Gordon Dadds, the legal and professional services firm, is urging the UK property sector to get to grips on the 4th EU Anti-Money Laundering Directive or face receiving a hefty financial penalty which could be unlimited.
The Directive which comes into force from today (26th June 2017), combined with the new investigation power being introduced by the Criminal Finance Act 2017, is going to impact the UK property industry significantly with banks and estate agents having to carry out further due diligence on both the buyers and sellers of property which will slow down the buying process by up to 186 days. There will also need to be formal risk assessments and nominated officers will have to be re-appointed if not currently an executive sitting on a board (or equivalent) of the business.
Gordon Dadds predicts that the new regime will increase workloads due to the required volume of administration with all polices now needing to be tailored to each client case and for the usual terms of business to be updated. This doubling of the workloads will increase company costs with existing staff requiring training and in a high proportion of cases, estate agents needing to recruit staff in order to help with the administration burden. We estimate this could cost the largest estate agents a combined additional cost of £6million.
Alex Ktorides, Partner at Gordon Dadds, says: “The Directive is a shake-up of the way that banks, estate agents and other parts of the regulated sector apply a risk based approach to customers. They will now have to consider the characteristics of the customer, the product and its distribution and the jurisdictions involved in determining the lengths that they have to now go to in terms of conducting due diligence on their clients. There is even a new requirement to force overseas branches of UK parent companies to apply UK standards. This will cause huge concerns to international businesses and even encourage moving head office from the UK.”
The property sector now has to act quickly in order to ensure it complies with the Directive. The purchasers and the seller are both now included in the application of customer due diligence, meaning additional checks will need to be carried out by estate agents, auctioneers and surveyors.
Alex Ktorides continues: “This is going to create substantial challenges for the property sector especially given the final version of the directive has only been made public today which has left no time for banks, estate agents and the lending sectors among others to update their policies and processes alongside training staff on the new regime. Some agents have in excess of 100 branches and have received no prior time to implement the new processes in order to comply.
“For many smaller estate agents (and surveyors) this will be the first time they will have carried out checks on both the buyers and sellers and they are going to have to get up to speed with the regime as quickly as possible or risk facing an unannounced visit from the HM Treasury.”
Gordon Dadds is calling on the UK property sector to act fast and to start to get to grips with the Directive from today. For many medium to large sized estate agents Gordon Dadds recommend they appoint a money laundering officer and a deputy to help with the increased work load and to ensure they are compliant and not falling foul of the regime which could spark a warning or fine from the HM Treasury.
(Source: Gordon Dadds)
At the current rate of fluctuation, with socio-political uncertainty reeking chaos in the markets, the pound’s performance leaves little to desire. Currency experts are now warning that further in 2017 we could see the pound hitting the same value as the euro.
According to the Sun, analysts have advised towards this possible plunge due to the general election, which resulted in a hung parliament, and the closing on the Brexit deadline.
Holidaymakers that are worried about the potential currency volatility ahead are being told to buy half their currency now and half closer to their break, as the pound could even break below the euro.
Finance Monthly has heard Your Thoughts on the possibility of a British value parity with the euro and included a few of your comments below.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
The prospect of the GBP/EUR exchange rate reaching parity or 1 GBP = 1 EUR has been raised many times over the course of recent events, before and after the Referendum vote. Throughout 2017 analysts have been split as to which direction rates will take, I believe there are two key features which explain why we are here and which will ultimately shape the likelihood of it being achieved.
Parity was almost reached in December 2008 when GBP/EUR hit 1.0227, since then the July 2015 high of 1.4345 had seemed to indicate such lower levels were confined to history. However, since 2016 and the result of the EU Referendum, politics has become the big driver on Sterling. Political concerns too have reached Europe and the failure of Le Pen and Gert Wilders to win any victory has seen the Euro strengthen. There is a German election in September and potentially an Italian vote too to be called in September, but, for now it seems the Euro has survived and this has helped it gain against the politically scarred Pound.
