countries by the World Economic Forum (WEF). Even short periods of unemployment can have severe implications for an individual’s standards of living, particularly if they were previously in a low-paying job and as such have no savings to fall back on. Similarly, several weeks without work can drive a family beneath the breadline, particularly in some African countries for which extreme poverty is already a significant issue.

For governments in these countries, as well as in more developed European nations, high levels of unemployment mean that benefits spending must be increased, putting further pressure on the national budget. Prolonged periods of unemployment can also lead to an erosion of skills, which in turn makes it more difficult for those without jobs to re-enter the workforce, thereby negatively impacting productivity and the country’s ability to pull itself out of economic trouble.

 

2 – Cyber-attacks
The explosion in scale and prevalence of cyber-attacks over the past 20 years means they are now the second most significant economic risk factor. The WEF estimates that data breaches, ransomware attacks and various other kinds of cyber incidents are the greatest threat to the economy of 19 countries, including the US, the UK, and much of Western Europe. As hackers’ techniques become increasingly advanced, companies are forced to shell out an ever-growing proportion of their profits to protect themselves online, which can impact business expansion. Not only that, when a cyber-attack does occur, it can cost thousands to rebuild computer systems and information databases, not to mention trust relationships with customers after such an incident.

If hackers gain access to governmental systems or the electricity grid, this can be even more disruptive. The WEF estimates that a six-hour winter blackout in mainland France could result in damages totalling over €1.5bn ($1.68bn), and that’s in a country that has the economic resilience to withstand a shock like that – nations with fragile finances could suffer far more deeply. There’s also the question of whose responsibility it is to bail out customers if they face monetary loss as a result of a cyber attack, as if a government is unable to offer any aid in doing so, the burden will fall on the private sector.

 

3 – Energy price shock
For countries such as Saudi Arabia, Qatar, Oman and Bahrain, whose economies are heavily reliant upon oil and natural gas revenues, a dramatic decline in energy prices poses a significant threat. The WEF estimates that 15 countries, including unlikely contenders such as Australia, are most likely to face an economic crisis as a result of an energy price shock, as was seen globally in 2015. In January 2016, the price of crude oil fell below $30 a barrel, compounded by a global oversupply and a shift away from fossil fuels. Countries such as Kuwait saw GDP contractions of up to three percent that year as a result, and some only emerged from recession in 2018.

The crisis emphasised the need for economic diversification, particularly in OPEC countries, but progress has been slow so far, which explains why an energy price shock remains a major risk. Not only would national industry be affected if prices were to drop or lift suddenly, but suppliers may be forced to reflect changes in the prices that customers pay for energy. This would drive down purchasing power, increase poverty and may cause a country to fall into recession.

 

4 – Failure of national governance
A vital part of a government’s role is to ensure that the existing law of the land is upheld, and introduce measures to improve living conditions for every single citizen. However, if this responsibility is not met, either as a result of corruption or ineffective policies, it poses a significant risk to the economy and to society. The WEF estimates that a failure of national governance poses the greatest threat of economic breakdown to 11 countries, including Panama, Greece, Ecuador and Brazil. Several of these nations, particularly Brazil and Ecuador, have significant issues with corruption to contend with, and current governments must work to unpick money laundering, bribery, fraud and various other issues that are deeply embedded in those societies. Previous governments in countries such as Greece have also overspent massively on a national level, creating a devil-may-care culture with regards to the budget, which now poses a serious threat to the economy.

It’s not just the responsibility of politicians to tackle government issues, though – businesses, civil society and the general public all have a role to play. Companies operating in countries with poor governance face higher costs, so it is in their interests to comply with national regulations and campaign for others that would protect their businesses. Similarly, consumers are more likely to be defrauded or scammed as a result of improper governance, while the legal system will groan under the weight of a pile of fraud cases in countries where regulation and compliance is inadequate.

 

5 – Fiscal crises
Fiscal crises tend to be the greatest economic risk factor in countries for which economic growth is erratic and could be derailed by any number of national or global fiscal events. This is certainly the case in the 11 countries named by WEF as the most likely to face economic breakdown as a result of a financial crisis, which include Turkey, Azerbaijan, Argentina and Russia. The 2008 crash is a key example, as it derailed the economic progress of developing countries, plunging many into deep recessions. Turkey in particular saw consistent GDP growth of above five percent in the early 2000s, until the impact of the financial crisis saw its economy contract by 4.7 percent in 2009.

Fiscal crises are highly unpredictable and it can be challenging for governments to know how to plan for them; however, reducing the national deficit, building a budget surplus, and encouraging business growth, productivity and employment is a good place to start. By preparing at a national level, governments can avoid excessive national and personal borrowing and debt when a crisis does hit, which has long-reaching economic effects and can derail recovery.

CheBanca!’s agile approach is allowing it to stay ahead of the competition

Posted on by Max Tomlin

Charles Darwin hit the nail on the head when he said that the species that survives is the one best able to adapt and adjust to the changing environment in which it finds itself. Regardless of age or intellect, the most successful people are those who take a flexible, adaptable approach to anything that crosses their path. While this applies in many areas of business, it is particularly pertinent to the banking sector.

Despite its move into the more traditional asset management sector, CheBanca! has stayed true to its innovative DNA

The global financial industry has found itself in hot water on occasion over the past decade, notably in the aftermath of the 2008 financial crisis. Faced with the challenge of survival, the institutions that persist today are those that have adopted this Darwinian approach of adaptability, using it to weather difficult market conditions. Italian omnichannel bank CheBanca! is a key exponent of this tactic.

A focus shift
A start-up created by Italian banking group Mediobanca, CheBanca! was founded in 2008. While it initially concentrated on deposits and mortgages, the plummeting interest rates during the worldwide financial crisis soon forced the lender to rapidly shift focus. Thanks to its agile approach, CheBanca! was able to reposition itself as an asset management and investment specialist.

837,000

CheBanca! clients

6,000

Number of new customers each month

The Italian player now boasts more than 837,000 clients and has positioned itself as an essential partner for clients with assets of up to €5m ($5.7m). It also caters for what it calls the ‘next wealth generation’ – clients who, in the next few years, will require state-of-the-art, contemporary asset management services to keep up with the rapidly changing pace of the business, technology and regulatory spheres.

Despite its move into the more traditional asset management sector, CheBanca! has stayed true to its innovative, technologically centred DNA. For instance, by opting for a portfolio-driven approach, the bank was able to achieve MiFID compliance quickly, thereby allowing it to concentrate on delivering value to customers. By taking its cues from client requirements, identifying solutions consistent with its market vision and clients’ investment objectives, CheBanca! has been able to evade the much-feared margin reduction often associated with the implementation of MiFID II. Instead, it has shown solid revenue growth in each of the four quarters since the legislation was introduced.

The competitive edge
Today, CheBanca! continues to grow, even in the midst of a highly volatile market. The bank is garnering an average of 6,000 additional customers per month, and has developed a new range of guided products to cater to its changing customer base. It has also developed a reputation among top asset managers, private bankers and financial advisors for its impeccable customer service, which harnesses the power of digital interaction to deliver more convenient contact options.

Digital transformation is at the heart of the bank’s strategic expansion plan: over the past two years, it has digitalised virtually all of its processes, from branch activities to smart ATMs, making it even easier for customers to manage their money. This includes the launch of web collaboration, a system that allows asset managers to share investment proposals remotely with clients without the need for them to visit a branch. Clients are also able to approve proposals from the comfort of their own homes, saving time for all involved. Furthermore, CheBanca! recently launched its own app, which is now used by some 300,000 individuals each month to source information, view account movements and make transactions.

One of the most impressive achievements to date is the implementation of graphometric signing. Today, some 60 percent of the transactions made in branch offices are by graphometric signature, once again testimony to the bank’s capacity to continually renew itself.

Safeguarding the future
Innovation never sleeps. This is why CheBanca! is committed to developing new services to deliver better value to its customers. In 2019, the bank will launch an updated version of Yellow Advice, its groundbreaking robo-advisory service and the first of its kind in Europe. This revolutionary service allows customers to set their own investment objectives and construct an efficient portfolio. At the same time, it’s an important enabler in customer management, making advisors more productive and allowing them to manage a growing number of customers, without compromising in terms of quality. A chatbot service, powered by artificial intelligence, will be up and running by June of this year, meaning clients will be able to receive answers to their questions by interacting with a virtual assistant. This platform will ensure greater effectiveness in answering customer requests without affecting the bank’s cost base.

The company’s Darwinist approach means it is unparalleled in the Italian financial market, and stands out for its durability. By continually reinventing itself, CheBanca! ensures that it remains an important fixture in the banking landscape.

Themed ETFs look poised to further shake-up the investment world

Posted on by Max Tomlin

For some people, investing will always be seen as pretty boring. Even the prospect of earning huge riches may not be enough to convince these individuals that studying share prices is worth their time. They might reconsider, however, if they were investing in businesses that were a little more stimulating than the norm. Real estate, while a sensible choice, may not get the heart racing, but perhaps robotics, cryptocurrencies or medtech are interesting enough to convince individuals to part with their cash.

Being interested in a subject is not the same as being knowledgeable in it, and investment always comes with risk

Of course, being interested in a subject is not the same as being knowledgeable in it, and investment always comes with risk. For every cutting-edge start-up that goes on to achieve business success, there are countless others that simply know how to talk a good game. Investors must be careful not to let their passion for a particular business sector cloud their judgment. This is particularly true now that thematic exchange-traded funds (ETFs) are
growing in popularity.

Essentially, ETFs are bought and sold just like regular stocks and, as such, can be traded at any time of the day through stock exchanges. However, they are pooled investment vehicles: they contain an underlying collection of different stocks, bond and other securities. They can focus on a broad variety of things, from commodities to forex and everything in between.

Unsurprisingly, the commodities that underpin thematic ETFs revolve around a shared topic or theme. Traded ETFs can now be focused on disruptive technologies, environmentally friendly firms, religion – pretty much anything that a potential investor can think of. Still, just because a shiny new ETF has been launched based on an interesting theme doesn’t mean it is necessarily worth backing, particularly given some of the thematic ETFs being made available.

Standing out
While the world of investment remains impenetrable for many, the market has undergone a substantial opening-up in recent years. The rise of digital investment platforms has allowed casual investors to check their portfolios and make trades using their smartphones – having a personal fund manager is no longer a necessity. Many of these new, digital-only investment platforms require little in the way of fees, cutting margins to the bare bones.

1990

The year in which the first ETF was created

80%

of thematic ETFs launched in Europe before 2012 have closed

As a result, investment managers are under pressure to continually create new products that will enable them to stand out in an increasingly crowded marketplace. ETFs are a case in point: the first ETF was not created until 1990, but it quickly became a mainstay of the investment scene. In fact, the rapid growth of ETFs meant that they too have become a crowded sector for investment platforms.

“ETFs offer two advantages to investors,” Daniel Wolfe, CEO of Tradingene, told World Finance. “First and foremost, they carry much lower loads (fees) for investors, making them an efficient way to get exposure to a diversified portfolio of assets. [Second], especially for those ETFs linked to popular indices, they generally outperform the majority of actively managed funds.”

Globally, there are now more than 2,000 ETFs for investors to choose from, so financial advisors need to be more persuasive than ever to ensure investors choose their funds over someone else’s. Pitching thematic ETFs to potential clients is one way of standing out, particularly if the theme is an eye-catching one. Drones, space travel and deep-sea exploration represent just a handful of the ETFs that are causing investors to take notice.

As well as allowing investors to engage with disruptive technologies, themed ETFs also let them tap into a narrative that may have personal significance for them. This also means they can bet broadly regarding a particular market – say, that health stocks will go up – without having to conduct detailed research about the leading industry players.

“ETF providers have moved into the space of active fund managers, through offering non-market cap products,” said Oliver Smith, Portfolio Manager at IG Smart Portfolios. “Themed ETFs are perhaps the most obvious; playing into our desires to invest in more interesting stories, some of which may have a structural growth element.”

The problem is, these stories do not always have a happy ending, When investment is driven by an emotional reaction – as may be the case with an investor getting a little carried away at the prospect of space travel – due diligence can quickly get pushed to one side.

It takes all sorts
Initially, there may not appear to be much difference between a thematic ETF and a regular one. After all, they are both made up of a collection of underlying assets and, in both cases, these assets are chosen because they are connected in some way. An ETF focusing on precious metals, for example, makes perfect sense from an investment point of view. The differing fortunes of, say, palladium, gold and silver provide enough diversification to hedge against volatility, but enough similarity to ensure that investors aren’t spread too thinly.

These ETFs, focused on related commodities or currencies, are not really what investors are referring to when they talk about thematic ETFs. Instead, a more concerning trend has developed recently where ETFs are being created with themes that appear to be based on little more than a gimmick.

An example of the thematic ETF trend being taken to its logical endpoint came in June 2017 when Dani Burger, a reporter at Bloomberg, looked into the possibility of creating an ETF for cat lovers. Choosing the stocks that went into her ETF was simple enough: any with the word ‘cat’ in them made the cut. Thanks to a few highly volatile penny stocks, the ETF actually promised huge returns (in percentage terms, at least), but had no economic basis.

