A recent report by accountancy firm Grant Thorton revealed that there were nearly 1 million job vacancies in the UK, with around half of this figure being in the food and drink industries which have heavily relied on an EU workforce for the past 20 to 30 years. While this might imply that Brexit is to blame for the UK’s supply chain crisis, the government and other prominent figures are insisting that the crisis is being caused by the lingering impact of the pandemic, making it difficult to understand what exactly is at the root of the problem.
Many industry bosses are blaming Brexit for the crisis, claiming that there’s a substantial lack of British workers filling the gaps left by Brexit in the haulage industry, hospitality industry, warehousing, and the meat production sector. In 2019, the average percentage of EU workers in meat processing companies stood at approximately 70%, according to BMPA.
Similarly, a March 2016 KPMG report for the British Hospitality Association showed that between 12.3% and 23.7% of the UK’s hospitality sector’s workforce was made up of EU nationals. At the time, KPMG estimated that the sector required 62,000 EU migrants per year to be able to maintain current activities and grow.
According to Grant Thorton, 1.3 million foreign-born workers had left the UK since the beginning of the pandemic and yet to return.
However, as the supply chain crisis spread to petrol stations up and down the country, transport secretary Grant Shapps dismissed claims that Brexit was at the root of the problem. He insisted that coronavirus was to blame and said that the shortage of lorry drivers in the country was due to the fact that 40,000 HGV driving tests could not take place because of the pandemic. There have also been ongoing Covid-related restrictions in some large manufacturing countries such as Vietnam, with Hanoi continuing its strict lockdown measures across 10 districts in early September.
Furthermore, it appears that the pandemic has not only limited the supply of some goods but has simultaneously had the effect of pushing up consumer demand. Flavio Romero Macu, a supply chain expert at Edith Cowan University, says that huge pent-up consumer demand in the wake of the pandemic has added to the strain on the world’s fragile economic ecosystem.
“Consumers are crazy to buy things because the world is awash with dollars from government stimulus, higher savings and pent-up demand. PlayStations, laptops, phones, gym equipment – you name it people are trying to buy it,” he says.
“Higher demand and restricted supply equals inflation: there’s no way out of it. You put all these things together and it's a perfect storm.”
The chief executive of the Cold Chain Federation, Shane Brennan, also agrees that the pandemic is to blame for the UK’s supply chain crisis, but he also pointed out that Brexit was limiting options for solutions.
Some critics argue that Home Secretary Priti Patel’s decision to shut the door to low-skilled workers in new immigration laws is the major contributing factor in the UK’s supply chain crisis. A spokesperson for the British Meat Processors Association (BMPA), which commissioned the Grant Thorton report, said that EU policy was not to blame for the issue. Instead, the BMPA blamed the Home Office’s domestic policy on who can and can’t come to the UK to work.
Retailers, meat processing plants, care homes, hospitality, and even big companies such as Amazon, are all competing for low-skilled, low-paid workers who are in very limited supply. This means that, even if there were plenty of lorry drivers on the roads, the UK’s supply chain would still have come under substantial strain from labour shortages.
Initially, the UK government rejected all calls to attempt to resolve the country’s supply chain crisis by issuing short-term visas to lorry drivers and workers from the EU, insisting that Brexit was the solution. However, in a major u-turn, the government has since confirmed a temporary visa scheme for 5,000 foreign HGV drivers as well as 5,500 poultry workers. The move aims to provide last-resort means of avoiding an escalation of the UK’s supply chain crisis before the festive season, with the government also announcing increasing funding for training and releasing a letter encouraging ex-HGV drivers to return to their former profession.
The cause of the UK’s supply chain crisis is still being hotly debated. However, the general consensus appears to be that, while it may have contributed to the problem, the covid-19 pandemic did not break the retail supply chain altogether. Ultimately, it seems that several different factors are to blame and, with several issues being much harder to fix than just one, experts are warning that the UK’s supply chain crisis could take a long time to fix.
UK banks and insurers have shifted thousands of jobs and over £1 trillion in combined assets out of the UK and into European Union hubs due to the impact of Brexit, a new study has confirmed.
According to research from think tank New Financial, more than 440 firms in the UK banking and financial services sector have relocate parts of their business, moved staff or established new EU entities in response to Brexit.
Roughly £900 billion of the relocated assets were moved by banks – equivalent to about 10% of the total assets held by the UK banking system. Insurance firms and asset managers shifted a further £100 billion.
“While this is the most comprehensive analysis yet of the impact of Brexit on the City, we think it is an underestimate: we are only at the end of the beginning of Brexit,” New Financial warned in its report.
The UK exited from the EU on 31 December after finalising a trade deal that did not cover the financial services sector. Without access to the single market and the so-called financial passport, which had allowed UK-based financial services companies to offer their services in Europe, firms have moved assets to EU nations to continue their operations.