Economic data is the second factor and here too we see the Eurozone outshining the UK growing 0.5% in Q1 2017 against the 0.2% for the UK. Divergence in monetary policy is also key as the UK and the Bank of England could potentially raise interest rates to combat rising Inflation, threatening consumer spending and lowering GDP. Meanwhile the European Central Bank are looking to withdraw stimulus and maybe raise interest rates in the future, helping to further boost the positive sentiments towards the Euro.
Ultimately the prospect of parity is not going away and the outcome of the UK election is vital to determining how likely, as it effects who is on the UK side of negotiations with the EU and how strong their mandate is.
We are only 2 months into the Article 50 window and just coming up to the one year anniversary of the vote on the 23rd June. We have in the grand scheme of history just begun on this path and looking at what is ahead the prospect of parity for GBP/EUR this year remains a very real possibility.
Owain Walters, CEO, Frontierpay:
Ahead of the election, some analysts warned that the value of sterling will reach just £1 to €1. The political uncertainty following the election hasn’t eased the short-term risks to the Pound. However, I would argue that this result will, in the long term, be good news for sterling.
What I believe we will see next, as the Conservatives are forced to form a coalition with the DUP, is that Theresa May’s plan for a ‘hard Brexit’ will be diluted, if not taken off the table entirely. Since the vote to leave the European Union last year, the currency market has, on the whole, not responded well to the dialogue around a “Hard Brexit” and with the influence of a more liberal party in a new coalition government, the idea of a ‘softer’ Brexit will provide support to the Pound and we will see a period of strength.
The significant losses that the SNP has seen will also reduce the chances of a second Scottish independence referendum. While the notion of another Scottish referendum hasn’t done irreparable damage to the pound, taking it off the table at least for the foreseeable future will certainly give the Pound an extra boost.
Patrick Leahy, CFO, JML:
If the political events of the last two years have shown us anything, it is that situations that are improbable are certainly not impossible. Sterling/euro – or even sterling/dollar – parity is not out of the question. Whether you are an importer or exporter of goods or currency, CFOs across the country would rather the whole thing settled down and we had some certainty; but that’s unlikely. So what can you do?
Being in the FMCG market, JML’s short-term retail price is fixed, and it takes a good year to adjust prices. Just look at the large drop in sterling, post Brexit; it is only now that the inflation effect is really starting to trickle through to business and consumers. So, as a CFO with no concrete forecast on what will happen with the rates, you must try to minimise the impact any movement has on your pricing and margin strategy.
As a net importer, UK businesses and especially retailers are always susceptible to falls in rate, pushing up our costs, reducing margins, or lowering volumes. In some ways, the best strategy any business can have to manage exchange risks is to sell to other parts of the world – it’s a natural hedge. But, it is not that simple, because margins in each country are important and you can’t always point to your exchange gains when discussing gross profits with your invoice discount provider.
For retailers, the key is to not overstretch yourself if hedging on currency movement. Regularly and accurately forecasting your business performance is key to achieving this. It’s impossible to know exactly what your currency requirements are in 12 months’ time, but you know you will have some. You might win and lose on currency movements along the way but by slowly building your hedged positions you will have minimised the risks and helped the business achieve its margin along the way.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
The White House is on fire. Every day – almost every few hours – new scandals are breaking. From investigations about Russian collusion to alleged obstruction of justice, the blaze is white hot. But when it comes to the world of businesses and law, it's not the alleged criminal law bombshells that are causing the most panic. James Goodnow, talks to Finance Monthly.
On June 1st, US President Donald Trump formally announced what everyone knew was coming: the US is out of the Paris Climate Accord. The announcement and its build up set off another explosion the likes of which Trump and his Twitter account aren't as accustomed to fighting: a neck-snapping backlash from the business community and the lawyers who represent them.
Trump Thumbs His Nose at Business
“Global warming is an expensive hoax!” Donald Trump famously — or infamously — tweeted in January 2014. With that shot across the bow at the global scientific community, Trump started his war against climate change. His claim served as a rallying cry for his base supporters — many of whom believed that rejecting limits on carbon emissions would lead to a resurgence of US jobs in the coal industry. And the strategy was largely successful, catapulting Trump into the White House.