Burger’s cat ETF may be an extreme example, but many other themed ETFs have dubious economic grounding too. Fund managers have created thematic ETFs centred on Millennials, conservative Christians and firms tackling obesity. By selecting assets based on how closely they match a particular theme rather than their future growth prospects, fund managers and investors are playing a risky game.

James Lindley, Managing Partner at Castell Wealth Management, told World Finance: “Unlike other investment approaches such as strategic beta strategies, the best of which are tested across sprawling historical data sets, thematic investing is entirely focused on trends that have yet to fully play out. If you look at the most popular themed ETFs – technology and environmental, as good examples – their popularity often appears to be correlated to news topics and ‘flavour of the week’ investments. This can also be seen in the growing popularity of social-themed ETFs, such as gender equality.”

It is important not to tar all thematic ETFs with the same brush, however: some are doing well for reasons other than luck. Environmentally themed ETFs, for example, have gained popularity because many governments are making efforts to decarbonise their economies – it is easy to see that this is a long-term trend, rather than a fad. Such a distinction is not always so easy to make, however. When ETFs targeting the ‘next big thing’ are created, perhaps fund managers are merely hoping that investors buy into the hype.

Choose wisely
If investors are to avoid being disappointed, they’ll need to carefully assess thematic ETFs before parting with their cash. Investors can calculate an ETF’s worth based on a multitude of factors, including the value of its net assets, the fund’s outstanding shares and the amount of excess cash in the fund. Assessing how long the ETF is likely to exist for is another good way of distinguishing the gimmicks from the real deal.

When ETFs targeting the ‘next big thing’ are created, perhaps fund managers are merely hoping that investors buy into the hype

“It is hard to spot what could constitute a gimmick, and investors should ask themselves whether they think the ETF will still be there in 15 years’ time,” Lindley told World Finance. “It is also worth considering themed mortality rates amongst ETFs. To put this into context, 80 percent of all thematic ETFs launched in Europe prior to 2012 have now closed.”

If ETFs do not attract enough interest to cover their costs, they will quickly be shut down – but equally, an ETF that is receiving a lot of hype may not represent a worthwhile investment either. Thematic ETFs often try to ride the coattails of the next big technological or social development, but if this centres on a theme that has already been widely publicised – say, artificial intelligence – then investors probably aren’t getting in early enough to maximise their returns. If something is creating enough buzz to be part of a themed ETF, then it’s possible that investors will be paying a high price to get involved.

“The main thing to be aware of – in any product launch – is that to get from concept to launch, a new issue will need a favourable performance tailwind,” Smith said. “It’s very rare to launch a new product where the underlying investment has performed poorly and looks cheap. Themed ETFs cover some quite niche parts of the market, and it would be unwise to commit too much of your portfolio to any one idea unless you are certain in your analysis.”

Ultimately, it is up to the individual investor to determine whether a thematic ETF represents a good investment. Sticking to funds with more than $50m in assets under management ensures they are less likely to fold any time soon, but equally this may mean the ETF is not quite as cutting-edge as investors would like. As with any other investment, carrying out due diligence will help when weighing up the risks and rewards of thematic ETFs.

Keep it simple
Despite the hype, returns on themed ETFs performed worse than stocks on the S&P 500 last year. Beating the market is difficult, regardless of whether investments concern a space travel ETF or a single real estate firm. At the end of December 2018, when US stock markets suffered their worst December since 1931, share prices of themed ETFs fell alongside stock market giants such as the S&P 500 (see Fig 1), demonstrating that these ETFs are just as susceptible to market volatility as any other fund.

Part of the problem lies in fund managers working backwards: instead of noticing a consistent theme among a number of different stocks with good growth potential, too many managers are choosing a theme first and then looking for the stocks to fit it. Not only does this increase the likelihood of choosing dud assets, but it can also prove misleading.

Some of the more exciting thematic ETFs are actually made up of rather more prosaic underlying stocks. The SPDR Kensho Final Frontier ETF that launched back in October, for example, has only dedicated approximately 50 percent of its assets to aerospace or defence firms. Electronics, energy, semiconductors and telecoms assets make up the rest of its holdings. These may all have some connection to space travel, but they don’t exactly conjure up images of an intergalactic future. “Themes are often misleading,” Wolfe noted. “Investors need to carefully examine the holdings in an ETF before entering. They should also try to understand how much of the underlying business is related to the theme.”

Still, investment platforms may feel as though they have little choice but to continue coming up with ever-more outlandish thematic ETFs in order to grab attention in a crowded marketplace. Assets held by low-cost and online investment platforms grew by 25 percent in 2017, partly due to their embrace of thematic ETFs. More established financial organisations are now beginning to take notice. In August last year, Goldman Sachs filed a proposal to launch five thematic ETFs of its own.

An easy criticism made against investing is that it is too detached from the companies being invested in – as long as they are making money, it doesn’t really matter what field they are in or what their business practices are. From this point of view, thematic ETFs are a good thing, bringing a more personal element into the world of investment and creating a closer emotional attachment between investor and investment. As long as backers don’t get caught up in the excitement of a newly launched ETF, a personal interest in a particular theme may actually turn out to be an advantage – whether it relates to space travel, religious ethics or cats.

Mental health issues are becoming more prevalent in the financial services sector

Posted on by Max Tomlin

For Alex Johnson, spending 15 hours at her desk was just another day in the office.

“The worst I did was actually 21 hours at my desk,” the former sales manager for a prominent multinational retail bank told World Finance. “It was brutal. Sometimes I’d be sat at my desk for two hours, not even able to go to the bathroom, because I had to get something done to pass it on to [my team]. I was always very conscious of the fact that they were all working in support of me, so I needed to get things through as quickly as possible to try and alleviate the pressure from them. But there was nobody ever alleviating the pressure from me.”

The companies driving innovation and evolution have a responsibility to ensure that they’re doing so in a responsible way

Johnson, whose name has been changed at her request, joined the bank in 2008, just as the financial crisis hit hard and teams were being trimmed to their bare minimum to cut expenses. “The immense cost pressures on financial institutions meant [they] had to have a leaner workforce with less staff, but the workload remained the same.” In such an economically challenging environment, the competition to bring in business was even more intense then it had been previously, which meant going above and beyond to win new clients – even if that involved stretching teams to the absolute limit.

Johnson worked on deals lasting anywhere between six and 18 months, which might see her working 18-hour days for the entire period. “[From the moment you win the business], the client sings the tune and you dance to it,” she told World Finance. “The client sets the project schedule and you have no choice but to meet the deadlines, or you’re out. Because there will be plenty of other people out there who will make those deadlines.”

Financial sector firms – particularly banking institutions – have long been regarded as demanding environments, but the pressure has hit fever pitch in recent years.

In the aftermath of the 2008 crash, with widespread layoffs taking their toll on the industry, those with an employment contract still to their name, like Johnson, were forced to work ever-longer hours in ever-more demanding environments as they watched the world economy crumble around them. It’s little wonder that this took its toll on many workers’ mental wellbeing.

Breaking point
Mental health conditions, and our awareness of how they affect working lives, have become increasingly widespread across the banking sector in recent years. In the UK, 15.4 million working days were lost in 2018 as a result of stress, depression and anxiety, while 62 percent of financial-sector firms reported an increase in mental-health-related illness in the workplace last year, according to a 2018 survey by Aon Employee Benefits.

15.4m

working days were lost as a result of stress, depression and anxiety in the UK in 2018

62%

of financial-sector firms saw an increase in mental-health-related illnesses in 2018

74%

of financial services workers think their employer should be doing more to help the wellbeing of their employees

42%%

of financial services workers would use emotional wellbeing support if it was on offer

In 2014, Johnson found herself suffering from what’s known as a psychogenic condition – a physical manifestation of her mental stress. Struggling with debilitating stomach pains, she found herself in a doctor’s office undergoing various tests to establish the cause of her condition. When no clear physical causes presented themselves, her doctor enquired as to her stress levels. “It sounds so insane looking back at it now, but I honestly didn’t realise how bad it was,” she said. When she began explaining her pressurised working environment, long hours and high-stress day-to-day life, she was referred to a psychologist for assessment, who found that her anxiety levels were “through the roof”. The psychologist compared her to a swan, Johnson said: “On the surface, everything seems very serene, calm and graceful, but below the water, the swan’s feet are frantically paddling away to try and keep it afloat. It’s funny how something as insignificant as that really hits home.”

There was one particular incident that made Johnson truly realise the severity of her anxiety. “I’ve always been very tough, very resilient, very determined – I believed I could get through anything,” she said. “But one morning, I was at London Bridge station, and it was really busy. People were pushing and shoving, and I got knocked about four or five times, and I remember all of a sudden I ended up standing in the middle of the station completely unable to breathe, and the tears started falling down my face, and I thought I was actually going crazy. I’d never experienced anything like that before – I understood later that it was a panic attack – but that was the thing that made me realise I really needed some help,” Johnson told World Finance. She began seeing a psychologist for regular sessions, who, she said, “really understood anxiety – why it happened, what to do about it”. For Johnson, it showed her a path through what she was experiencing, helped her to understand her state of mind and develop coping strategies when anxiety knocked her back.

Sadly, Johnson’s story is not unique within financial services. Executives at the uppermost echelons have been beset by mental health conditions, including Lloyds Chief Executive António Horta-Osório, who took two months off in 2011 after suffering from sleep deprivation and exhaustion, and former Barclays Head of Compliance Hector Sants, who was signed off on medical leave in 2013 due to severe stress.

It has led some to take their own lives: Martin Senn, the former chief executive of Zurich Insurance, took his own life in 2016. Senn had resigned from the company the previous year after a major explosion in China had forced the company to pay out $275m in claims, leaving it in financial jeopardy. According to the US Centres for Disease Control and Prevention, sales representatives for financial and business services are 39 percent more likely than other members of the workforce to take their own lives.

Sea change
In the wake of Senn’s suicide, and the hundreds of others that have occurred among financial services professionals across the globe since 2008, many have speculated over what could have been done to prevent these desperate acts from taking place. Ending the stigma surrounding mental health in the industry and encouraging those in senior positions to discuss the consequences of high-pressure environments is certainly high on that list. “I definitely think there’s a benefit in leading from the top,” said Johnson. “Someone more junior might be afraid of how it would reflect upon them if they admitted they were struggling with the workload; they might worry that it could be career-limiting.” If that discussion were driven by a senior executive, it would establish and reinforce a culture of honesty and an understanding that no one is immune to the pressures of the banking environment.

The option for group or individual psychological sessions within the workplace could also help support those in search of coping mechanismspreventing stress from manifesting as a condition such as depression or anxiety. According to a 2018 survey by Westfield Health, 74 percent of banking and financial services professionals think their employer should be doing more to support the physical and mental wellbeing of their employees, with 42 percent saying they would use emotional wellbeing services if they were available. Counselling options would give employees somewhere confidential and impartial to turn, creating an environment where they could air concerns that perhaps they didn’t feel comfortable speaking to superiors, or even friends, about. Offering this in the workplace would also take the pressure off professionals to seek it out themselves.

“I am someone who is quite resourceful in that sense, in that if I have a problem, I will hunt around for a solution, but I’m also aware of the fact that not everyone is that way,” said Johnson. “I can imagine some people must feel really lost, and not know where to turn. With men in particular, it’s not necessarily the done thing to talk about emotions as much; they might feel really helpless and awful and then they don’t know how to get out of feeling that way. So if somebody was taking care of looking after their emotional wellbeing, it would make a huge difference,” she added.

Companies should be taking action well before that point, though – not solely to tackle mental health issues where they already exist, but to create a culture where they’re not so common in the first place. This might include taking steps to turn down the heat in high-pressure environments, whether that’s by ensuring executives aren’t setting the precedent of absurdly long hours, or introducing flexible and remote working policies for those who don’t need to physically be at their desks every day.

Re-examining benefits packages to ensure they’re actually beneficial for staff is a great place to start. “Companies need to be asking themselves whether they’re just box-ticking when it comes to their wellbeing programme,” said Johnson. “[There’s no point] in giving employees a subsidised gym membership if they’re chained to their desk for 15 hours a day.” Rather, they should consult with staff and focus on introducing practical policies that have a real, positive impact both inside and outside the office.

As within individual companies, industry-wide change begins at the top. “I think it could trigger [a culture change] if you had some big players within the industry make some noticeable shifts in mentality,” said Johnson. After all, the companies driving innovation, progress and evolution also have a responsibility to ensure that they’re doing so in a responsible way – or risk finding that their market-leading position is in jeopardy. Striving for greater returns, better deals and bigger numbers has always been a driving force in financial services – now it’s time to apply that same ambition to making workplaces the most open and supportive they can possibly be.

Spain’s export boom continues to bolster its economy

Posted on by Max Tomlin

Spain was hit as badly as any country following the 2008 financial crisis. The collapse of the nation’s housing bubble revealed the unsustainability of its high GDP growth rate, after which the economy began contracting, unemployment skyrocketed and a €100bn ($113.6bn) rescue package was needed. Spain joined Europe’s group of economic basket cases dubbed the ‘PIIGS’.