The study estimated that between 300 and 500 smaller EU financial firms may open a permanent office in the UK, far lower than earlier forecasts of around 1,000. The study added that, while the UK still holds a £26 billion annual trade surplus n financial services with the EU, this figure may decrease as its dominant position is chipped away.
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In the lead-up to Brexit, EY found that 400 relocations were announced at major financial services firms in London.
This ongoing disruption, coupled with changing consumer behaviour characterised by the growing preference toward mobile and online services, is driving regulatory changes that are shaping the future of finance.
While this is happening to varying degrees in regions and countries around the world, there are local nuances to consider. This is particularly true in the United Kingdom, where speculation is rife around what the future will hold for the UK following its departure from the EU and the impact this will have on financial services.
As one of the world’s leading financial centres, the UK is well-positioned to keep pace with changes in the industry. But in terms of regulations, there are still several questions around how the UK will adapt, what legislation it will adopt or modify, and what impact this may have on the wider EU region.
Post-Brexit PSD2
The Payment Service Directive 2 (PSD2) has been a linchpin of European financial regulations since its introduction in 2018, increasing security for online transactions and encouraging more competition through open banking.
The transition period ended on 1st January 2021 and enforcement of PSD2’s Strong Customer Authentication requirements for merchants will take effect at different times. The EU’s deadline is on 1st January 2021 while the UK’s is on 14th September 2021, which will no doubt cause a great deal of confusion for consumers.
It’s well known that digital currencies have – in their relatively short history – been used for illegal activities, so building trust in the technology through compliance will be a key focus for regulatory bodies in the future.
In the case of a no-deal Brexit, a draft version of the UK Financial Conduct Authority’s (FCA) Regulatory Technical Standards on Strong Customer Authentication and Common and Secure Open Standards of Communication indicates that the UK regulators would continue to accept the EU’s eIDAS certificates (or electronic Identification, Authentication and Trust Services) for authenticating third-party providers to banks. However, the document also recognises that UK entities may require alternative methods, suggesting that both routes are still on the table.
Discussions are still ongoing, but time is running out. As security is a key component of the directive, mandating the use of transaction risk analytics and replication protection in mobile apps, any new UK-specific variant will have to ensure that consumers remain protected and banks can still offer fully seamless digital experiences.
Driving digital identities
Some of the biggest regulatory developments throughout 2020 have come in the area of identity verification, with COVID-19 accelerating digitisation initiatives and investment. As an increasing number of customers are either reluctant or unable to visit a bank branch, fully digital and seamless identity verification has become a key requirement for remote account opening and onboarding.
This is an area where regulations – such as Know Your Customer (KYC) – play a key role, and where authorities have had to move quickly. For example, in response to the pandemic, the UK FCA issued guidance on digital identity verification permitting retail financial firms to accept scanned documentation sent via email and ‘selfies’ to verify identities.
This was supplemented by a 12-month document checking service pilot launched by the UK Government in the summer. Participating private sector firms can digitally check an individual’s passport data against the government database to verify their identity and help prevent crime.
And this is just the beginning. There are plans for private-sector identity proofing requirements and work being done to update existing identity-checking laws to become more comprehensive. Perhaps most significantly, the UK government plans to develop six guiding principles to frame digital identity delivery and policy: privacy, transparency, inclusivity, interoperability, proportionality, and good governance.
This all points towards a financial future that will be driven by digital identities. With customer behaviour likely changed forever, digital identity verification will be essential to improving the remote onboarding experience, while also minimising the threat of fraud and account takeover attacks.
The evolution of AML
Anti-money laundering (AML) legislation is also set to progress in the future, driven largely by an increasing focus on cryptocurrencies. Digital currencies are currently garnering plenty of attention from European regulators, as illustrated by the introduction of the 5th Anti-Money Laundering Directive (AMLD5).
EU member states were required to transpose AMLD5 into national law by the beginning of the year, with the goal of preventing the use of the financial system for money laundering or terrorist financing. One of the directive’s key provisions focuses on restricting the anonymous use of digital currencies and, as such, it now applies to both virtual cryptocurrency exchanges (VCEPs) and custodian wallet providers (CWPs).
VCEPs and CWPs that were previously unregulated must now follow the same rules as any other financial institution, which includes mandatory identity checks for new customers.
With the role of cryptocurrencies in our financial system expected to increase significantly over the coming years, we can expect European regulations to continue in this vein – particularly in a leading FinTech nation like the UK. It’s well known that digital currencies have – in their relatively short history – been used for illegal activities, so building trust in the technology through compliance will be a key focus for regulatory bodies in the future.
2020 has certainly been a year of upheaval for financial services regulations and we can expect this trend to continue into the new year. With digitisation in the industry evolving at a rapid rate, governments and lawmakers will have to work hard to keep pace. As the EU and the UK have shown, the future of finance will have plenty to offer.
Finance Monthly hears from Rob Coole, VP of Cloud Technologies at IPC, on the outlook for the UK fintech industry post-Brexit.
