FT : UK pulls back from clash with Big Tech over private messaging

UK pulls back from clash with Big Tech over private messaging
Ministers will not immediately enforce online safety bill powers to scan apps after WhatsApp threatened shutdown

The UK government has conceded it will not use controversial powers in the online safety bill to scan messaging apps for harmful content until it is “technically feasible” to do so, postponing measures that critics say threaten users’ privacy.

In a statement to the House of Lords on Wednesday afternoon, junior arts and heritage minister Lord Stephen Parkinson sought to mark an eleventh-hour effort to end a stand-off with tech companies, including WhatsApp, that have threatened to pull their services from the UK over what they claimed was an intolerable threat to millions of users’ privacy and security.

Parkinson said that Ofcom, the tech regulator, would only require companies to scan their networks when a technology was developed that was capable of doing so. Many security experts believe it could be years before any such technology is developed, if ever.

“A notice can only be issued where technically feasible and where technology has been accredited as meeting minimum standards of accuracy in detecting only child sexual abuse and exploitation content,” he said.

The online safety bill, which has been in development for several years and is now in its final stages in parliament, is one of the toughest attempts by any government to make Big Tech companies responsible for the content that is shared on their networks.

Social media platforms have railed against provisions in the bill that would allow the UK regulator to force them to allow their encrypted messages to be monitored for harmful content, including child sexual exploitation material.

WhatsApp, owned by Facebook’s parent Meta, and Signal, another popular encrypted messaging app, are among those that have threatened to exit the UK market should they be ordered to weaken encryption, a widely used security technology that allows only the sender and recipient of messages to view a message’s contents.

Meredith Whittaker, the president of Signal, described the government’s move as “a victory, not a defeat” for the tech companies.

“Of course, this isn’t a total victory,” she wrote on X, formerly known as Twitter. “We would have loved to see this in the text of the law itself. But this is nonetheless huge, and insofar as the guidance for implementation will have the force to shape Ofcom’s implementation framework, this is, again, very big and very good.”

Will Cathcart, head of WhatsApp, said the company “remains vigilant against threats” to its encryption. He posted on X: “The fact remains that scanning everyone’s messages would destroy privacy as we know it. That was as true last year as it is today.”

Officials have privately acknowledged to tech companies that there is no current technology able to scan end-to-end encrypted messages that would not also undermine users’ privacy, according to several people briefed on the government’s thinking.

Critics have long argued such a technology does not exist and that current scanning technologies have been found to make errors, wrongly identifying safe content as harmful, and requiring flagged material to be checked by human monitors, therefore exposing private content.

The government said on Wednesday that its position on the issue “has not changed”.

“As has always been the case, as a last resort, on a case-by-case basis and only when stringent privacy safeguards have been met, [the legislation] will enable Ofcom to direct companies to either use, or make best efforts to develop or source, technology to identify and remove illegal child sexual abuse content — which we know can be developed,” the government said.

Parkinson added in the Lords: “It is right that Ofcom should be able to require technology companies to use their considerable resources and their expertise to develop the best possible protections for children in encrypted environments.” But he did not give any details.

Child safety campaigners have spent years pushing the government to be tougher on tech companies over abuse material that is shared on their apps.

Richard Collard, head of child safety online policy at the National Society for the Prevention of Cruelty to Children, said: “Our polling shows the UK public overwhelmingly support measures to tackle child abuse in end-to-end encrypted environments. Tech firms can show industry leadership by listening to the public and investing in technology that protects both the safety and privacy rights of all users.”

Reuters : Scholz: Germany must pull together to overcome economic crisis

Scholz: Germany must pull together to overcome economic crisis

BERLIN, Sept 6 (Reuters) - German Chancellor Olaf Scholz on Wednesday called on the ruling coalition and democratic opposition to pull together to overcome the "mildew of red tape, risk averseness and despondency" that has weighed down Europe's largest economy in recent years.

This was also key, he said, to fend off "those who want to draw political profit from decline scenarios and panic-mongering" amid a sharp rise in support for Germany's far-right.

"The citizens are fed up with this standstill, and I am too," Scholz said in a speech to the Bundestag lower house of parliament during a session on the 2024 budget, sporting a black eye patch following a jogging accident.

The chancellor announced a new "Germany pact" with a bundle of measures aimed at streamlining the country's notoriously slow bureaucracy and speeding up the digitalization of the economy.

FT : FSB warns of risks posed by hedge funds’ ‘hidden leverage’

FSB warns of risks posed by hedge funds’ ‘hidden leverage’
Policymakers step up concerns over impact of bets on bonds

The world’s most powerful financial policymakers have singled out a group of hedge funds as a potential source of instability for financial markets, in a marked escalation of existing concerns about the impact of their bets on bonds.

The Financial Stability Board, comprised of the world’s top finance ministers, central bankers and regulators, on Wednesday warned that part of the hedge fund industry had “high synthetic leverage in general”.

The role played by hedge funds and other financial institutions such as asset managers and pension funds in bond markets has come under increased scrutiny since March 2020, when US government bond yields dramatically increased as demand evaporated.

The default of Archegos Capital Management in 2021 also underlined how leverage could cascade through markets and the banking system when the fund’s series of highly concentrated bets on share price moves soured.

Markets remained “vulnerable” to “further liquidity strains” from so-called non-bank financial institutions, the FSB noted. However, it added, “Within the hedge fund sector, there is a group of funds, typically pursuing macro and relative-value strategies, with very high levels of synthetic leverage,” without naming any institutions.

Synthetic leverage is used to boost returns or hedge positions and created using derivatives or other complex financial instruments, which are often held off balance sheets. Regulators find it more problematic to evaluate than outright borrowing because it is more difficult to measure institutions’ exposures and liabilities can rise quickly.

Macro hedge funds take bets on direction of assets or interest rates. Relative-value ones aim to exploit market inefficiencies such as the difference between the price of futures contracts and the underlying asset.

Hedge funds’ leveraged bets on bonds were blamed in March 2023 for exacerbating another spate of turmoil in US Treasuries, prompting Securities and Exchange Commission chair Gary Gensler to tell the Financial Times that funds should face higher scrutiny.

Still, even as regulators threatened greater oversight, exposures continued to grow in some areas of the market. A paper published by the Federal Reserve last week showed that hedge funds’ notional short positions in five- and 10-year US Treasuries were above all-time highs as of May 9.

The FSB added that hedge funds could also have “hidden leverage” because they typically borrow from several prime brokers to increase the size of their bets. “Furthermore, a few prime brokers dominate the provision of lending to hedge funds, and this concentration could amplify shocks and propagate them through the financial system,” the FSB added.

An executive at a firm that specialises in similar trades argued that hedge funds have “overfished” in the market, and warned that regulatory caps on the amount of leverage these funds can access through the repo market will be next.

The FSB has already begun work on leverage in non-banks and on Wednesday said the area would be a “key area of policy focus in 2024”.

It wants to address “the most salient data gaps” on the exposures of non-bank financial institutions, potentially by pulling in information from trade repositories and from the banks providing them with leverage.

It also wants measures to contain “excessive leverage behaviour”, which could include higher requirements for haircuts and margins on derivatives and securities financing transactions, as well as “measures to enhance prime brokers’ risk management and improve the liquidity preparedness of non-bank investors”.