Companies are continuing to focus on exports even though domestic demand is starting to return

Today, Spain’s economy tells a very different story. Its GDP is forecast to expand by 2.1 percent in 2019, outperforming most other nations in Western Europe, and economic reforms have been implemented to make Spanish businesses leaner and more profitable. Exports have been at the heart of this resurgence.

The crisis of a decade ago forced firms to make difficult decisions, but they are now reaping the rewards. By tapping into global supply chains and international markets, Spanish businesses have been able to grow even when domestic troubles persisted. Whether or not the country can continue its export-led boom, however, will depend on maintaining the right level of investment and hoping that global demand avoids a downturn.

Trimming the fat
The simplest explanation for Spain’s export surge is that, following the financial crash, businesses were given little choice but to look overseas. The crisis of 2008 caused a significant decline in domestic demand – one that was unlikely to be a flash in the pan. William Chislett, Associate Researcher at the Real Instituto Elcano, told World Finance that there is “nothing magic” about Spain’s recent export growth.

38,373

The number of Spanish firms that could be classified as ‘regular exporters’ in 2012

50,562

The number of Spanish firms that could be classified as ‘regular exporters’ in 2017

67%

of Spanish exports are sent to other EU countries

$18bn

Amount received by the Spanish automotive industry in greenfield investment between 2007 and 2017

“With a shrinking domestic market, both in the private and public sector, small and medium-sized companies in particular risked going to the wall because of a shrinking domestic market,” Chislett explained. “The only alternative they had was to go abroad and see if they could sell there, which they did successfully on the whole.”

The automotive sector remains the biggest exporter of Spanish goods, but even looking at smaller firms, a growing reliance on exports can be clearly discerned. In total, the number of Spanish businesses that can be classified as ‘regular exporters’ – firms that have exported for four years continually – increased from 38,373 in 2012 to 50,562 in 2017. In addition to motor vehicles, Spain also exports significant amounts of machinery, plastics, pharmaceuticals and food products.

Ironically, it seems that Spain’s current growth is not in spite of the financial crisis, but because of it. As well as causing domestic demand to plummet, wages in the country also fell, making Spain more competitive across global markets. A comparison with Italy – another of the so-called PIIGS countries that suffered so much following the financial crash – demonstrates that Spain’s export-driven success is not easily replicated.

Following the 2008 financial crisis, productivity in Italy fell, meaning that it required more employees or higher costs to produce goods and services. In Spain, partly as a result of painful cost cutting, productivity levels remained level. This means that today, the unit labour costs in Spain remain four percent lower than they were at the beginning of 2008. In Italy, on the other hand, they are now 12 percent higher.

Going global
Spain’s ability to boost its export figures is also testament to the way in which its domestic businesses have managed to integrate themselves within global supply chains. Between 2007 and 2014, Spanish export firms increased the proportion of imported components that constituted their goods and services, indicating that they became more incorporated within global value chains.

Businesses are also starting to look further afield. Although EU states still make up the most common destinations for Spanish goods – intra-EU trade constitutes 67 percent of the country’s exports – other markets like China and Turkey are growing in significance.

Even in tough times, Spain has found the resources to invest in its most successful export sectors. The Spanish automotive industry received over $18bn in greenfield investment between 2007 and 2017 – an amount that has enabled it to shift its focus and improve profitability. SEAT, for example, returned to profit for the first time in approximately 10 years back in 2016 and agreed to up production at its Martorell factory as a result.
Spain’s export growth is not limited to goods, with services also showing signs of improvement. The export of non-tourist services has grown more than sevenfold over the past 25 years, with knowledge and company-based services accounting for much of the recent growth. Exports of Spanish services accounted for 10.5 percent of GDP in 2017 – a figure only bettered by the UK among the EU’s top five economies. Perhaps most promising of all, though, is the way in which companies are continuing to focus on exports even though domestic demand is starting to return.

During its pre-crisis heyday, Spain’s economy was being driven by credit-fuelled construction projects

“The temptation is always there for businesses to just focus on the home market once domestic demand picks up again,” explained Chislett. “Others, however, will rightly be reluctant to give up on the hard work required to secure market share overseas. The motor industry will never focus just on the domestic market, but even a lot of the smaller [businesses] are now regular exporters.”

Over the past few years, domestic demand in Spain has grown steadily, expanding 2.9 percent in 2017. A general return of market confidence has provided businesses with the assurances they need to begin targeting their goods and services at the Spanish market again. Even so, they are reticent to give up the market share they have acquired overseas. After all, if they do so, there is no guarantee that they will be able to get it back again.

The pain in Spain
Although Spain’s export-driven economy is often held up as a prime example of how to recover from an economic downturn, it should be remembered that there has been plenty of difficulty along the way. As well as wage cuts, there have also been labour market reforms that have made it easier for businesses to fire their employees. These reforms may have been necessary to improve Spain’s competitiveness, but that will provide scant consolation to workers who have had to put up with stagnant pay packets for the last few years, or who lost their jobs altogether.

The move towards exports has successfully restructured Spain’s economy, but even that comes with risks. During its pre-crisis heyday, Spain’s economy was being driven along by credit-fuelled construction projects, which eventually collapsed under the weight of their own debt. The construction industry is now much smaller and exports have grown to fill the gap, but the sustainability of this approach has also been questioned.

If global growth was to slow, for example – and many predictions suggest it will – Spanish businesses that rely on overseas sales may begin to struggle. The IMF recently cut its world economic growth forecasts for 2019 and 2020 twice in the space of three months. Unresolved issues in the EU and an expected slowdown in China are at the root of such concerns.

Even if such forecasts prove to be overly negative, other issues could derail Spanish businesses. Currently, many of their exports have a low technical component that makes them particularly susceptible to competition from emerging markets.

“A number of problems remain for the economy as a whole,” said Chislett. “The education system is pretty lousy and this factors into the economy. Spain needs an education system that produces more skilled workers, which will, in turn, create more workers that can contribute higher up within the export value-added chain.”

The gains from the export booms are also not being shared equally, with a substantial proportion of Spain’s exports concentrated in the hands of just a few organisations. Looking at 2017, the top 10 exporters accounted for 15 percent of the country’s exports, while the top 25 accounted for a quarter. Given such figures, it is perhaps unsurprising that Spain’s continued economic growth is hiding some ongoing problems.

Spain’s Gini coefficient – a measure of a country’s income inequality – is among the highest in Europe, and more than a quarter of the population remains at risk of poverty or social exclusion. Even Spain’s unemployment figures, which have certainly improved since the financial crisis, remain disappointing: total unemployment is around 14.5 percent, although it has been steadily declining in recent years (see Fig 1). Perhaps more concerning is that youth unemployment is close to 40 percent.

Clearly, the export boom has not managed to resolve all of Spain’s economic woes. In order to ensure that exports continue to perform well and the related economic benefits are shared around, greater investment is needed to allow small-to-medium exporters to continue expanding. Only then can the country move away from an export trade that is dominated by a handful of major players.

Similarly, funding for research and development must be increased. Spain’s budget currently resides at just 1.2 percent of GDP – far below that of the EU’s biggest spenders. This not only traps Spanish firms in a cycle of low-value exports – it leaves them highly susceptible to competition from higher-skilled workforces elsewhere.

Spain left it too late to move away from its dependence on an overheating real estate market, and subsequently had to rely on a series of painful reforms to recover from the economic crisis of 2008. Although exports have come to the rescue, there are no guarantees that they can be relied upon forever. Spain must now start planning for sustainable long-term economic prosperity that is based on hi-tech services and domestic consumption, in addition to exports.

Why cryptocurrencies could be about to fill the cash gap

Posted on by Max Tomlin

When the price of oil crashed in 2014 (see Fig 1), Venezuela’s economy plunged into a deep recession. With the country almost entirely dependent on the substance, an economic crisis erupted, while rampant inflation rendered its currency, the bolívar, virtually worthless.

The use of cash is dwindling, replaced by easy and convenient card and mobile payments

In December 2017, Nicolás Maduro, who had become the de facto dictator of the country, took a radical step to revive the economy by announcing plans to launch a Venezuelan cryptocurrency. Called the petro, the digital coin would be backed by the country’s oil reserves.

At the time, cryptocurrencies were gaining wider recognition in the financial world as bitcoin’s price soared to record highs. The clamour around the currency reached a fever pitch in mid-December when it hit an all-time high of nearly $20,000. Just a month after Maduro’s announcement, however, the price of the world’s biggest cryptocurrency halved (see Fig 2). Since then, its value – and the value of other major digital currencies – has only continued to fall.

Nevertheless, the idea of a state-backed cryptocurrency took hold for a number of central bankers. Although the petro has been engulfed in controversy and confusion, a handful of countries are now getting serious about creating their own digital currency.

A nefarious vehicle
The petro was meant to revive Venezuela’s ailing economy and bring life back to the bolívar. Using the cryptocurrency – essentially a repackaged government-controlled asset – Maduro hoped to avoid US sanctions by making international transactions outside of the conventional banking system.

Darrell West, the founding director of the US-based Brookings Institution’s Centre for Technology Innovation, explained the appeal of cryptocurrencies for sanctioned nations: “Countries that face limitations on global trade or international transactions see these currencies as a way to operate outside the control of central banks. That gives them the power to operate autonomously with other nations even though major governments are trying to isolate them internationally.”

But the legitimacy of the petro is still hazy. Despite Maduro’s bold claim in 2018 that the petro had already raised $3.3bn, a Reuters investigation later found that Venezuela’s cryptocurrency could neither be traded on any major exchange, nor accepted as currency by any other country. What’s more, other government officials said the coin was still in development, and it is unclear whether the oil reserves said to be the basis of its value can actually be extracted.

Despite the disputes and ambiguity around the petro, other countries that are similarly shut out of the global financial system through sanctions are developing plans to create their own state-backed cryptocurrencies.

Around the time when Venezuela was gearing up to announce the petro, Russia’s plans for a digital alternative to its ruble – the CryptoRuble – emerged. In 2018, Sergei Glazyev, an economic advisor to President Vladimir Putin, told a meeting of government officials that a CryptoRuble would help Russia “settle accounts with other counterparties all over the world with no regard for sanctions”, according to a report by the Financial Times.

$3.3bn

the disputed amount generated for Venezuela in 2018 by the petro, according to president Maduro

Iran revealed that it was also interested in developing a digital currency after the US began reimposing sanctions on the country. The coin will reportedly be called PayMon, and will be backed by Iran’s gold reserves.

Compared with Venezuela’s petro, these countries are taking a more robust approach to cryptocurrencies, according to Yaya Fanusie, a senior fellow at the Foundation for Defence of Democracies. “[Iran and Russia are] not just making an announcement and putting something out there that’s not really connected to the rest of the economy. They’re actually doing research. They’re laying the groundwork. They’re collaborating. I think their effort is a lot more sophisticated and thought out,” he told World Finance.

Even so, it is unlikely the two countries will be able to operate outside of the conventional banking system in the way they envision. Soon after Venezuela launched the petro, the US prohibited Americans from using or trading the cryptocurrency. In an article for the Brookings Institute, West and co-author Jack Karsten called the petro “deceitful” and said it offered no long-term value for international holders. They wrote: “The petro cannot stabilise the Venezuelan economy and instead exists to create foreign currency reserves from thin air.”

Scandinavian progress
Circumventing financial sanctions is certainly not the only application for state-backed cryptocurrencies. Elsewhere in the world, the use of cash is dwindling, replaced by easy and convenient card and mobile payments. Sweden is expected to become the world’s first cashless society by as soon as 2023: the use of cash has been plummeting there since 2007, when around SEK 100bn ($10.7bn) was in circulation. In 2018, just SEK 45bn ($4.8bn) moved through the economy.

The ubiquity of digital payments is beginning to make cash transactions more costly for retailers

The ubiquity of digital payments is beginning to make cash transactions more costly for retailers. When cash payments fall below seven percent of a Swedish retailer’s total transactions, it becomes more expensive to manage than the marginal profit the sales offer. According to a 2018 survey by the country’s central bank, the Riksbank, only 13 percent of respondents paid for their most recent purchase in cash, compared with 39 percent in 2010.

The Riksbank is now researching a central bank digital currency (CBDC) called the e-krona. Unlike Venezuela, which attempted to create a brand new currency, the e-krona would give the public access to a “digital complement” to its physical currency, the Riksbank said, and would remain a state-guaranteed means of payment.

$865m

stolen from crypto exchanges in 2018

40%

of illicit transactions between criminals in the EU involved bitcoin in 2015

$15.7trn

worth of global online payments in 2017 were made in China

$337bn

worth of global online payments in 2017 were made in the US

The basic benefits of digitalising a currency include efficiencies in digital payments and transparent transactions. Central banks could also allow policymakers to see every transaction in real time, allowing the bank to track every unit of currency. “So theoretically, for monetary policy [digital currencies could enable] better control and maybe more effective policy,” Fanusie said.

The Riksbank has also recognised the risks involved with implementing such new and wide-ranging technology, saying on its website: “The question of whether Sweden should introduce a state-issued digital krona is one that will affect the whole of society… By continuing to examine the scope for doing so, the Riksbank is preparing a possible way forward towards meeting a new digital payment market.”

