Everything seems to indicate that going forward, the financial sector will continue to be challenged by cybersecurity threats, despite the allocation of significant resources to this ongoing battle. The continuous challenge is brought about by the speed of technological change and the ever increasing level of sophistication of techniques used. Financial institutions currently find themselves attempting to home in on a moving target which substantially increases the risks posed.

The threat matrix is expanding

Threats are continuously evolving and the threat matrix is expanding. At the same time, banks and similar organisations are under pressure to enhance their product offering, normally requiring the integration of new technologies.

Balancing technological expansion with assurance on technological security is an extremely difficult task and a costly (but necessary) exercise. To further complicate matters, organisations also increasingly depend on third party-vendors and specialist product suites, having to rely on systems which are outside their control.

Reports suggest that attacks are becoming more frequent, sophisticated and widespread, targeting not only financial services but also other areas of any given jurisdiction. As far as the banking sector goes, this will include for example all deposit takers, payment services companies, credit card firms and providers of e-money services.

These attacks normally originate from different groups such as activists and units of organised crime and may arise from within the state or abroad. Most firms, irrespective of size and area, experience intrusion attempts. When successful this potentially leads to user account takeovers, identity theft, network disruptions and attempts to alter data integrity.

Security technology

Firms will be looking to protect themselves by ensuring a robust IT governance framework which will include security policies, relevant education and training, ongoing risk management, third-party assurance (by way of audit) and satisfactory monitoring and reporting. Additionally, financial institutions will look at implementing security technology in an attempt to be immune from attacks.

Such technology normally comes in the form of known software and hardware including anti-virus and spyware/malware detection software, firewalls, access security and intrusion prevention systems.

It is also extremely important that, where possible, data transferred is encrypted. Also of importance is that penetration testing is conducted by the firm itself. Many organisations do not give sufficient importance to this extremely important task.

To be prepared, organisations in the financial sector will need to focus on long-term planning, resources permitting. This will typically include an IT strategy, including budget attribution and project planning.

This is fundamental to ensuring that the balance between technological development and security assurance is fair. This will inevitably have a bearing on budget allocations which are on the increase. Additionally, the IT function will need to be an integral piece of risk management, providing valuable insight to developing the firm’s risk matrix.

Knowledge exchange platforms

As an industry, we need to cooperate and possibly engage via knowledge exchange platforms so that more effective risk mitigation strategies can be implemented. This would also assist smaller firms where resources may be more limited. Ideally, these knowledge platforms need to cross-borders where Gibraltar should attempt to participate in international networks, working together to protect the international community from such threats.

Additionally, the Government of Gibraltar will need to reinforce the importance of cyber security and encourage information sharing forums and specialised task force committees to focus on these issues.

The Gibraltar Banker’s Association takes this important subject very seriously and commits to work together with governments and regulators, both local and in home state of local subsidiaries/branches, to ensure that an appropriate framework and policies exist to mitigate the ongoing threat of cyber-attacks.

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That implies GIB has potential to lend £160m to £200m for mortgages and business borrowing before any further investment is required, assuming the personal and business loans meet immediate and extended liquidity demands on a tiered risk basis, and there is adequate security.

The move was prompted by the intended closure from October of Barclays, leaving NatWest as the only high street bank. Delays with conversion of a former Main Street discotheque into the GIB headquarters building means the Bank is unlikely now to open before early 2015. As a result, Barclays has agreed to delay its departure until January.

GIB needs its premises to be complete and operating systems fully in place before the Financial Service Commission (FSC) will grant a ‘banking licence in principle’, an administrative procedure that falls near to the end of in-depth FSC checks on the quality and independence of the Board of directors, as well as of senior staff and working processes.

Fabian Picardo, Gibraltar’s Chief Minister, revealed in June the appointment of seven independent non-executive directors, including the present Chairman of Lloyds Bank (Gibraltar), Albert Langston, and former FSC chief executive, Marcus Killick, who started the GIB licencing process before retiring in February. The others include lawyers, a businessman, and one government official, Dilip Dayaram Tirathdas, the financial secretary.

In May, Lawrence Podesta joined GIB as chief executive from being chief operating officer and deputy chief executive at Lombard Odier (Gibraltar), the Swiss-owned private bank, and Derek Sene moved to become GIB’s chief operating officer after 40 years with Barclays in Gibraltar. Several Barclays staff are expected to be offered jobs with GIB, which will provide full retail banking services.