Despite Trump's bluster, the business community largely took a wait-and-see approach following Trump's election. The reason: Trump engaged in plenty of campaign hyperbole that was ultimately dialed back once he assumed office. Obamacare "repeal and replace" is stalled, construction has not started on Trump's border wall with Mexico, and his travel ban has been blocked by the courts. Perhaps the withdrawal from the Paris Accord would end with the same fate: a promise that would be delayed or not fulfilled.
The business world miscalculated. What business leaders monitoring the situation failed to account for is the fact Trump was backed into a corner. He needed a win with his base. And withdrawal from the Paris Accord is one of the only "successes" he could accomplish unilaterally.
The Business World's Reaction
The response from the business and legal community has been swift. On June 1, 25 major US companies, including juggernauts Apple, Facebook, Google and PG&E signed an open letter to the president that appeared in the New York Times and Wall Street Journal. The letter makes the business case for the Paris Accord: "Climate change presents both business risks and business opportunities."
The day before the announcement, Tesla and SpaceX CEO Elon Musk gave Trump an informal ultimatum on Twitter, saying he will have "no choice but to depart" from Trump advisory councils if Trump pulled the plug on the Paris Accord. Musk's comments are not isolated. Since the election, over 1000 businesses signed the Business Backs Low-Carbon USA statement.
The chorus of voices coming from the business community is united by a common theme: US withdrawal from the Paris Accord is not only ethically questionable, but leads to dangerous instability for business. Every day, business leaders make difficult decisions about where to allocate resources. A stable and uniform framework allows businesses to confidently invest in technology that will last into the future. According to the Business Backs Low-Carbon USA statement: "Investment in the low carbon economy ... give[s] financial decision-makers clarity and boost[s] the confidence of investors worldwide."
Legal Community Reaction
Trump's decision has also put lawyers into hyper-drive. Within Washington, there is widespread disagreement about the legal implications of Trump's move. Last week, a group of 22 US lawmakers, including Senate majority leader Mitch McConnell, warned Trump in a letter that his failure to withdraw from the Paris Accord could open the litigation floodgates: “Because of existing provisions within the Clean Air Act and others embedded in the Paris Agreement, remaining in it would subject the United States to significant litigation risk." But it's far from clear that US withdrawal from the Paris Accord will immunize the White House from the courts – with groups that favor the agreement already having vowed to sue.
In-house lawyers are no doubt sweating, as well. Lawyers at large corporations with operations in the United States are tasked with providing recommendations to business leadership on what they can and can't do from a regulatory perspective. With Trump pulling the US out the Paris Accord, lawyers now have to look to domestic regulations — a scheme that itself could be turned upside down — and try to reconcile those with international protocols. All of this uncertainty may translate into lawyers feeling like they are walking on quicksand.
Trump's Political Miscalculation?
Trump prides himself on operating on instinct. Prior to making his decision to pull out from the Paris Accord, he no doubt felt the rumblings of this business backlash coming. Why, then, did he move forward? Part of the answer may lie in his examining his base. Recent polls show that, for the first time, Trump's support among his core supporters is starting to erode. And that may spell danger for Trump, who relied on a mobilized and rock-solid base to ride into the White House. Trump thus decided that his need for a political victory and appeasing his base was worth the kickback from the business community.
But Trump may be missing something here. According to many reports, moderate conservatives and centrists who voted for Trump did so in part because they believed his rhetoric was nothing more than puffing that wouldn't ultimately be acted on. They were willing to throw their support behind him believing that he would revert to more traditional GOP, pro-business values.
But Trump's withdrawal from the Paris Accord demonstrates that Trump isn't all talk. When his back is against the wall, he is willing to act – even if it means acting against the interests of non-base voters who helped elect him. That realization may alienate the critical segment of the business electorate he needs to win again in 2020. More immediately, it may spell trouble for Republican members of Congress in 2018.