By not acting on digital currencies, the bank said it would be abandoning the payment market to private agents, making it difficult to “promote a safe and efficient payment system”. Indeed, similar discussions are beginning to occur in other countries, such as Switzerland, which in 2018 began research into a state-backed e-franc.

Starting small
While Sweden, Switzerland and others continue weighing the pros and cons of implementing a state-backed cryptocurrency, a small island nation in the South Pacific is preparing to take the plunge. The Marshall Islands plans to launch a digital currency called the Sovereign, or SOV, to its population of 53,000 by as soon as 2020.

Barak Ben-Ezer, previously the CEO and co-founder of Israeli fintech company Neema, came up with the initial idea, which quickly gained the support of Hilda Heine, President of the Marshall Islands. The government’s Declaration and Issuance of the Sovereign Currency Act in February 2018 made the idea into a legal possibility.

According to its website, as both a fiat currency and a cryptocurrency, the SOV would act as a “Panama Canal between the old world of traditional finance and the rising tide of cryptocurrencies”. It continued: “SOV is the first crypto free of the regulatory friction and ambiguity faced by bitcoin and others. It’s just money, no different than the dollar, euro or yen, and benefits from the well-established regulatory and legal framework shared by all sovereign currencies.”

Countries shut out of the financial system through sanctions are developing their own state-backed cryptocurrencies

Ben-Ezer has brought on several co-founders to help bring his vision to life, including Peter Dittus, who was the secretary general of the Bank for International Settlements (BIS) from 2005 to the end of 2016 and currently acts as the chief economist at SOV. He told World Finance that the Marshall Islands was the perfect place to test a state-backed cryptocurrency because of its small size and the fact that the country’s legal tender, since the 1980s, has been the US dollar.

“If the new cryptocurrency doesn’t work as well as you expect, you have a fall-back position. So your downside risk is very small,” he said. A country like Sweden, on the other hand, is much bigger and has a well-established currency of its own. “They must be very careful,” he warned.

Much can still go wrong when trying to incorporate a new technology like a cryptocurrency into an established economy. For instance, security systems must be carefully developed to ensure there is no way for hackers to break in, as they have at numerous exchanges in recent years. In 2018 alone, around $865m was stolen from cryptocurrency exchanges. “[Hacks] can happen to central banks as well as to private people or exchanges,” Dittus said.

On top of that, countries like the Marshall Islands that have a reputation as a tax haven must go further to ensure any new currency cannot be misused. Cryptocurrencies already have a bad name as a result of their use in illegal activities – a 2015 report by Europol said bitcoin was used in over 40 percent of illicit transactions between criminals in the European Union. Dittus stressed that the SOV would be the first fiat digital currency with anti-money-laundering and Know Your Customer provisions built into its core. The company is calling this the Yokwe protocol.

“To make a cryptocurrency a serious currency, you must make sure that it cannot be misused,” Dittus said. “You want to have this currency recognised in international transactions as well, and that means that banks and regulators across the world must accept this as a real currency.”

Chinese promise
However, it is neither Sweden nor the Marshall Islands that presents the most exciting prospect for state-backed cryptocurrencies in Fanusie’s mind: China has long looked to push the boundaries of the definition of ‘currency’. It was in China that paper bills were first used in place of coins during the Tang dynasty, which held power in the country from 618 to 907. Today, mobile phone payments are soaring in China thanks to the widespread use of payment apps, including Tencent’s WeChat and Alibaba’s Alipay. Digital payments accounted for almost half of the global volume in 2017, according to research by PwC. That same year, $15.7trn worth of online payments were made in China, compared with just $337bn in the US.

The People’s Bank of China has been researching and actively monitoring the development of digital currencies and blockchain technology since 2014. In 2018, Zhou Xiaochuan, the former governor of the central bank, called the development of a digital currency “inevitable”.

Experts in the country are approaching cryptocurrencies in a “sophisticated and strategic way”, Fanusie said. For instance, he told World Finance, the bank’s Digital Currency Research Institute has set up think tanks in two Chinese provinces where innovators are encouraged to work on blockchain projects.

39%

of survey respondents in Sweden in 2010 paid for their most recent purchase in cash

13%

of survey respondents in Sweden in 2018 paid for their most recent purchase in cash

Unlike Venezuela or Sweden, China has been tight-lipped about its plans for any state-issued cryptocurrency, including what it would look like, how it would work and a timeline of when it would be launched. “They’re pretty much fertilising the environment. They’re laying down the groundwork on cryptocurrency,” Fanusie said. “China is going to be the potential game-changer.”

A Chinese digital currency would not only facilitate a cashless society, but it could also bolster monetary policy proposals, such as the Belt and Road Initiative, China’s multibillion-dollar plan for a 21st-century Silk Road.

As Jennifer Zhu Scott, a founding partner at the investment community Radian Partners, described in an article for the World Economic Forum, if the Chinese central bank used its own cryptocurrency to replace the dollar for trade along the Belt and Road Initiative, it could challenge the dollar’s dominance. “China’s digital currency revolution would expedite the accelerating retreat of the US in international trade while serving the Chinese Government’s key domestic agendas and potentially have a profound impact on… society as we know it,” she wrote.

Central power
The debate around state-backed cryptocurrencies has opened up to include key financial institutions around the world. For instance, the BIS warned central bankers in March 2018 that state-backed digital currencies could threaten the financial system by causing consumers to swarm from private banks to the central bank during times of financial instability, causing a “digital run”.

Many of the original supporters of cryptocurrencies were compelled by the idea of decentralisation

“[CBDCs raise] old questions about the role of central bank money, the scope of direct access to central bank liabilities and the structure of financial intermediation,” the BIS said in a 2018 report, adding that further research was needed on topics including the possible effects on interest rates and movements in exchange rates.

In November 2018, Christine Lagarde, Managing Director of the International Monetary Fund, argued for central banks to consider how state-issued digital currencies could boost public policy goals, such as financial inclusion, consumer protection and privacy in payments.
Speaking at a fintech conference in Singapore, Lagarde also warned of risks to financial stability and innovation, but she said the advantages of CBDCs were clear: “Your payment would be immediate, safe, cheap and potentially semi-anonymous. And central banks would retain a sure footing in payments. In addition, they would offer a more level playing field for competition, and a platform for innovation.”

She continued: “Putting it another way, the central bank focuses on its comparative advantage – back-end settlement – and financial institutions and start-ups are free to focus on what they do best – client interface and innovation. This is public-private partnership at its best.”

There are still hurdles the industry would have to overcome, however. One possible point of contention is likely to remain between those who currently promote cryptocurrencies and central bankers, who would control them: decentralisation.

Many of the original supporters of cryptocurrencies were compelled by the idea of decentralisation. Unlike a fiat currency that is controlled by a central bank, cryptocurrencies are processed through distributed ledger technology so they are not managed by any one entity. “State-backed cryptos blur the line between digital currencies and state control because they operate at the discretion of the particular government,” West explained. “The whole point of a cryptocurrency is to avoid government control.”

In the crypto world, Dittus said, decentralisation is “a little bit like a holy grail”. Although Ben-Ezer emphasised in an interview with the Next Web that the government cannot control the supply of the SOV and will have no control over how it circulates, Dittus said some centralised function is necessary, particularly in monitoring the anti-money-laundering features.

“A purely decentralised official sovereign currency cannot exist in my mind. It doesn’t work,” Dittus said. “A country’s currency that is accepted internationally must have good enough oversight by this country so that other countries will trust that this is a good currency.”

The Riksbank drew a line between CBDCs and cryptocurrencies like bitcoin to eliminate this paradox. Crypto assets like cryptocurrencies are not money, it says on its website, because “these assets lack an official issuer and do not function like a normal means of payment… An e-krona, if it becomes a reality, would be issued by Sveriges Riksbank and have the same value as banknotes and coins. [Crypto assets], on the other hand, should not be seen as currencies, but rather as a form of financial asset.”

Taking root
However it is defined, experts are still split on whether they think any kind of digital currency issued by a central bank would take off.

Building national cryptocurrencies and the financial systems needed to support them will not be easy

West was pessimistic about the future of cryptocurrencies like Venezuela’s petro, telling World Finance that central banks were unlikely to trust financial tools outside conventional regulation. “Having digital currencies creates risks that monetary devices will create major loopholes in current rules on global trade,” he said.

If these institutions decide to embrace a new technology, the question remains whether digital currencies will be introduced in a year, a decade or longer. Having worked on digital money projects since 1995, Dittus said the basic idea for cryptocurrencies is the same today as it was then. “The difference is that now the technology is there, and people understand how to implement this in a relatively user-friendly way compared to 1995,” he said. He added that it is something that is “taken seriously – not just by some sort of ‘crypto freaks’, but by lots of central banks”. Dittus believes cryptocurrency technology is still in its early days, but he sees a lot of potential: “I have little doubt that some sort of digital money will see the light in many countries.”

Still, there is much work to be done establishing the financial technology infrastructure needed to support a state-backed cryptocurrency. “The system is not really built, and it’s more than just having the software,” Fanusie said. “You need to have exchanges. You have to have places where people can purchase the cryptocurrency and ways for merchants to take it. That’s not something that’s going to happen overnight.”

Building national cryptocurrencies and the financial systems needed to support them will not be easy, but technology will likely continue evolving to catch up with the idealistic plans of entrepreneurs and financial institutions, as it has in the more than two decades since Dittus first came across digital currencies. While we may be many years away from any radical departure from the paper notes and coins we carry around in our pockets, it is clear that the seed of an idea has begun to germinate.

Unpicking the psychology that drives stock market trends

Posted on by Max Tomlin

On December 15, 1989, in the dead of night, Italian-American artist Arturo Di Modica set out to erect his latest work. With a little help from the Bedi-Makky Art Foundry, he embarked upon the ambitious task of transporting a 7,000-pound, 11-foot-tall bronze sculpture from his New York studio apartment to the very heart of the city’s financial district.

Di Modica’s Charging Bull statue has inspired veneration from tourists hoping for a cut of the riches it represents

When workers at the New York Stock Exchange arrived the following morning, they found a vast symbol of strength, prowess and unpredictability waiting for them. Since then, Di Modica’s Charging Bull statue, which turns 30 this year, has inspired veneration from tourists hoping for a cut of the riches that it represents.

The statue is also a physical manifestation of a ubiquitous Wall Street term: the bull market. Like its animal equivalent, this kind of financial climate is revered and feared in equal measure by investors. While a ride astride the bull can be a thrilling experience, it’s only a matter of time before the animal bucks – and those that fall best beware the stampede.

Unpicking the nomenclature
The term ‘bull market’ and its counterpart, the bear market, originate from an 1859 oil painting by American artist William Holbrook Beard, entitled The Bulls and Bears in the Market. The painting depicts a clash between a group of bears, representing ‘bearish’ or conservative investors, and a group of bulls, representing ‘bullish’ or aggressive investors, in front of the New York Stock Exchange. Beard’s image established these terms and their new meaning in the financial community’s vocabulary, and they remain ubiquitous today when discussing stock markets.

32

Number of bear markets that occurred between 1900 and 2008

50%+

Amount FTSE 100 recovered between January 2009 and November 2010

Extravagance and optimism are the axioms of a bull market, which occurs when stocks rise more than 20 percent from their 52-week high and continue on that upward trend. Investors enter a state of irrational exuberance, whereby stocks have risen in price for so long they believe that they will never stop rising. This then creates a self-fulfilling prophecy: investors bid prices way above the stock’s underlying value, the stock price soars due to perceived demand, and the cycle begins again. Bull markets only occur in a healthy economy, and are usually triggered by top-line revenue growth as measured by GDP or substantial profit growth by key market players.

By contrast, a bear market is categorised by caution and restraint; it begins when stock prices have fallen more than 20 percent from their 52-week high, and continues until the trend is reversed. Bear markets have occurred 32 times between 1900 and 2008, about once every three years, and typically last just over a year. Bear markets can be caused by stock market crashes, or occasionally by market corrections. While shrewd investors recognise that corrections are a natural part of any stock cycle, as they allow consolidation before the market goes on to reach higher highs, they can also trigger panic for less experienced market players, who then unwittingly send the market crashing downwards by panic selling.

Evidential proof
Within economic circles, the current state of the market and whether it will subsequently transform into either a bear or a bull is a constant source of debate. Many analysts argue that we’re currently in the longest ever bull market, which began in 2009, but it’s currently teetering on the brink: in December 2018, the S&P 500 came within two points of entering official bear territory, according to CNN. Nobel Laureate Robert Shiller told press at Davos in January that there is a very real threat of us entering a bear market in 2019; others have argued that we’re already there.

The endless opining as to whether the market is currently a bear or a bull can, ironically, cause it to switch from one to the other, due to the psychological phenomenon of herd mentality. This is commonly defined as the tendency for people’s behaviour or beliefs to conform to those of the group to which they belong, and is well documented among the investment community. In a bull market context, it typically stems from an assumption that others around you know something you don’t, and by not following their lead, you risk missing out on a great opportunity. Similarly, in a bear market, it’s triggered by other investors around you pulling out – you assume they have the inside track on information about a company’s future, and you decide to retract your investment too.