In recent years, the fintech industry has become an important focus for the UK, with the sector going from strength to strength. By the end of 2019, the UK's fintech sector was worth £11 billion in revenues, and accounted for roughly 8% of total financial services output. Adding to this, 44% of fintech companies that are based in Europe and valued at over $1 billion are based in the UK, while the UK continues to gain new investment in the fintech sector.
In a similar way to how the COVID-19 pandemic has introduced wide-ranging changes to the way we work and live, the impact of Brexit will continue to be felt for a long period of time.
While no single EU rival to the City of London has emerged yet, different Member States are taking advantage of the uncertainty presented by Brexit and are positioning themselves as new homes for fintechs. For example, both Lithuania and Malta have let it be known that they can provide new homes for UK-based fintechs, with Lithuania even running a PR campaign promoting itself as “the new capital of fintech” in the midst of the UK’s exit from the EU. This provides fintechs with a regulatory authorisation in an environment which has an entry point to the EU, something that the UK is now unable to offer.
Nevertheless, the Brexit situation is not necessarily all doom and gloom. There is the potential for a number of new opportunities to emerge on the back of Brexit for the fintech sector. For example, the combination of Brexit and the COVID-19 pandemic have given fintechs an opportunity to collaborate like never before in order to piece together end-to-end solutions. This has seen the emergence of a hybrid-European view as providers look to share connectivity across mainland Europe and the UK, with lots of solutions being designed between Frankfurt, Paris and London. Furthermore, this increase in collaboration should resolve a number of issues, such as reducing the dependency that fintechs have on countries and specific technologies.
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Additionally, the Kalifa Review – a report on how the UK can maintain its leading global fintech reputation – laid out a number of recommendations to help the UK’s fintech industry to thrive in a post-pandemic, post-Brexit world. These recommendations include making changes to UK listing regulations so as to make the UK’s Initial Public Offering (IPO) market a more attractive location for fintechs, as well as creating a centre of Finance, Innovation, and Technology, to drive both domestic and international collaboration in order to boost growth across the country's fintech ecosystem. In addition to this, Chancellor Rishi Sunak’s 2021 Spring Budget included a new fast-track visa for specialists in the fintech sector – a recommendation from the Kalifa review that aims to provide a boost to the fintech industry post-Brexit. If the UK is able to take on board these recommendations, then there is an opportunity for the UK fintech sector to continue to grow and thrive following Brexit.
Finally, it is also worth noting that the fintech UK has always had a strong ecosystem. This is down to a number of factors, including having good and solid infrastructure already in place, a deep understanding of the industry, and a willingness to continue to innovate and develop fintech. In fact, Brexit provides the UK with a fantastic opportunity to change its financial regulation, which could help make the country even more appealing to fintechs.
Although the winners and losers of trading venues has been a focus for many in the aftermath of Brexit, these volumes overlook the hybrid models that are being created between London and other key European, and international markets. Today, there is more focus on global connectivity, reducing silos and increasing business resilience. Cloud and SaaS models will continue to be key to supporting customers, wherever they are in the world, regardless of borders.
As such, while both Brexit and the COVID-19 pandemic have presented numerous challenges, their combination has created a great opportunity for the UK’s fintech industry to continue to thrive and for the UK to remain an unquestionable leader when it comes to fintech.
Dima Kats, CEO of global payments company Clear Junction, discusses some of the unforeseen complications of Brexit and the possible solutions.
As people increasingly live and work across borders, there is a greater need for money to move freely too. But what happens when the nature of one of those borders changes? Following the UK's recent departure from the European Union (EU), there has been a shift in some financial institutions' behaviour within the EU. Specifically, in the processing of Single Euro Payments Area (SEPA) transfers.
Organisations within the UK are still learning the full impact of the UK's recent Brexit deal. However, over recent weeks, corporations making SEPA payments from accounts in the UK to the EU are experiencing additional fees and payment refusals.
Starling Bank recently noted that several companies across Europe have been refusing to accept direct debit payments from some Starling euro accounts because they contain the country code ‘GB’.
It is important to note that the UK is still a SEPA member and that even though the UK is no longer part of the EU, it is still very much part of the Single Euro Payments Area. Refusing to accept payment from the IBAN code of a SEPA member is a violation of EU rules.
Some European banks, notably in Spain and Italy, have introduced recent charges to payments coming from or going to the UK. These new fees can vary from an €18 flat charge to a percentage of the amount shared or received, ranging from 0.3-0.5%, which can add up to a significant figure.
Refusing to accept payment from the IBAN code of a SEPA member is a violation of EU rules.
While this situation has understandably caused some consternation, the UK's continuing membership of SEPA means we believe these rejections are temporary outliers. Indeed, this is merely one of several hiccups because of the regulatory changes. We are still experiencing the aftershocks of Brexit across Europe and will continue to do so for a while. However, in the coming months, we should see a more standardised approach emerge across EU financial institutions, with less disruption to providers and consumers as awareness of the new regulations increases.