The White House is on fire. But it may not be heat from the blaze that stops Trump politically – but rather a cooling to Trump and his policies from moderate Republicans and the business world.
James Goodnow is an attorney and legal and political commentator based in the United States. He is a graduate of Harvard Law School and Santa Clara University. You can follow him on Twitter at @JamesGoodnow or email him directly at james@jamesgoodnow.com.
Movinga recently completed a study which investigates the possible benefits of foreign human capital in Germany. In order to do this, research was conducted into each of the 16 federal states. The number of firms receiving venture capital, the number of patent applications, the unemployment rate, and the percentage of the state that were born in another country were all examined. The findings show that German states with a higher percentage of foreign-born citizens see higher levels of innovation. They also illustrate that attracting more people from other countries does not mean higher unemployment.
In order to analyse the possible benefits of foreign human capital, the diagrams compare the key indicators on innovation and economic prosperity (firms accepting venture capital, patent applications, unemployment) with the percentage of the population that are born in another country. All data used for this report was provided by The Organisation for Economic Co-operation and Development (OECD) and the German Federal Statistical Office (Destatis).
With 81.4 million citizens, Germany is Europe’s largest country by population. It is also the nation with the largest foreign-born population in Europe, with more than 7.8 million (9.6%) originating from another country. However, this diversity is not evenly spread across Germany’s 16 federal states: five states have more than 10% of citizens who are foreign-born compared, whereas five states have a foreign-born population of less than 3%. This disparity is illustrated in Figure 1.
Figure 2 shows that the city states such as Berlin and Hamburg that have a higher percentage of foreign-born citizens are also home to a higher number of firms receiving venture capital. Similarly, Figure 3 displays that the two federal states with the most patent applications (Bayern and Baden-Württemberg) are also diverse demographically, with around 10% of their populations being foreign-born. In contrast, Figures 1, 2 and 3 also convey that the federal states with fewer firms receiving venture capital and lower numbers of patent applications like Sachsen-Anhalt and Mecklenburg-Vorpommern have smaller foreign-born populations.
Figure 1- Distribution of foreign-born workers in Germany
Figure 2 - Number of firms receiving venture capital
These findings convey that people born in other countries are of great economic value, and that an attitude of openness to foreign-born citizens is important in order for support innovation, research, development and growth. The relative weakness of the federal states with fewer numbers of people born in other countries suggests that they could boost innovation and their general economic performance through attracting more talent born outside Germany.
Figure 3 shows Bayern and Baden-Württemberg also have some of Germany’s lowest unemployment rates, whereas Sachsen-Anhalt and Mecklenburg-Vorpommern have some of the highest unemployment rates. This shows that having a higher number of foreign-born citizens does not mean that fewer people will be able to find jobs. Unemployment is higher in the diverse states of Berlin and Hamburg compared to the national average, but this is more indicative of their unusual positions as city states rather than their economic weakness.
‘The impressive amount of firms accepting venture capital and the number of patent applications in the diverse regions of Berlin, Bayern and Baden-Württemberg suggests that foreign human capital helps support innovation and growth’ said Movinga's MD Finn Age Hänsel.
Figure 3
The European economy has entered its fifth year of recovery, which is now reaching all EU Member States. This is expected to continue at a largely steady pace this year and next.
In its Spring Forecast released today, the European Commission expects euro area GDP growth of 1.7% in 2017 and 1.8% in 2018 (1.6% and 1.8% in the Winter Forecast). GDP growth in the EU as a whole is expected to remain constant at 1.9% in both years (1.8% in both years in the Winter Forecast).
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: "Today's economic forecast shows that growth in the EU is gaining strength and unemployment is continuing to decline. Yet the picture is very different from Member State to Member State, with better performance recorded in the economies that have implemented more ambitious structural reforms. To redress the balance, we need decisive reforms across Europe from opening up our products and services markets to modernising labour market and welfare systems. In an era of demographic and technological change, our economies have to evolve too, offering more opportunities and a better standard of living for our population."