“The price of a market is the best thermometer for public opinion,” said Paddy Osborn, Academic Dean at the London Academy of Trading. “If there’s good news, people will buy and the price will go up. If there’s bad news, people will sell and the price will go down.” He believes that humans are “inherently herding animals whose instinct is to do the same as everyone around us”. It is that emotional instinct to follow that underpins herd mentality.

There are a number of examples of this phenomenon in recent economic history; notably, in 2010, investors missed out on hundreds of millions of pounds in lost returns in the FTSE 100, which recovered more than 50 percent between January 2009 and November 2010. Had they left their money in the FTSE, investors would have seen a much higher return than corporate bond funds, for example, which produced an average return of 28 percent over the same period. However, in the midst of the financial crash, flighty investors triggered a herd exit from equities, depriving everyone of sorely needed gains.

Osborn believes that herd mentality is more likely in a bear than in a bull market. “Stampedes occur when panic and fear set in – they’re much stronger emotions than the joy associated with getting rich,” he told World Finance. “When people start losing money, that’s when they run for the door.” However, there are examples – albeit fewer of them – of upward stampedes in stock markets, one of which being the 2000 dotcom boom. The realisation that the internet could be monetised triggered a mass influx of investment into fledgling online companies. Many transpired to be hopeful speculation, as the sector was very much in its infancy and failure was common. As such, investors that had hoped for huge wins were left wanting.

A split second
While herd mentality is by no means a novel phenomenon, it’s perhaps surprising that it continues to play a significant role in stock markets today, given that so much of trading is now computerised. But, Osborn said: “Automated systems are still programmed by human beings; at the end of the day, the decisions that are being made, and the price action that causes someone to sell, are exactly the same.” However, he explained, automation has significantly sped up the pace of that decision-making process by squashing a day or a month’s worth of activity into a minute or an hour. “All that automated trading does is accentuate the speed of the inevitable herding behaviour,” Osborn added.

Social media platforms have also had a significant impact, in that they have increased the rate and volume of information that is disseminated to such an extent that rapid market swings can be caused by a single post, depending on its author. In December last year, a tweet shared by US President Donald Trump in which he referred to himself as “Tariff Man” sent the Dow Jones Industrial Average tumbling a whopping 800 points (see Fig 1), with the S&P 500 also losing 90 points (see Fig 2). Trade-reliant stocks suffered particularly badly, as investors were rattled by Trump’s post, which seemed counterproductive to the conciliatory talks intended to end the US-China trade war that were occurring at the same time.

Posts such as this, shared without contextual data and perhaps without consideration for market impact, but rather in a show of political bravado, can send markets soaring up and down in an instant, wiping out hard-won investor gains. While it is well documented that political instability often spills over into markets, previous figureheads have mediated their communications to ensure that dramatic swings such as those caused by Trump’s tweet are limited – something the current president has declined to do.

Prominent business leaders have also triggered significant market moves through imprudent social media posts. On August 7 last year, Tesla founder Elon Musk tweeted that he had secured funding to take the company private at $420 a share. Prices skyrocketed to $379 on the stock market, before crashing back down to $322 on August 24 when the original post was revealed to be erroneous. He was later fined $20m by the Securities and Exchange Commission for the “false and misleading” post.

The fact that these two high-profile figures were able to share uncontextualised, histrionic and incorrect information in a public forum in a matter of seconds triggered investors to act, herd-like, in a way that they may not have done had the information been shared in a more measured way, or in a different format. “Instead of reading newspapers and taking a day or two to absorb financial information and react to it, [that process] happens instantaneously on social media,” Osborn explained.

The game of trust
Both incidents, and others like it, have raised the question of trust – an ever-declining commodity in our digitally driven world. Herd mentality inherently relies upon trust, in that the initial market move is triggered by a leader or source of some kind, whose information is considered reliable and therefore worthy of being acted upon. This could be a small news item or a comment by a seasoned investor like Warren Buffett that inspires perhaps five percent of investors to sell, in turn triggering others to follow suit.

On social media platforms, this has the potential to be exploited. “There’s a lot of uninformed people [online] who don’t necessarily have the understanding to accurately interpret information,” said Osborn. “The ‘clever’ people with a big audience can push the markets around by putting comments out on social media – not necessarily false news but perhaps accentuated a little, to push a share price in a certain direction. Because they know they have an audience, that’s a very easy way for them to disseminate information to people and get the result that they wanted very quickly.”

This exploitation of trust is now an entire business model in itself for so-called ‘social trading platforms’, such as eToro. These firms allow novice investors to peg their trades to those made by seasoned professionals, allowing them to ride coattails when prices go up. While it has certainly made trading more accessible, it can also be dangerous, as it allows any member of the public to integrate themselves into an industry of which they have no knowledge and end up blinded by dollar signs. Career investors will understand that it’s possible – even probable – to have a few months of five percent gains before losing 10 percent in a single month – most will expect that kind of fluctuation. For those unaware of these oscillations, they’re more likely to pull funds out the second they risk losing a penny, which in turn can trigger dramatic market moves. “I can totally understand why people [use these platforms], but their naivety makes them react in a knee-jerk way,” Osborn told World Finance.

Looking ahead
The current investment climate, with all of its confusion surrounding reliability, is symptomatic of a wider issue at play: that of perspective. The rapid dissemination of online information, together with the emergence of new technological players that soar to the top of markets in no time at all, drives markets forward at a pace that’s challenging to keep up with. This, together with the long-running debate as to whether the market is a bear, a bull or something teetering on the brink between the two, means that less experienced investors can rush into trading decisions due to fear of missing out on a gargantuan pile of wealth.

Herd mentality continues to play a significant role in stock markets today

In reality, both bear and bull markets – and all the swings that occur within each of them – are part of an overarching business cycle driven by global socioeconomic factors outside of any individual’s, or even country’s, control. This cycle, composed of a never-ending series of peaks and troughs – none with any fixed time frame – is the only market factor that is absolutely guaranteed to go up or down. It’s controlled to some extent by fiscal and monetary policy, but national market moves, currency crises, political revolutions and natural disasters could send the world soaring to a dazzling peak, or plummeting to a devastating trough.

“I think there is certainly over-optimism when people start to approach trading,” said Osborn, referring to the get-rich-quick motivation that can drive risky trading decisions. “In reality, if you look at the history, stocks generally go up over a long-term cycle.” Essentially, those making low-risk, stable investment choices now are likely to be in profit in 10 years time. While the explosion of tech stocks, the emergence of exciting start-ups and the rapid distribution of information via social media has driven a growing appetite for volatility-based trading, seasoned investors generally agree that it’s the few, not the many, who make money that way.

Ultimately, we’d all like to believe that we’re the exception, not the rule. In reality, there are very few people who accrue enormous wealth on a risky bet, and even then, much of that will be down to luck, not knowledge. While ‘everything in moderation’ might seem like a boring old adage, it’s also shrewd advice when it comes to choosing where to invest. By eschewing the herd and making low-risk, empirically driven financial decisions based on the understanding that a larger cycle is at play, investors can safeguard their finances for the future.

FXCC continues to thrive through its customer-centric approach

Posted on by Max Tomlin

Volatility and daily price swings are to be expected in the forex market, but long-term predictions regarding currency shifts can still be made. As such, exciting developments are expected in the coming year, with traders watching carefully for potential policy changes at the US Federal Reserve and the Bank of Japan. For anyone who wants to make the most of market shifts, choosing the right forex trading model is essential.

Exciting developments are expected in the coming year, with traders watching for policy changes at the US Federal Reserve and the Bank of Japan

Away from political matters, the forex market is set for a period of significant technological development. Social trading is expected to continue its momentum, while advanced digital infrastructure will open the market up further to smaller brokers. This will enable them to deliver platforms that boast the speed and scale that modern-day traders demand.

The regulatory landscape for forex has also shifted recently, with ESMA trading regulations coming into force for Europe-based brokers and traders in 2018. However, at FXCC, we have chosen not to bemoan this development. Instead, we believe that the newly imposed rules will not only benefit the industry, but will also help our business identify traders that require the high-quality services that FXCC has built its reputation on.

Building a platform
At FXCC, we are passionate advocates of the straight-through processing/electronic communication network (STP/ECN) trading model, which allows brokers to offer more reliable trades and more accurate pricing. We believe this is the only truly credible option for retail traders who want to operate in an environment as close to that experienced by institutional traders. Our XL account is one of the most effective trading accounts available and, dependent on certain conditions, offers zero-fee trading.

The forex market may be in a constant state of flux, but that’s exactly why traders need a broker that is trustworthy, knowledgeable and possesses the digital tools required to make trades quickly and seamlessly. Founded in 2010, FXCC boasts a dedicated team of professionals with extensive experience of the finance sector. Our customer-centric approach means that we are not only committed to our own success, but also to our clients’.

At FXCC we’ve always regarded ourselves as pioneers. Before entering the forex market as a retail broker, we conducted a number of tests, analysing the industry from every angle and researching our competitors’ business practices. There were plenty of options already available to forex retail clients back in 2010, so we asked ourselves an important question: how could we create a unique selling point? In order to come up with the right answer, we set about making the kind of service improvements that our competitors weren’t capable of. We decided to make excellence a defining part of our unique brand.

It must be remembered that while we were looking to launch a new brokerage, the global economy was still recovering from the impact of the 2008 financial crisis. It was entirely understandable that enthusiasm for a new brokerage was somewhat subdued. Nonetheless, we turned the negative financial climate into a positive. We realised that if we could claim our place in the market at such a difficult time, we could lay the foundations for a bright future.

Naturally, we decided that providing an STP/ECN model was our best route forward and the only way to provide the level of service we were demanding. While ECN trading is regarded as standard practice now, back in 2010, when we began to put the company’s launch plan together, combining ECN alongside other beneficial factors into one transparent service was not the industry norm.

Understanding the different types of forex platform is not always easy. Both the STP and ECN models are used by what is known as ‘no-dealing desk brokers’ – these are the brokers that give their clients direct access to the interbank foreign exchange market. Within this, an STP broker passes orders directly to a pool of different liquidity providers, giving clients the best possible price. The ECN model is similar but has traditionally been out of reach to the retail trader as minimum deposit amounts can be high. A hybrid model, like the one we employ at FXCC, delivers the best of both worlds.

As experienced traders, analysts and businesspeople, we knew that we didn’t necessarily have to become the largest broker in Europe. Instead, we were determined to create a bespoke, personal bureau service for discerning and demanding clients. We wanted to create a brokerage that would pass our ultimate test: one that we would be eager to trade with ourselves.

A priceless service
It has always been our intention to provide trading conditions that are as close to perfect as possible for our clients. We know forex retail trading isn’t simple – the market doesn’t reward everyone – and it can take several years to become proficient, let alone profitable. But we believe that clients should be able to trade without any concerns that their broker is trading against them, or doesn’t have their best interests at heart. Therefore, an STP/ECN model was the right and only choice for us. We’ve stayed rigidly wedded to our early principles.

With the STP/ECN model, a broker needs to retain their clients for a prolonged period of time. This loyalty can only be acquired if brokers are willing to go the extra mile for their clients. Brokers must also deliver superb account options, excellent analysis – both fundamental and technical – and make sure they are continually ready to cater to a client’s every query and request.

At FXCC, we provide our clients with access to MetaTrader software platforms, giving them all the tools they need to carry out research and easily enter and exit trades. Trading into and through an ECN, via an STP method, is still the only access route to markets by which retail clients, who may only have modest account sizes, can enjoy a trading experience similar to that of professionals trading at tier one institutions. Nothing else comes close.

Taking our bespoke service to the next level has become our primary objective. The company’s mission is to provide unparalleled levels of support and service to all our clients. Irrespective of their account size, all our clients receive equal care. We also took a view that we had to distinguish ourselves from our competitors by providing an account that had zero fees – an account where what you see is what you get. We believe that a completely transparent service, delivered through state-of-the-art platforms, is the right offer for all retail clients who are trading forex.

Our model is the only method by which traders can ensure they’re operating in a market that is devoid of interference. The prevailing market conditions are replicated by the ECN so clients can trade safe in the knowledge that they’re working in a fair environment, with no broker bias.

Never standing still
We test our business proposition by continually thinking of ways to ensure that our client base remains intact, while seeking opportunities to attract new clients to our service. As a result, we are constantly looking to improve our offering.

We’ve added various free widgets to our website for clients to use, as we believe that ongoing engagement is critical to a good client-broker relationship. Our market analysis, which we believe is second to none, is also available online. Furthermore, we keep in mind how important simplicity is when clients are looking for a broker. That’s why our XL account charges no swap fees, no markup, no commission and no deposit fees.

Client retention is the cornerstone of our business. It is one of the key metrics by which a broker’s performance can be measured. By building a relationship with our clients over many years, even when market conditions and national economies fluctuate, we have been able to achieve a high level of client loyalty.