Despite the litany of recent Brexit plans formulated by governments and negotiators, none explicitly addressed the fintech industry. Fintech professionals understand the challenges of building relationships and facilitating seamless transactions between institutions. The smooth operation of these processes, established over several years, was hard-won, and it is unlikely that the industry wants to rewind the clock to how things were before SEPA. The mutual participation in the clearing schemes in Europe and the UK has worked well and it would be counterproductive to change this because of Brexit.
We can only praise the European Central Bank’s initiatives to have the UK remain part of SEPA. This decision, taken two years ago, has contributed to the peace of mind of many fintech professionals in relevant countries. As a result, we hope there will be minimal impact on the clearing schemes' operational process in the coming months.
Currently, regulatory frameworks between the UK and the EU are aligned, and there is no reason for extra fees. Which leaves us wondering what consumers and institutions should do if they do face any additional charges?
As a first step, consumers need to be aware of what is going on and any potential issues. Some banks, such as Starling and Revolut, have already taken proactive action in this area, but more widespread initiatives would be welcome.
For the consumer, there are currently no easy, off-the-shelf solutions. This complexity means that people need to speak to their banks in the first instance and then the local regulator to add pressure and make local banks comply with the SEPA scheme rules.
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What would be useful here is the increased provision of easy-to-access and easy-to-use tools, documents and templates for consumers to share with the EU banks they are dealing with that may be implementing additional fees. The right way to address this situation is to give consumers that power.
For financial businesses who are unclear of regulatory frameworks post-Brexit and what this means for their customers, they should work closely with a regulatory services provider that is a participant member of SEPA, enabling clients to have unrestricted access to the EU interbank clearing system.
At Clear Junction, we value our SEPA membership highly and recognise its vital role in simplifying payments across Europe. We want to see common sense prevail and hope that Brexit has no lasting impact on the future of SEPA payments.
UK exports of goods to the European Union (EU) fell by a record margin at the start of the year as Brexit came into effect.
Exports to the EU fell by 40.7% in the first month since leaving the EU, the equivalent to a £5.6 billion loss in trade, the Office for National Statistics (ONS) revealed in figures released on Friday.
Imports from the EU also suffered, falling 28.8%, or £6.6 billion. The losses seen in both EU exports and imports represent the greatest monthly falls seen since records began in 1997.
The slump occurred as Brexit took effect on 1 January 2021, marking the UK’s official exit from the single market and the implementation of new trading rules and customs checks. It also coincided with the UK’s third national lockdown amid accelerating COVID-19 cases, further exacerbating the trade slowdown.
Exports of food and live animals – particularly seafood and fish – were the hardest-hit by the disruption, plunging 63.6% in January. However, the sector counts for only 7% of total UK exports. Overall, global UK exports and imports fell by around a fifth at the beginning of the year.
Although the fall in exports was historic, the decline did not reach the 68% plunge that road hauliers had expected to face. January’s GDP figure also represented the UK’s largest economic contraction since the beginning of the pandemic, but did not fall as much as the 4.9% anticipated by analysts.
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The lack of a greater decline in GDP is believed by some analysts to suggest that businesses and households have adapted better to lockdown restrictions than they had prior to April 2020, when GDP fell by more than 20% as the first lockdown measures were imposed.
The past year has been one like no other for the UK. We are adjusting to a new way of life, having spent the best part of a year under pandemic restrictions. It was also the year that we left the European Union for good, after four years of political friction and confusion. These once in a lifetime events have understandably impacted our personal and professional lives. Financially, the effect of the pandemic has resulted in the prediction that a fifth of all small businesses will collapse in the UK, and recent news that we may be plunged into a double-dip recession suggests that we are not over the worst of it. Business leaders have had to adapt and re-adapt to survive the past year, and the world of work will look different as we move forward.
Brexit has also had an impact on jobs and the way we work. Alongside further economic uncertainty, there is set to be an increase in the difficulty of importing EU-based talent as Brexit brings in more stringent rules around work and immigration. While the rules are designed in part to allow highly-skilled workers the opportunity to come to the UK, they may be put off by changeable legislation and red tape, leading to talent shortages in key sectors.
The double hit of Brexit and coronavirus has already highlighted the importance of malleable work environments – businesses will only survive this period if they are truly flexible and willing to adapt. Research from Future Strategy Club shows that 29% of business leaders streamlined their teams during the pandemic, and thousands of businesses have given up office spaces as employees work effectively from home. Firms are having to adapt to new regulations and legislation, making way for a more flexible design, both in terms of physical space and headcount.
EY estimated that due to Brexit, £1.2 trillion in assets have been moved from London to the EU, along with around 7,500 jobs.