Albert Isola, Minister for financial services, assured that “All other aspects of the new Bank including its technology platform, its management team and its systems and operations are on course to be concluded in anticipation of the building works being completed”.

It is unclear how GIB will ‘co-operate’ with, and ‘complement’ the State-owned Gibraltar Savings Bank (GSB), which intends to offer enhanced and new services, including “instant access current-account facilities for the payment of Government bills by standing order and by direct debit and facilities for the electronic transfer of funds between bank accounts.”

GSB will introduce ATM cash machines and a ‘VISA approved’ debit card, to bring about a ”transformation” this financial year as it starts to make use of the latest banking technologies, with further branches and public counter positions envisaged, Picardo noted.

GIB, unlike GSB with reserves of some £11m projected to grow to £20m by end-March 2015, is a credit institution subject to FSC licensing and regulation.

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In general, 2013 was clearly a great year for equities and risky assets. The so-called “fall of safe havens” fully unfolded early in the year when US and German government bonds declined and gold dropped as economic improvements materialised. This meant that portfolios with higher tolerance for risk generally did very well in 2013 as we took advantage of the opportunities markets offered. We also were very cautious of government bonds, anticipating the poor returns from this market.

As economic improvement gradually emerged in published data, the prospect of interest rate rises no longer seemed quite so distant and longer-term interest rates rose in response.

By focusing on shorter duration bonds, high yield, subordinated bank debt and floating rate instruments we have managed to produce positive returns from fixed income in a difficult environment. Client portfolios have, therefore, done well overall and enjoyed healthy returns.

For the financial community it was a remarkable year as the Nobel Prize in Economics was attributed to Professors Eugene Fama, Lars Peter Hansen and Robert Shiller “for their empirical analysis on asset prices”. According to our records, it has been 23 years since the Nobel Academy last distinguished a work that relates to investor needs in terms of investments, asset allocation or strategy.

Looking ahead, 2014 appears that it will be a year of further economic “normalisation”, which should remain supportive for cyclical and risky assets, especially in advanced economies. The call for better 
economic prospects in 2014 remains unchanged, but our confidence is now higher. There is clearly better visibility, with fewer identified uncertainties. For example, geopolitical tensions have greatly eased, Eurozone sovereign stress has waned and the US fiscal dispute is over.

In fact, there are even more potential positive surprises ahead: Japan’s economic policies may prove a success thanks to innovative initiatives, Eurozone structural reforms on internal competitiveness could be decided and China might surprise the world by succeeding in a smooth transition from its planned export-driven economy to a liberalised consumer-driven economy, averting a hard landing. International investors increasingly share the sentiment of better visibility, currently driving asset prices higher. (Three of our seven conviction ideas for 2014– see box below).

This trend should continue. In a world of low interest rates and abundant liquidity, stocks and high-yield bonds still have room to appreciate further. Whilst interest rate rises are nearer, we do not expect them this year in Europe, UK or the US. We expect some “tapering” (reduction in bond buying) by the Federal Reserve (FED) shortly, but liquidity will remain very good and after a short period of adjustment we expect markets to remain supported by growth and strong corporate earnings.

Yet, we cannot help tempering our optimism for 2014 with some reminders of caution. Improved visibility on what is known should not to be confused with lower risks overall. The world is, of course, full of uncertainties and surprises. Keeping in mind Robert Shiller’s impressive record of tracking investor exuberance by warning for bubbles in 2000 and again in 2005-2007, we have to remember his conclusions:

^l Long-term asset returns are conditioned by structural equilibrium in economic conditions, such as interest rates, growth rate and corporate profitability. This equilibrium prevails over cyclical fluctuations. Over long periods, the main economic drivers such as unemployment, profits or inflation, revert to their average trends.

^l Therefore, relevant predictors of long-term returns are not short-term trends but valuation metrics that show the relationship between asset price and a long-term average of an economic indicator such as stock index/ GDP, stock prices/tangible assets, stock prices/profits, bond yield/average inflation. Note that these metrics do not give any valuable information for short-term returns.

^l Bubbles do exist, and appear when investors fall prey to “irrational exuberance” confusing short-term market trends with long-term expected returns. In conclusion, beware of possible market exuberance building up in 2014 as global growth accelerates, thus be ready to reverse positions if needed. Most asset prices could perform well given current economic and financial conditions, but this is not a guarantee of extraordinary long-term returns, especially if the current conditions are themselves extraordinary. In non-Nobel wording: “tall trees can’t grow to the sky.”

www.privatebanking.societegenerale.com/hambros

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