The recent ESMA ruling, which restricted the leverage clients can use and, as a consequence, the margins required to trade, has served as a wake-up call to the retail trading industry. In our opinion, it has reinforced our belief that forex traders need to seek out brokers who offer the best value for money. With the ESMA regulations coming into force, brokers must recognise that only traders who adopt a professional attitude are likely to remain in the industry – only those with a reasonable level of account funding are likely to stay the course.

Rather than label the ESMA ruling as detrimental, we view it as a huge positive for the company and our service. Only the most prudent of brokers will continue to survive and thrive, with clients likely to move their funds to more established brokers offering the lowest transaction charges. While there have been unforeseen and indirect consequences of the ESMA ruling, they have largely been beneficial. Many of the faults that have hampered retail traders have been addressed by the new parameters. Overtrading will be reduced, and the perennial affliction of traders – attempting to trade from an undercapitalised account – should now be addressed.

Modern Monetary Theory gains traction in the US

Posted on by Max Tomlin

As the world’s foremost economic superpower, the idea that the US could suffer from hyperinflation seems preposterous. Hyperinflation is associated with failed states like Weimar Germany, Zimbabwe and Yugoslavia. It would be highly unlikely for any developed economy, least of all the US, to experience a similar fate – but in fact, the US has already suffered at the hands of spiralling inflation.

Some analysts are predicting that we could see a US currency collapse within the next decade

During the American Revolutionary War, the US governing body issued almost $250m worth of a new tender known as the ‘Continental currency’. With little control over how many bills were being issued and lacking the required taxation to take notes out of circulation, the value of this currency quickly plummeted. By 1780, just five years after the start of the war, they were worth approximately one fortieth of their face value.

Of course, the US economy has developed significantly since then, and the likelihood of it becoming caught in an inflationary trap now is much less likely. Nevertheless, some analysts are concerned, predicting that we could see a US currency collapse within the next decade. These fears partly stem from geopolitical factors, although US economic policy is playing a role too.

The rise of Modern Monetary Theory (MMT) has got orthodox economists in particular running scared, because of its suggestion that the US can increase its deficit spending significantly without having to balance its books.

In the past, while MMT remained a fringe view, mainstream economists didn’t have to engage with its ideas particularly closely. However, the theory has gained greater traction of late, especially among prominent left-wing political figures. Enacting a federal jobs guarantee and boosting the resources allocated to public services could certainly prove to be popular policies, but it would take a brave politician to argue that the US could simply issue more currency to pay for them.

14m-19m

Potential additional jobs created by MMT

$500bn-$600bn

Potential increase in GDP created by MMT

<1%

Potential increase in inflation created by MMT

In recent decades, governments from across the world have rarely run budget surpluses, frequently increasing spending to pay for things that were deemed to be essential. However, they have always claimed that they intended to cut the deficit eventually. Under MMT that could be about to change – and if it does, the US economy will be entering uncharted territory.

Not so modern
Despite its name, MMT is not actually that new. Its origins can be traced back to the work of Georg Friedrich Knapp in the early 20th century, who posited that banknotes need not be connected to any tangible commodity – say, gold – in order to attain worth. Their value comes from the fact that they are accepted at ‘public pay offices’ – by the state, essentially. Once this fact is acknowledged, theoretically there are no spending constraints for a sovereign state able to issue its own currency.

Russian economist Abba Lerner took Knapp’s work to its logical conclusion with his theories on functional finance, which argued for an interventionist government and focused on policies to reduce unemployment, rein in inflation and encourage appropriate levels of investment. It rejected “completely the traditional doctrines of ‘sound finance’”, contending that there was no need to balance the budget. MMT, a term coined by Australian economist Bill Mitchell in the 1990s, makes similarly bold assertions.

The theory is based on three economic principles that sound simple enough. First, fiat currencies are public monopolies – that is, central banks are the only institutions authorised to issue them. These currencies are also the only accepted payment for taxes. Nations with control over their own floating currencies are not financially constrained because they pay for their obligations with the very currency that they emit and control. Second, governments that sell bonds in a nation’s currency cannot technically default on their debt, even though they may choose to do so. And third, MMT argues that it is normal for governments to run deficits. In fact, every dollar spent by the government that exceeds the money received from taxes is one more dollar for the private sector. In essence, a public deficit is a private surplus.

Despite its name, Modern Monetary Theory is not actually that new

“None of these rather obvious stylised facts [are] part of orthodox economic theory,” said Pavlina R Tcherneva, a research associate at the Levy Economics Institute. “When pressed, mainstream economics would admit that currency is a public monopoly, but this fact is virtually ignored and mainstream theory still talks as though the government has to borrow its own money back from the private sector in order to spend. And outside of MMT, I see virtually no economist who has said that eliminating the deficit means that we are eliminating the surplus of the private sector.

“This is such a basic accounting claim, and yet, mainstream theory continues to argue that deficits crowd-out private spending and investment. In fact, it’s precisely the opposite – deficits provide net financial assets (the surpluses) to the private sector that can be used to finance investment and spending.”

According to MMT, since governments dropped the gold standard in 1971 and switched to fiat currencies, there is no need for them to finance their spending through taxation or borrowing. Instead, as the sole issuer of currency, it can simply create more money. While this could cause debt-servicing costs to increase, in this situation, governments could lower interest rates to make repayments easier. This would also ensure capital costs remained low in the event of investors running scared.

In its current state, the US economy is severely underutilised. Infrastructural projects remain in blueprint form only, minerals are left in the ground, and the country’s employment rate has hovered just below 60 percent for the past decade (see Fig 1). This is all a hugely inefficient waste of resources. Governments should not attempt to balance the budget, but balance the economy instead. It’s a distinction that seems minor on paper but could, if accepted, result in politicians enacting radically different economic policies.

The price of policy
John Maynard Keynes, talking about Lerner’s economic ideas in 1943, said: “His argument is impeccable. But heaven help anyone who tries to put it across.” Certainly, the suggestion that the US Government – or any other government, for that matter – should ramp up its deficit spending is not likely to be much of a vote-winner. Or at least, it hasn’t been until recently – perhaps with the scars of the financial crisis a little too fresh in everyone’s minds.

Today, however, MMT is gaining political traction. Progressive politicians on the left of the Democratic Party, like Alexandria Ocasio-Cortez, have spoken about raising government spending to pay for things like a Green New Deal. Other proponents of MMT can be found all across the world: the first MMT conference occurred in 2017, where a policy was discussed that would provide a job paying $15 an hour for anyone who wanted work. At the conference, economist Larry Randall Wray claimed that such a policy would provide an additional 14 to 19 million jobs, add between $500bn and $600bn to GDP, and add less than one percent to inflation.

In its current state, the US economy is severely underutilised

“MMT has gained… popularity in recent years because it has pointed out some very obvious aspects of public finance and opened up a range of economic possibilities,” Tcherneva told World Finance. “For a very long time, we’ve been told that the government must balance its books like a household, or it can go bankrupt. And therefore, the argument went, in the name of fiscal discipline, we had to sacrifice some policy priorities. Pressing economic problems, like hunger, unemployment, infrastructure degradation, we were told, could not all be financed. None of these claims [are] true.”

Governments often talk about their efforts to balance the books, but in practice, they hardly ever manage to achieve it: over the past 40 years, the US has only once managed to match its spending against tax revenue. In reality, governments find a way to pay for things that they deem to be important, regardless of how big their deficit has become. This could be a tax cut for the rich or a federal jobs guarantee – there is nothing inherently political, socialist or otherwise, about MMT.

“The US Government already enacts MMT,” Tcherneva said. “MMT is not a proposal. The recent [corporate] tax cut is only the latest demonstration that the government funds large-scale » programmes without ‘running out’ of financial resources. The prescriptive part of MMT simply says that since we can already see that there are no limits to government spending, is there a better way to spend? Can we get more bang for our buck, so to speak? What did we get in return for the recent tax cut – more inequality, a share buyback?”

One of the most commonly cited policy proposals among MMT proponents is the implementation of a federal jobs guarantee. The main problem in the US economy today is a lack of demand, in part caused by underemployment. A jobs guarantee would, of course, be hugely costly, but it would also provide citizens with the security and spending power to increase consumption, which would feed back into the broader economy. The guarantee could even turn out to be temporary if the increase in federal spending spurs an uptick in private sector hiring.

Governments often talk about their efforts to balance the books, but they hardly ever manage to achieve it

MMT supporters also rightly point out that the US Government already spends a great deal of money on the unemployed in terms of social support programmes and indirect costs related to crime and mental health. Resources are inefficiently locked up in providing for people who would rather be doing productive work. In this sense, a job guarantee is simply a different form of spending – one that Tcherneva says gives “better bang for your buck”.

A nation’s true wealth is the sum of the real goods and services that it can create. Provided these are being exploited in an environmentally sustainable way, the most efficient use of these resources comes from full employment. If MMT can achieve this, it is certainly better than paying to have people queue up for their social security cheque.

A risky business
MMT can be difficult to process initially – after all, orthodox economics has stressed that if a country increases the money supply too much then inflation will occur, making it more difficult for ordinary people to purchase the goods and services they need. Even worse, hyperinflation could bring an entire economy to its knees.

It is worth remembering, however, that printing money does not necessarily affect the amount of money being spent. And even if it does, MMT also proposes that government funds are allocated to the creation of more goods and services. As long as aggregate demand and monetary supply remain roughly in tandem, then it does not necessarily follow that increased deficit spending will lead to a devaluation of the US dollar. More importantly, MMT has never claimed that deficits are not important, or that the government can spend frivolously.

“There is a widespread misconception out there that MMT proposes running the printing presses,” Tcherneva said. “[It] emphatically [does] not. MMT explains how governments with monetary sovereignty currently spend. MMT explains the financial limits faced by government that do not have their own floating currencies. MMT suggests that we can increase or redirect spending in ways to serve the public purpose. Critics scream: ‘Inflation! Hyperinflation!’ but ignore the core tenet of MMT. The limits to government spending are the real resources, not finance.”

In fact, the finite amount of real resources at a government’s disposal is something that MMT critics have focused on. No one is really sure what would happen if the US Government kept increasing the deficit to pay for things after it had employed every worker and the economy was running at full, or nearly full, capacity. It has been suggested that hyperinflation would take hold.

Of course, MMT proponents argue that such a concern is nothing more than hypothetical posturing. The US is far away from using its full amount of real resources and can always use taxation to curb inflation should it occur. What’s more, much of the developed world has been operating in a low inflation environment for a number of years now. Despite deficits spiralling and years of quantitative easing, inflation has remained stubbornly low (see Fig 2). The threat it poses appears to be exaggerated, for the time being at least.

Times are changing
According to supporters of orthodox economics, MMT could bring an economic superpower to its knees. That appears unlikely at the moment, but significant geopolitical shifts could bring such doom-mongering closer to reality.
First, foreign governments that hold dollar-denominated debt would have to start selling up. Japan, China and a number of other countries keep billions of dollars’ worth of US Treasury holdings, keeping the dollar’s strength up. If economic confidence in the dollar declines, these foreign governments may decide to sell, depressing the value of the dollar further. That is not likely to happen at the moment, as these countries rely on US consumers buying their exports. However, an unforeseen economic crisis could change matters – a move away from the petrodollar, for example, could prove disastrous.

“I think a currency collapse in the US is unlikely,” Tcherneva told World Finance. “I think we need a failed state to see a collapse in the dollar. I cannot imagine a macroeconomic policy we could undertake under current conditions that would bring about a currency collapse. Look at the trillions of dollars we’ve spent for ‘unproductive uses’ – such as financing endless wars. And yet that didn’t cause drastic currency
depreciation or collapse.”

A wholehearted embrace of MMT would no doubt affect how investors view the US

However, a wholehearted embrace of MMT would no doubt affect how investors view the US. Although inflation has remained stubbornly low in the face of huge amounts of government spending, it is possible that this is because there is the expectation that the running up of large deficits was a temporary response to the financial crisis of 2008. In effect, although quantitative easing has been in place for years, there is a belief that it will come to an end.

If the US Government instead decides that it can increase deficits as part of long-term economic policy, businesses might suddenly become concerned. They might start raising prices, and then inflation could set in. While this doesn’t seem like much of a problem at the moment, it could very well rear its head later.

The fact remains that even though governments around the world display little commitment to lowering their deficits, they at least profess to. MMT would mark a departure from this and would likely lead to a substantial increase in deficit spending – in the short term, at least. How businesses and foreign investors would react to such a shift in economic policy is difficult to predict. However, convincing them that a government is not financially constrained by its budget, but by its access to real resources – labour, land and other assets – may be too much to ask.

It is possible that we will find out soon enough. For too long, citizens have been told that the government cannot afford to invest more in education, healthcare, infrastructure and other public services. At the same time, they have seen governments find money to pay for tax cuts, bank bailouts, military activities and other programmes that they likely deem to be less essential.

MMT asks that instead of worrying about their balance sheets, governments start looking at ways to use the resources at their disposal in the most efficient way possible. According to the theory, generating full employment, creating a more equal society and fortifying our education systems are all possible without causing rampant inflation. It is not a question of being able to afford it – it is a question of political will.