One way that business leaders are becoming more flexible is by utilising short-term, freelance talent, as opposed to hiring full-time, permanent talent for roles that may soon change or become defunct in such a rapidly changing environment. Often, these leaders don’t just need advice on how to see their firms through these unprecedented times but require a hands-on approach to guide them through. With new rules and restrictions in place as we leave the EU, a short-term, outside consultant can bring a fresh perspective to struggling businesses, and integrate a new, more flexible ethos to firms who are looking for the best way to accommodate new business models and legislation. In a time of economic turmoil and uncertainty, funds and resources may be low, utilising freelance talent also allows firms looking for specific talent to find it quickly and without breaking the bank.
However, finding the right talent for your company can be difficult. Many companies are hiring the same standard consultants and creatives from the same consultancies and agencies who use the same methodologies that have been used for the past 30 to 50 years - and are therefore getting the same solutions to their problems as their competitors and everyone else. Platforms such as Future Strategy Club have a curated selection of the most innovative talent in the world, available without the usual overheads and contractual entanglements that large consultancies and agencies wrap around their talent. These platforms allow businesses to directly access experienced individuals with many years' worth of skills to tap in to, having weathered the 2008 crisis, COVID-19, and now Brexit.
The freelance and gig economy works the other way, too, in that it provides a chance for those who find themselves furloughed or perhaps made redundant to launch their own business or at least the next stage in their careers. EY estimated that due to Brexit, £1.2 trillion in assets have been moved from London to the EU, along with around 7,500 jobs. Combined with increased job losses and furlough due to the pandemic, many people are likely to be uncertain about their career prospects. Those who may find themselves being made redundant or furloughed may choose to capitalise on their skills and past experience to launch a freelance career – as with kids and mortgages in tow, falling back to the bottom of the career ladder is not on the agenda.
Freelancing and the gig economy often get a bad rep. Freelancers have been excluded from the benefits of the permanent workforce - including workplace culture, socialisation and support networks - and it is clear that the perception of freelancers and skilled consulting work has long needed an overhaul. Fortunately, this appears to be changing. The rise of co-agencies, such as Future Strategy Club, provide freelancers with resources, learning and development opportunities and a network, making freelancing a viable long-term option – one that can be done for an entire career, as opposed to a placeholder between jobs.
It’s clear that the world of work going forward is going to look very different. 2020’s turbulence is set to carry on over to 2021, and businesses and talent that can utilise this to their advantage will thrive. Businesses who open up to hiring freelancers are more likely to adapt and may even come out of this period stronger than they were before, and entrepreneurial freelancers have the opportunity to work for themselves, choose their own working environment and gain true security from their own knowledge and skillset.
The deal that the UK Government secured with the EU, right at the end of the tumultuous year that was 2020, came as a surprise, and some considerable relief. At Amaiz, we spent part of December looking into the impact of Brexit, particularly on financial services and published a report on our findings, so we were probably more aware than most what the deal needed to deliver for FinTech.
We had years to prepare for Brexit. Whilst some stakeholders needed some convincing that the referendum in 2016 represented a final decision that couldn’t be reversed, the rest of us knew that somehow, the Government would feel compelled to deliver on the result. One way or another we would be exiting the EU so only the foolhardiest of companies would not have prepared. The results of our research in December showed that people were as ready as they could be:
The changes that company leaders believed would have the most impact were changes to regulations (37.4% of respondents said this was a concern), increased costs of doing business (37.2%), and reduced access to suppliers (35.5%). Overall, 57% of companies believed that Brexit will have some negative impact on their business and some (6.6%) believed it will destroy their business.
Size was a big factor in how prepared companies were for the changes – with smaller companies employing between 1 and 10 people concerned about increased costs (45.7%) and those with staff of between 11 and 50 about taxes and VAT (41.3%).
The challenge in December was the uncertainty that remained right up until the deal was announced. How can you prepare effectively when you don’t know what you’re preparing for?
Financial services represents 12% of the UK’s GDP and our vibrant FinTech startups and smaller businesses are a key part of that. It had been a success story, that has taken advantage of the cultural, regulatory and geographical advantages that the UK enjoys. It is the startups that drive innovation in the sector and create the global players of tomorrow.
In December, the financial services sector was preparing for a no-deal Brexit, as that appeared to be the most likely outcome. The larger companies had already registered companies and offices within the EU so that they could continue trading there, whatever deal was or wasn’t struck. At Amaiz, we were in a position to take this route ourselves. However, this was not an option for much of the vibrant FinTech community, it was not within their resources, particularly as there was no certainty on what Brexit would mean.
Of course, at the same time as this Brexit uncertainty, our FinTech startups and smaller companies were battling with the impact of the pandemic. The FCA (the Financial Conduct Authority) and FSB (Federation of Small Business) both published figures in January that show the alarming impact of the pandemic on SMEs. The FCA found that 59% of smaller financial firms expected that their profits would take a hit this year[1]. The FSB found that just under 5% of smaller companies expect to be forced to close within 12 months, the largest proportion in the history of the Small Business Index and could mean that 295,000 companies will go under[2].
Brexit, therefore, came at a critical time for all companies and most SMEs in December (62.4%) told us that the pandemic was likely to affect them more in 2021 than Brexit (17.3%).
If FinTech is to survive the many challenges that this year brings, the Government needed to deliver a deal that gave financial services the ability to operate across the EU. That didn’t happen. Instead, the Brexit agreement created a distortion in the market that threatens UK FinTech still further.
Following the deal, EU FinTech companies can operate in the UK, and there are many companies eyeing up the UK market, particularly FinTech companies based in Amsterdam and Germany, so our FinTech will be in competition with them. However, as e-passporting has not been agreed, our UK companies cannot now operate in the EU. I have seen no evidence that the Government has recognised this as a priority issue to resolve. I urge them to do so as the consequences for the sector and the UK economy will be enormous.
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The report, Brexit Brink: Are British SMEs about to fall off the edge of Europe – or building new bridges? is based on a survey of SMEs across the UK and is free to download from www.https://journal.amaiz.com/amaiz-guide/.
[1] https://www.reuters.com/article/us-health-coronavirus-britain-markets/up-to-4000-financial-firms-could-fail-due-to-covid-says-uk-regulator-idUKKBN29C0R7?edition-redirect=in
[2] https://www.fsb.org.uk/resources-page/at-least-250-000-uk-small-businesses-set-to-fold-without-further-help-new-study-warns.html
In the accounting market, standards such as the IFRS and whether businesses will continue to follow these will have long-term implications for investors, auditors and business leaders alike. This could make the UK more attractive to foreign investors or put firms at risk of having to follow two sets of rules if they trade continentally.
After a Parliamentary committee ordered the separation of auditing and consulting services in the Big Four firms, the FRC came under threat as the Government tried to show its teeth in governing this area.
However, with Joe Biden looking to have a closer relationship with Europe, it looks increasingly likely that to remain a globally facing country that acts as a bridge between Asia, Europe and North America, the UK Government may need to deal with the Big Four and this issue and bring governance more in-line with their European and American counterparts.
The general market will have a huge part to play on whether or not national entities decide to take action in the regulatory space. A huge part of the accounting space moving forward will be increased by Mergers and Acquisition deals, despite a relatively slow year. According to S&P Global Platts, in the US, during the first three quarters of 2020, the industry saw 81 deal announcements worth a total of US$7.75bn; this is compared to 200 deals worth US$47.05b over the same period in 2019.
Despite a bleak year, the market appears to be surprisingly optimistic. According to a poll of executives and M&A professionals, 87% of respondents said they expect M&A activity involving privately-owned companies to increase in 2021. The poll, conducted by law firm Dykema Gossett PLLC, also revealed that more than seven out of 10 respondents expect to close a deal during 2021 and 71% believe that the market will strengthen.
Part of this strengthening deal flow attitude is due to the broader economic recovery and confidence in the market as a whole. In its latest World Economic Outlook, the International Monetary Fund (IMF) predicts the global economy to experience a partial rebound to 5.2% growth in 2021. In Dykema Gossett PLLC’s survey, respondents are optimistic about the economy. Six in ten said they hold a positive view of the economy over the next 12 months; 17% hold a negative view, and the remaining 23% held a neutral view.
This is also set to be boosted by an ever-increasing promised financial stimulus from new US President, Joe Biden. In the week that Biden was announced as the winner of the 2020 election, share prices were boosted by the largest growth in two months as a Democratic President would result in a major new stimulus package. London’s FTSE 100 closed up by 131 points, or 2.33%, at 5786. Furthermore, all three of the leading barometers of US share prices – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq – were showing gains on the morning of election day in the US.
These market indicators and supposed optimism for 2021 demonstrate a new market for business and, in turn, for the accountancy space. There has been a huge amount of scrutiny over auditing practices and services sold to clients that may have a conflict of interest, so for firms that can solely focus on high-value deals, the market looks bright. Despite this, there will have to be additional movement as gaps appear to vacate (especially the Big Four). For example, in mid-November, PwC sold off its FinTech business amid greater regulatory scrutiny on conflicts of interest. This could give other mid-tier and boutique firms the opportunity to gain market share, as the Big Four focus on auditing and legal services, especially in the non-auditing space.
According to Financial News, the FinTech eBAM, which has been rebranded as LikeZero, automates regulatory risk analysis for around ten of the City’s largest financial firms and is to be acquired by its management in a deal backed by two private equity firms. PwC is not allowed to sell its own technology to their audit clients as per restrictions introduced by the Financial Reporting Council. In 2016, the FRC restricted Big Four firms from providing audit clients with financial technology as part of an effort to reduce conflicts of interest within the audit sector. This deal could be the first of many as the Big Four firms leave spaces that it has previously tried to dominate.