The dark underbelly of the traditional Chinese medicine boom

Posted on by Max Tomlin

Natural is best. That’s what most of us believe – that’s what we’ve been led to believe. And yet, inundated with information, it’s often hard to decipher the facts from all the noise. Multibillion-dollar industries, propping themselves up with falsehoods, certainly do not help in this scenario. Authoritarian rulers, prestigious supranational organisations and pure financial might don’t either.

With China’s government behind it, there appears to be little that can get in the way of traditional chinese medicine’s expansion

But let’s back up for a moment. Traditional Chinese medicine (TCM) has been expanding at a notable rate as of late: in 2016, the sector grossed CNY 860bn ($130bn), then expanded a further 20 percent throughout 2017, according to China Daily. A similar pattern can be seen overseas, too: according to Nature, a weekly science journal, the selling of TCM and other related products to One Belt One Road countries has surged. Between the years 2016 and 2017, exports experienced a whopping 54 percent growth to $295m. Indeed, according to the National Centre for Biotechnology Information, China exported TCM to 185 countries and regions around the world in 2016, with $526m worth exported the US alone – making up 15 percent of China’s annual TCM exports at the time.

There are a number of reasons behind this swelling demand. First, there is the inevitable convergence of TCM and other global-facing trends, such as wellness and organic foods. Increasingly prevalent and powerful, common rhetoric these days advocates the ingestion of pure, natural ingredients, as opposed to artificial, chemical compounds. The conversation almost equates to a stark debate of good versus evil: the honest farmer versus the big bad corporation; gentle herbs versus toxic substances, and so on.

As this conversation continues to gather momentum, industry players have happily jumped on the bandwagon. One such market is TCM, but its story is far more complex than one simply related to a growing awareness about wellbeing.

$130bn

grossed by TCM sector in 2016

20%

growth in TCM sector in 2017

54%

increase in TCM exports between 2016 and 2017

$526m

value of TCM exports that went to the US in 2016

15%

of China’s TCM exports went to the US in 2016

185

countries and regions TCM is exported to

Making a case
There are some powerful arguments in favour of TCM. Of particular note is artemisinin, an antimalarial drug that has played an instrumental role in reducing malaria-related mortality worldwide. It was first discovered in 1972 by Chinese professor Tu Youyou, who, as part of a secret government operation, was on the search for Chinese herb recipes with antimalarial properties. Winning the Nobel Prize in Physiology or Medicine in 2015, artemisinin arguably marks China’s most significant contribution to global health.

Then there’s aspirin, one of the cheapest, most widely used painkillers on the planet. This drug, with its analgesic, anti-inflammatory and anti-pyretic properties, is derived from willow bark – or, more specifically, its key ingredient, salicylic acid. First used by the ancient Egyptians and further espoused by the father of modern medicine, Hippocrates, willow bark has also been used in TCM for thousands of years.

More recently, traditional Chinese remedies have inspired some fascinating work. For example, Dr Paul Iaizzo, Professor of Surgery, Integrative Biology and Physiology at the University of Minnesota, is using artificial bear bile (bear bile being a common ingredient in TCM) to improve the success of organ transplants. “If we use a preconditioning of delta opioids, fatty acids or even some of the bile acids, we show improved function immediately after reanimation and for extended periods,” he told World Finance. This work could be a game-changer for organ transplants.

These examples – among others – make for persuasive vindication. Surely if these gems have been found among the troves of TCM, there must be others too.

Pressure from above
The Chinese Government – specifically, President Xi Jinping – is consciously driving the expansion of the TCM market at present. This became all too clear in a speech he gave in spring 2018, during which he also outlined plans to stay on as premier indefinitely. According to sources familiar with the matter, he devoted at least half an hour of his speech strictly to TCM, and explained there was no need to test the efficacy and toxicity of such treatments. The president also revealed a key stratagem in the market’s global expansion: the opening of some 300 TCM centres in various countries around the world. Domestic TCM centres, meanwhile, continue to attract more visitors to China, effectively becoming medical tourism hotspots. Since 2002, for example, some 50,000 foreigners (the majority being from Russian-speaking nations) have visited Sanya, a city in China’s Hainan province, for TCM treatments.

Clearly, there is a strong financial incentive for promoting TCM around the globe. And this is all the more pronounced given China’s recent economic slowdown, which has seen GDP growth drop to levels not seen since the 1990s (see Fig 1).

Moreover, Xi’s TCM ambitions have a strong political component. Dr Donald Marcus, Professor of Medicine and Immunology Emeritus at the Baylor College of Medicine, told World Finance: “He’s pushing it very hard for two reasons. One, he’s on a campaign to promote China as a great power and a source of all kinds of wonderful cultural and scientific things. He’s also facing the same problem that Chairman Mao faced, which is that they don’t have enough western-trained doctors to take care of a huge Chinese population, so they’re promoting the idea that TCM is just as good.” He added: “So it’s part of this nationalism push, but also, they’re making a lot of money with it.”

Africa, a continent that has a growing dependency on China, is one of the main targets for China’s plans. Africa is the perfect market for TCM. Like China, it suffers from a shortage of western-trained doctors and medical centres, leaving many – particularly those in remote, rural areas – with little access to healthcare. TCM offers a solution to this problem, as it’s far cheaper than western medicine. Furthermore, it does not require anything like the same level of training for practitioners.

In less developed nations that are unable to provide western medicine to sprawling populations, TCM can make for very profitable business. It also acts as a means for giving individuals the impression that they are being treated, when in reality, this is not quite the case.

“Insofar as it is being adopted, the impetus to try comes from clever marketing and does not come from any evidence whatsoever that TCM is scientifically sound or medically effective,” said Dr Steven L Salzberg, Professor of Biomedical Engineering, Computer Science and Biostatistics at Johns Hopkins University. Sadly, by using TCM, unknowing patients are less likely to seek proven treatments, which could in turn worsen their respective ailments. But this tragic tale does not end there.

Natural-born killer
Aristolochic acid, which is derived from aristolochia, a large plant genus, is a common ingredient that has been used in Chinese herbal remedies for thousands of years. Following an outbreak in the Balkans in the late 1950s, it was discovered that not only does aristolochic acid trigger nephropathy, or kidney failure – it can also cause cancer. “The International Agency for Research on Cancer has said it’s one of the most potent carcinogens in humans, but what we didn’t know until this century was just how big a problem it is in places like China and Taiwan, where aristolochic acid is used,” Marcus told World Finance.

Aristolochic acid is the embodiment of the dangers that alternative medicines pose

“Several studies that were done in Taiwan and China in this century found that close to 50 percent of kidney tissues from patients with kidney failure or cancer had the molecular signature of aristolochic acid nephropathy,” Marcus explained. “Those data indicate that tens of millions of people in Asia are at risk for aristolochic acid nephropathy.”

While many websites in China once brandished warnings about the dangers of aristolochia, it has been noted that within just weeks of Xi’s aforementioned speech, they had all disappeared. But how is it that more is not being said overseas? With this question comes another, perhaps more worrying, player in this increasingly conspiratorial story.

Affirming the illusion
Last year, the World Health Organisation (WHO) revealed that, by 2022, TCM would be included in its 11th International Statistical Classification of Diseases and Related Health Problems. According to the organisation’s website, the document is “the diagnostic classification standard for all clinical and research purposes”. The work also sets the healthcare agenda for more than 100 nations worldwide.

For China’s burgeoning TCM market, this is massive news. It marks the first time that TCM will be recognised by an international body with the prestige of the WHO. It also sets a scene wherein TCM is more commonly used as ‘acceptable’ treatment for various diseases.
And yet, there is little to no evidence of the effectiveness, or even simply the safety, of many of the treatments offered by TCM. This is all the more surprising given the high standard of testing that the WHO usually requires.

When asked what the WHO could possibly be thinking with such an extraordinary divergence from its standard procedures, Salzberg answered: “The WHO’s endorsement of TCM seems to be the culmination of a campaign by one person – its former director – who mistakenly believes (or seems to believe) that TCM is real medicine.” He is referring to Margaret Chan, who was director of the WHO between 2006 and 2017. “I don’t understand her motives, but scientifically speaking, she’s mistaken.” The WHO did not respond when contacted by World Finance.

The WHO’s Traditional Medicine Strategy 2014-2023 confirms the organisation’s backing of TCM and its integration into health systems around the world. To this end, the WHO recommends that member states ensure reimbursement mechanisms are in place and insurance companies are fully aware.

Among the scientific community, it is widely acknowledged that aristolochia is a powerful carcinogen, which can also cause irreversible kidney damage. But despite the fact that around 400 papers attesting this had been published by 2014, there is not a single mention of aristolochia in the WHO’s strategic report from the same year.

Aside from Xi’s assertion that TCMs need not be tested, as well as the WHO’s glaring omission, matters are made even worse by the fact that labels on TCM products are often incomplete, failing to list all ingredients included. This is particularly worrying given the ubiquity of aristolochia and its horrendous side effects. Back in 2012, a study by Murdoch University was carried out on 15 TCM samples seized by Australian customs. Testing found that the samples contained 68 plant families, including aristolochia and another poisonous herb, ephedra. On all samples, there was a clear lack of labelling with regards to these ingredients and their concentrations. “We also found traces from trade-restricted animals that are classified as vulnerable, endangered or critically endangered, including the Asiatic black bear and saiga antelope,” lead scientist Dr Mike Bunce stated at the time. A more recent study could not be found, which only further emphasises the lack of testing in the field.

Smoke and mirrors
Despite the dearth of scientific evidence verifying the effectiveness of many TCMs, such treatments have numerous advocates around the globe. Of course, among them are those with a clear financial reason for supporting the market, but there are also countless individuals that anecdotally attest to the wonders of TCM. Now, in the case of ingredients such as willow bark, there is plenty of scientific evidence to confirm its effectiveness, but for hundreds upon hundreds of others, there simply is not. So, how can we explain the success stories of those without financial incentives?

Without testing and standardisation of natural ingredients, the room for error is simply too great

The placebo effect plays a central role. Up until the 19th century, few medicines and herbal remedies actually worked. Nevertheless, when people met with medical practitioners, their symptoms soon subsided. While prescribed treatments were thanked, the nature of symptomatic illness means that they often improve even without medication.

Placebos are extremely powerful. Just the expectation of improvement upon having seen a doctor can lead to an easing of symptoms, or even a reduction in pain. In fact, a study by Dr Jon Levine from the University of California in the 1980s found that the typical placebo effect is comparable to an 8mg dose of morphine. This phenomenon goes a long way in explaining why, for centuries, so many people experienced improvements after taking TCMs, despite the lack of actual scientific evidence to corroborate their effectiveness.

As for the ingredients that have been proven to be effective, here comes another revealing factor in the case against TCM: referring to artemisinin and Taxol, an anti-cancer medication derived from the yew tree, Marcus told World Finance that “the crude extracts of both do not work very well”. He continued: “So in order to get them to work and be useful, they had to be purified, characterised and standardised.”

He also points to digitalis, a plant genus used to treat congestive heart failure and atrial arrhythmias. “When I was starting my medical career as a young physician a long time ago, we were using crude extracts of digitalis… [It] was a nightmare because it wasn’t standardised, so the content varied all over the place and had a very narrow range of safety. And beyond that, it caused hair-raising toxicity and even fatalities.”

Without testing and standardisation of natural ingredients, the room for error is simply too great. Any single component in a plant can vary enormously in concentration from year to year – even when grown in the same place. This painfully came to light with digitalis and its active ingredient, digoxin: only when digoxin is extracted and manufactured as a pure chemical can it be used safely and effectively.

Marcus added: “There’s nothing mysterious about what the active ingredients of herbal remedies are. They are chemicals, just like the chemicals that we use for prescription drugs. They have the same potential for causing a variety of good effects and bad effects, so if the belief that natural medicines are in some mysterious way different from purified prescription medications and that they’re safer, it’s totally wishful thinking.”

Follow the science
Today, many of us believe that natural must be best, but this is simply not the case when it comes to medicine. As Salzberg explained: “We now have treatments and even cures for a host of ailments that no one could treat centuries ago. Thus if you’re sick, you want to get the latest,
science-based treatment. Selling people on the idea that ancient practices are somehow superior – in the absence of any real evidence – may cause people to suffer unnecessary pain and even permanent disability.” But there are powerful engines in play to make us believe otherwise, for there are billions of dollars to be made from alternative therapies. Accordingly, the market is now expanding at a rapid rate, not just in western countries among educated, high-income individuals, but also in developing nations as a far cheaper option for proper medical care.

Aristolochic acid is the embodiment of the dangers that alternative medicines pose. Unfortunately, however, in the battle for global health, the opposing side has a great deal at stake. In addition to the formidable financial incentives for growing the TCM market, there are strong political motivations also. Indeed, it would seem that TCM is currently being used as a political tool – a marker of China’s growing prestige and authority around the globe. The WHO’s worrying actions seem to attest to this.

But the science speaks for itself. “If a treatment works, it’s medicine. If it doesn’t work, it’s something else. Labelling it as ‘traditional’ or ‘alternative’ or ‘holistic’ (to name a few) doesn’t make a practice legitimate,” said Salzberg. In the case of TCM, the wheels are already in motion: with the weight of China’s government behind it, there appears to be little that can get in the way of the market’s expansion. Our only hope, as always, rests with education. With greater awareness about the dangers of aristolochic acid – and, indeed, the threat of using alternative medicines in place of proven treatments – perhaps we might just be able to stop this market from growing to epidemic proportions.