I predict that with the FRC trying to tighten regulations in the auditing space, the Big Four will try and expand their non-auditing services such as legal and digital services to maintain their revenues, regardless of whether the FRC is successful or not. However, many mid-tier firms are already there and, in this space, so there will be more competition than ever before. This could lead to a break-up of the market and if other big-name collapses take place, more large companies in the FTSE250 space will begin to move away from the established Big Four.
Credit card giant Mastercard is set to increase the fees it charges EU merchants for taking payments from online shoppers in the UK by at least 400%, sparking fears that merchants could choose to pass on these costs to UK consumers.
The Financial Times, which first reported Mastercard’s latest move, said that the increase would benefit banks and card providers rather than Mastercard itself.
Since 2015, the European Commission has capped credit card interchange fees at 0.3%. Now that the UK is no longer part of the EU, however, payments between the UK and the European Economic Area are now deemed “inter-regional”, so the interchange fees will increase to 1.5%.
The fee for debit card payments is also slated to rise from 0.2% to 1.15%. Both fee increases are set to take effect on 15 October.
MP Kevin Hollinrake, chair of the parliamentary group on Fair Business Banking, said the move “smacks of opportunism.”
"I would urge the regulators to step in as a matter of urgency to ensure that financial institutions do not use Brexit as an opportunity to hike up costs that consumers will ultimately bear," he said in a statement to the FT.
Anton Komukhin, Head of Product, at Unlimint, also expressed concern. "The increase in fees announced by Mastercard for UK purchases from the EU will definitely be a challenge for businesses on both sides (both EU and UK) and such a significant increase in price will undoubtably impact trade with the UK," he said. "It’s obvious that such a reaction is not aimed at maintaining cross-border turnover or trade - and looks only like an attempt to make more money from merchants in an already challenging environment due to Brexit and the pandemic."
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Mastercard has defended its decision, pointing out that the new interchange levels are already paid by EEA merchants on all cards issued outside of the EU, and that there is no evidence that European businesses charge consumers in these regions higher prices than those levied for consumers within the EEA as a result of this.
"In practice, only EEA merchants making eCommerce sales to UK cardholders will see a change,” the firm said. “Interchange is not a consumer facing cost but the fees paid between merchants and banks for the provision of payments. Consumers should not feel any impact of changes in interchange fees.”
This latest change comes as UK businesses face a number of new hurdles stemming from the country’s withdrawal from the EU. Increased red tape has led to delays in goods imports and exports, and the trading of European shares has moved away from London due to new restrictions.
Finance Monthly hears from Stuart Lane, CEO of Trade Nation.
2020 was an extraordinary year for traders as the coronavirus spread across the globe, triggering worldwide lockdowns and restrictions and bringing unprecedented volatility to the markets. And while the effects of the pandemic are still far from over, 2021 is set to look very different. Not only do the new vaccination programmes give hope for an eventual return to normality, but we will also see how major political changes play out, such as Brexit and Joe Biden’s first year as President of the United States.
For traders hoping to get ahead of the markets in 2021, here are five key areas for them to keep their eyes on over the next twelve months.
With Brexit now pretty much done and dusted, we may see the pound sterling continue to recover from the lows seen last March. However, the big question is whether its strength will hold back possible gains made on the FTSE 100, which has been lagging behind US indices and the German DAX — both of which recently hit record rights. The FTSE, on the other hand, is still more than 12% below the highs experienced in early 2020.
It’s commonly believed that sterling strength weighs heavily on the FTSE due to the fact the majority of the index’s constituents export goods abroad. The higher the value of sterling, the more these goods cost foreign importers, which in turn means less are sold.
On the first full trading day of 2021, all five of the major US tech giants (Alphabet, Apple, Amazon, Facebook and Microsoft) — which have effectively driven the extraordinary rally in the US stock indices since the pandemic lows of last March — were down 1.8-2.2%. This is because it looked like the Democrats were about to win control of the Senate, giving the party a clean sweep: Presidency, Senate and House.
As it turned out, the Democrats did win those two vital Senate seats in Georgia. For now, the Republicans have no majority anymore. It also means that Vice President Kamala Harris has the deciding vote whenever there’s a 50:50 Senate split. The Democrats now have the clean sweep they were hoping for, making them much more likely to pursue a radical programme of high spending reforms. This has gone down well with investors who have already rushed to buy stocks, pushing all the major US indices to fresh record highs.
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The high street changed beyond recognition in 2020, although it’s well-known that the move away from bricks and mortar to eCommerce was already well-advanced. Now, old-style department stores which were once the foundation of every mid-sized town shopping centre look unlikely to survive. Therefore, a strong online presence is vital for retailers. There will be considerable pressure on the UK government to get involved and save the high street. But will this mean a shake-up on things like business rates and rents, or a lazier approach that simply involved dishing out temporary relief?
As we have seen from early reports on holiday-period spending, food retailers continue to perform well, as do online retailers. But following a boost to high streets in early December, footfall collapsed before Christmas as fresh COVID-19 restrictions were brought in. It’s now reported to be down by 43% in 2020 compared to the previous year. The big question is whether this misfortune will reverse once restrictions are lifted, or will the hope offered by vaccination programmes come too late to save many of our high street favourites?
When it comes to technology, perhaps the most exciting thing for traders to follow are the advances in medical tech. The mRNA vaccines are a massive development; a new method of vaccine production that will help bring fresh vaccines to market much faster than was previously possible. Also, mRNA vaccines can be adapted quickly and cheaply to address new virus variants, thereby opening up the prospect of vaccines for previously untreatable conditions too.
Elsewhere in tech, Tesla’s stock price soared to a fresh record high in the first week of 2021, making founder Elon Musk the richest person on the planet — overtaking Amazon owner Jeff Bezos. Many analysts continue to insist that Tesla, along with Bitcoin, is in an unsustainable bubble, and one day all those paper-millionaire investors will wake up broke. But for now, the owners of Tesla shares and Bitcoin are laughing the loudest.
Ethical investment could be one of the biggest buzz areas in 2021. The sector has matured to a great extent, so ethical investment no longer means merely pruning portfolios of defence, tobacco, oil, and mining stocks. Now, there is a large and expanding ‘green’ industry to consider. Last year the UK saw more than $4 billion put into funds claiming to focus on ESG — environmental, social and governance investing. However, not all funds are the same, and careful diligence must be taken to separate those with a genuine will to manage their businesses ethically, and the bandwagon jumpers.
We are already seeing a rise in ethically questionable investments too, water being the most notable. CME Group has recently started offering water futures, and this is also relevant to farmland which is a very big consideration in the US. In fact, these are both areas in which Michael Burry (of The Big Short fame) is now heavily invested. Will more traders now be tempted to follow his lead? Only time will tell.
Dion Travagliante, Head of North America at Hoptroff, outlines the importance of MiFID II compliance in ensuring UK firms remain internationally recognised.
Announced on Christmas Eve, the Trade and Cooperation Agreement – better known as the ‘Brexit Deal’ – leaves lots of question marks for those in financial services. Before anything else can be decided, the EU must first accept that Britain’s financial regulations are “equivalent” to those in the European Union: the Markets in Financial Instruments Directive (MiFID II).
Since its implementation in January 2018, MiFID II has transformed financial services with policies that promote transparency and trust across processes within the industry. As Britain navigates a new economic arena, many are hoping to avoid further instability by conforming to the existing internationally respected regulations.
The MiFID regulations were implemented after the global financial crash of 2008 for a very simple reason: to prevent another crisis. The rules cover areas of financial practice that most people have never even considered. This means that British businesses are currently following an extremely clear and thorough guidebook that protects them from financial damage.
The rules on time synchronisation are one notable example of this. Accurate time is at the heart of electronic trading – but all clocks naturally drift. It might not matter if the time on your phone is a few seconds out, but it does matter if the time is wrong on a busy server that transfers thousands of pieces of data every second of the day. If your server’s clock is wrong, data logs can become confused, transactions may be cancelled, and you will be vulnerable in the event of a dispute.
Accurate time is at the heart of electronic trading.
This is where MiFID II comes in. Article 50 restricts every server that is an active market participant to a maximum divergence of between 100 microseconds and 1 millisecond (depending on the type of trading) from the benchmark of UTC (Universal Time).
MiFID II is vital in protecting the best interests of British businesses, but the importance of the regulations go even further. As British financial services look to recover from the shock of the COVID-19 pandemic, Britain must do everything it can to stabilise its position in the global economy.
Amending MiFID II is a threat to this stability, as international trust in a country’s financial market is dependent on the extent of its regulations. This was made evident last February when the pound dropped sharply against the US dollar following suggestions of a MiFID “shake up” by the ESMA.
In the past, some groups have been resistant to upholding financial regulations because it has been expensive to do so. To get precision timing, companies had to install and maintain a satellite receiver at every active trading venue, secure access to a grandmaster clock, and spend resources on monitoring and verifying their data logs.
Recent technological developments have made this reluctance redundant. Smarter solutions have entered the market that make carrying out the best financial practice a lot easier and more cost-effective. Traceable Time as a Service (TTaaS) is the premier network-delivered solution for time synchronisation. The software product synchronises your clocks and monitors data for you; no hardware or maintenance is required.
Financial firms across Britain have spent the past three years implementing processes that adhere to MiFID II. Instead of “shaking up” the rules once again, consistency is needed as the industry moves forward.
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Ever since its inception, MiFID II has played an essential role in rebuilding trust in the financial markets. Regulations like those placed on time synchronisation ensure that these markets are both reliable and protected and they have never been more easy or cost-effective to implement. This trust is something that Britain should not take for granted as the world enters an extremely turbulent economic period.