Technological shortcomings continue to haunt the banking sector

Posted on by Max Tomlin

The resilience of the UK banking sector – once dubbed the ‘banker to Europe’ – is beginning to come under question. Not only is political strife influencing the industry’s reputation, but a spate of technology outages has also prompted the government and the UK’s Financial Conduct Authority (FCA) to issue warnings about the state of British banking.

Challenger banks have been making headway in the industry since the time of the global financial crisis

Tech crashes at UK banks more than doubled in 2018, rising by 187 percent in the year to October. Even with this staggering increase, the FCA said its estimates were likely to be conservative due to significant under-reporting. However, a few incidents were too big to sweep under the rug: for instance, in April last year, a botched IT operation at TSB – which is owned by Spain’s Banco de Sabadell – locked millions of customers out of their online banking accounts for weeks. The fiasco cost the company £330m ($426.8m) and led to the resignation of its CEO, Paul Pester.

Numerous other shorter-lived outages occurred in the UK in 2018 and into 2019, but the issue for financial institutions is global: banks ranging from the US’ Wells Fargo to National Australia Bank have reported nationwide outages over the past year, while in June, Visa Europe’s payment system crashed, leaving millions of customers across the continent unable
to use their cards.

An unstable legacy
Large financial institutions are perfect targets for hackers. Not only do they safeguard a vast store of private data and sensitive financial information, but they are often furnished with ageing IT infrastructure. Igor Pejic, Head of Marketing at BNP Paribas’ personal finance arm in Austria and author of Blockchain Babel, a new guide to distributed ledger technology, told World Finance that some banks’ legacy core systems date back to the 1950s and 60s when the technology was first developed. “Legacy systems are the major point of IT failure,” Pejic said.

50%

of all banking IT assets were in urgent need of modernisation in 2016

43%

of banking systems were running on COBOL in 2017

220bn

lines of COBOL code were still in use in 2017

Up to 50 percent of all banking IT assets were found to be in “urgent” need of modernisation in 2016, according to the Escaping Legacy report conducted by consultancy firm Accenture and the University of Surrey. In fact, many banks still use the programming language COBOL, or Common Business-Orientated Language, which was developed in 1959. In 2017, Reuters reported that 43 percent of banking systems were currently built on COBOL and 220 billion lines of COBOL code were still in use.

COBOL’s age is not a problem in itself – its software was updated as recently as 2014. “However ancient and clunky legacy systems are perceived to be, the truth is they are generally robust,” explained Gareth Jones, the director of information security and platform development at financial services provider Fraedom.

But when it comes to maintaining systems, programmers who use COBOL are most likely to be between 45 and 55 years old, Reuters found, whereas younger coders use programming languages such as JavaScript and Python, both of which were developed in the 1990s. This means that within a decade, COBOL expertise could be very difficult to come by.

The matter is further complicated by the fact that many banks have created a patchwork system, with layer upon layer of newer tech built on top of ageing core systems. These irregular structures are now often the culprits behind banking outages, as it is very difficult for new IT recruits to follow decades’ worth of complex workarounds unless in-depth knowledge is passed on.

This all creates technical debt, a concept in software development that reflects the additional cost of work caused by taking an easy route instead of a longer-term approach that might be more expensive upfront. When companies take shortcuts, they accumulate technical debt. According to Pejic, this results in more problems in the long run: “The more subtle complexity you have, the more possible bugs or glitches you can have. Eventually [these shortcuts] will end up causing more likely IT failures or… vulnerabilities to hackers.”

Rising to the challenge
Challenger banks have been making headway in the industry since the time of the global financial crisis because of their groundbreaking, tech-led strategies and personalised approach. A 2019 Fraedom survey of banking decision-makers in the US and UK found that nearly half of all respondents thought the biggest barrier to the growth of commercial banks was legacy systems. In response to the rise of nimble and innovative challenger banks, 44 percent expected their organisation to invest heavily in updating legacy systems.

But updating the technology at the core of our financial institutions is even more complicated than maintaining legacy systems. According to the FCA, many of the UK’s tech outages in 2018 were caused by replatforming failures. Pejic compared it to changing a jet engine while in flight: “You cannot just switch it from one day to the other.”

Any move away from legacy systems will create technological issues, including outages. Jones told World Finance: “The outages are… a symptom of a general drive within the industry to innovate, reduce costs, transform digitally (including the move away from legacy systems) and the break-up of banks.”

Some companies do manage to pull off these impressive feats of computer programming: Ant Financial, a subsidiary of China’s Alibaba, is just 14 years old, and already it is on its fifth generation of IT infrastructure. Unfortunately, many financial institutions are not so proactive. Following its study, Accenture said “legacy stasis” is deeply embedded in banks’ boardrooms. Though executives know the pace of technological change is only accelerating, they see the modernisation of systems as being “overly complex, expensive and unacceptably risky”.

It typically takes a “cataclysmic event, like a full-blown outage” to catalyse change, the Accenture report said. “By then, of course, irreparable damage may well have been done.”

A seat at the table
Institutions that want to match Ant Financial’s pace of technological change should employ someone at board level who understands the bank’s IT infrastructure and the current technological environment, such as a chief digitalisation or chief data officer.
“Unless the legacy system is understood fully – with all of its bolt-ons – it’s very difficult to do a lift and shift from a legacy system to a new one. So, transition challenges are really in change management, the system’s features and strategy management,” Jones told World Finance.

According to the FCA’s Megan Butler, who spoke in London last year about tech outages, banks are struggling to recruit the right skills at the top level. “Historically, and for most of my career in this industry, the rock stars of finance were always the alpha traders,” she said at the time. “Today, it’s the CIOs and IT consultants who are in high demand and short supply… meaning the best are difficult to employ and hard to retain.”

At a time when cyberattacks are getting more structured and coordinated, it is clear just how important it is for banks to have the right protections in place. Migrating core systems may be daunting, but it is necessary. At the moment, Jones sees outages as inevitable due to the sector-wide shift towards online products and offerings. “As a matter of fact, we’ve probably not seen the worst of it yet,” he said. The FCA also said it sees “no immediate end in sight to the escalation in tech and cyber incidents”.

Despite this, outages are becoming more concerning due to the criticality of banking services. Banks big and small will be faced with continual challenges as the tech landscape evolves, but as Pejic’s jet engine metaphor makes clear, moving away from legacy systems will be as complicated as it is essential.

Going forward, it appears inevitable that consumers will continue experiencing outages as the industry modernises. Therefore, the banks that recover the quickest and do the most to protect consumer data and security will be the ones to come out on top.

Adapting to succeed in the constantly evolving forex industry

Posted on by Max Tomlin

With the introduction of online trading, capital markets have undergone a revolution driven by technology and radical change. In many ways, online trading has democratised the entire industry by slashing intermediation costs and giving the public broad and instant access to financial markets through forex and contract for difference (CFD) products. Its introduction has also given rise to new business models such as online trading platforms. This in turn has allowed retail traders to operate independently from overarching financial organisations.

As a result of its revolutionary nature, online trading has become a highly competitive and rapidly evolving field

It is still a relatively new industry, but as a result of its revolutionary nature, online trading has fast become a highly competitive and rapidly evolving field. In the past decade, the online financial services industry has also undergone some major transformations: stricter regulations by supervisory authorities such as the European Securities and Markets Authority and the enforcement of the EU General Data Protection Regulation, the most important change in data privacy regulation in 20 years, have created a complex set of restrictions and challenges. The latest advertising controls by Google and Facebook are further adding to the challenges faced by today’s brokers.

Evolving to succeed
According to Markos Solomou, COO at forex and CFDs online broker BDSwiss, change in the online financial services industry and the broader digital sphere is not only inevitable, but also beneficial. “Regulatory pressures ultimately force brokers to deliver more value to their clients by maintaining a greater level of transparency with regards to their procedures and processes,” he told World Finance.

BDSwiss remains ready to accommodate stricter regulatory and advertising controls, as it believes that these restrictions help protect the interests of clients while laying the groundwork for a new era of fair and transparent online investing. “Today’s successful brokers focus on an optimum customer experience that is earned by offering superior service, rather than by taking risk and engaging in unwarranted marketing practices,” Solomou added.

BDSwiss has not only managed to successfully overcome the aforementioned industry challenges and withstand the test of time, but it has also built a robust network of partners and expanded on a global scale. The company has now evolved into a one-stop broker that offers unparalleled multilingual support, native platforms and competitive trading conditions on more than 250 forex and CFD assets to a growing client base. Solomou believes that BDSwiss’ success over the years can be attributed to its forward-thinking approach and ability to remain flexible.

“Being able to constantly adapt to change is no easy task,” he said. “It requires a high level of digital maturity, constant re-evaluation and refinement of your business model, and the right talents and key players at a management level who have the experience necessary to lead the company in the right direction.” He acknowledged that achieving a proactive business model in a fast-changing digital world is an ongoing process – one that requires time, money and resources. However, that process “also increases the likelihood that your organisation will not only survive, but also thrive”, he told World Finance.

Forex brokers are also facing a separate set of business challenges in the modern era, due to the rapidly expanding application of cutting-edge technology. To remain competitive in an evolving field, brokers need to have a solid foundation, as well as secure data management strategies in place. These in turn require substantial investment in business technology infrastructure, combined with a strong organisational framework. The backbone of every successful broker is a regulated trading environment that safeguards investors’ best interests by providing safety of funds and secure transaction processes via authorised, top-tier payment providers.

As Solomou noted: “The online trading industry is extremely fast-paced, and we need to constantly consider how we can deliver an optimal trading experience along with unparalleled support to our clients.” He outlined that BDSwiss’ service-delivery agility was dependent on stable infrastructure – the combination of these two factors has allowed the company to maintain a competitive edge in the industry. “A solid market presence translates into a robust brand name that inspires investors’ trust, attracts strong partnerships and helps support a growing client base.”

A global partners network
Maintaining a robust network of partners on a global scale has been a key ingredient in BDSwiss’ success. “We build long-term, mutually beneficial and highly lucrative business relationships with our partners,” said Solomou. BDSwiss’ dedicated Affiliate and Business Development teams focus on providing optimal support and assistance to both new and experienced affiliate marketers and ‘introducing brokers’ (IBs), helping them expand their businesses and maximise their earnings. By supporting partners with resources and constantly working on research to come up with products that really add value for today’s traders, such as educational resources, market alerts or custom trading tools, the company has been able to optimise conversions.

“Our aim is to go above the traditional broker offering and provide our partners with benefits that add true value, such as personal support, dedicated call centres, competitive and transparent remuneration options, timely and secure pay-outs, and some of the most advanced tracking and reporting tools,” Solomou told World Finance. “More importantly, we listen closely to our partners’ requirements and suggestions, thereby ensuring we accommodate their every need.” The company is then able to build comprehensive support packages based on their clients’ preferred marketing channels, target audience and conversion goals, rather than offering an off-the-rack service that doesn’t meet all of their requirements.

BDSwiss has a total of seven offices worldwide, including European outposts in Cyprus and Berlin, as well as recently opened offices in Kuala Lumpur. Having a solid presence in both Europe and South-East Asia enables the firm to offer its affiliates and IBs a complete 360-degree solution that can help them expand their reach. For instance, the group regularly invests in hosting local seminars and collaborative events, such as free forex seminars, multilevel trading workshops and exclusive educational events in a number of different locations.

Investing in innovation
BDSwiss seeks to disrupt the financial services industry by maintaining a forward-thinking approach while investing in continuous innovation and fintech solutions that redefine the world of online trading. “With everything from natively developed platforms and apps to advanced trading tools that enhance the client experience, we aim to exceed expectations,” Solomou told World Finance. “We maintain the loyalty of our partners by ensuring that the end client has the best possible trading experience.”

The company achieves this by investing in in-house fintech solutions, offering some of the most competitive trading conditions on a broad range of CFD assets, as well as integrating the latest automation and trading tools available. Some of BDSwiss’ latest additions include the MetaTrader 5 and Autochartist platforms. “We focus on what really adds value for traders in the long term, and we remain agile to the industry’s trends and changes. Essentially, we work tirelessly to become a truly one-stop broker covering our clients’ every possible trading need through our highly advanced platforms, ultra-competitive trading conditions and multilingual support,” Solomou explained.

The online investment arena is changing at a faster rate than ever before. We are on the brink of a new era for the online investor: he or she can now expect more transparency, superior platforms and more competitive trading conditions than ever before. Online brokers today do bear more responsibility, but they also need to continually refine their offering, while specialising and innovating to maintain their competitive edge.

Overall, the industry is likely to continue consolidating, and key market players are looking forward to what lies ahead. BDSwiss in particular continues to welcome any opportunity that will take its clients’ trading experience to the next level. “As for the future, we aim for ongoing growth by investing in fintech, embracing innovation and offering our clients and partners a better service through new technologies, a wider variety of products and continuous support,” Solomou concluded.