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Europe is entering its fifth consecutive year of growth, supported by accommodative monetary policies, robust business and consumer confidence and improving world trade. It is good news too that the high uncertainty that has characterised the past twelve months may be starting to ease. But the euro area recovery in jobs and investment remains uneven. Tackling the causes of this divergence is the key challenge we must address in the months and years to come.”
Global growth to increase
The global economy gathered momentum late last year and early this year as growth in many advanced and emerging economies picked up simultaneously. Global growth (excluding the EU) is expected to strengthen to 3.7% this year and 3.9% in 2018 from 3.2% in 2016 (unchanged from the Winter Forecast) as the Chinese economy remains resilient in the near term and as recovering commodity prices help other emerging economies. The outlook for the US economy is largely unchanged compared to the winter. Overall, net exports are expected to be neutral for the euro area's GDP growth in 2017 and 2018.
A temporary rise in headline inflation
Inflation has risen significantly in recent months, mainly due to oil price increases. However, core inflation, which excludes volatile energy and unprocessed food prices, has remained relatively stable and substantially below its long-term average. Inflation in the euro area is forecast to rise from 0.2% in 2016 to 1.6% in 2017 before returning to 1.3% in 2018 as the effect of rising oil prices fades away.
Private consumption to slow with inflation, investment remaining steady
Private consumption, the main growth driver in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households. As inflation is expected to ease next year, private consumption should pick up again slightly. Investment is expected to expand fairly steadily but remains hampered by the modest growth outlook and the need to continue deleveraging in some sectors. A number of factors support a gradual pick-up, such as rising capacity utilisation rates, corporate profitability and attractive financing conditions, also through the Investment Plan for Europe.
Unemployment continues to fall
Unemployment continues its downward trend, but it remains high in many countries. In the euro area, it is expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009. This is thanks to rising domestic demand, structural reforms and other government policies in certain countries which encourage robust job creation. The trend in the EU as a whole is expected to be similar, with unemployment forecast to fall to 8.0% in 2017 and 7.7% in 2018, the lowest since late 2008.
The state of public finances is improving
Both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio are expected to fall in 2017 and 2018, in both the euro area and the EU. Lower interest payments and public sector wage moderation should ensure that deficits continue to decline, albeit at a slower pace than in recent years. In the euro area, the government deficit to-GDP ratio is forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018, while in the EU the ratio is expected to fall from 1.7% in 2016 to 1.6% in 2017 and 1.5% in 2018. The debt-to-GDP ratio of the euro area is forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018, while the ratio in the EU as a whole is forecast to fall from 85.1% in 2016 to 84.8% in 2017 and 83.6% in 2018.
Risks to the forecast are more balanced but still to the downside
The uncertainty surrounding the economic outlook remains elevated. Overall, risks have become more balanced than in the winter but they remain tilted to the downside. External risks are linked, for instance, to future US economic and trade policy and broader geopolitical tensions. China's economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country's exit from the EU are also considered as possible downside risks in the forecast.
Background
This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 25th April 2017. Interest rate and commodity price assumptions reflect market expectations derived from derivatives markets at the time of the forecast. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 25th April 2017. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.
(Source: EU Commission)
Last week Brexit Secretary David Davis said the UK will not be paying the EU’s expected €100 billion ‘divorce bill’ in order to leave the Union. Michel Barnier, the EU’s Chief Negotiator said it’s not a punishment, simply a settlement of accounts.
This ‘divorce bill’ is expected to be the most fought over and sensitive areas of the Brexit negotiation process between the UK and the EU.
Below Finance Monthly has heard Your Thoughts and listed comments from various expert sources.
Ben Martin, Founder, The Brexit Tracker:
A €100bn EU exit bill, paid upfront represents 18% of all income earned in the UK in the first three months of 2017. Or 239% of the annual increase in UK income earnings (12 months to March 2017 vs March 2016.) [Source: ONS GDP March 2017.] Either way it’s a huge figure.
So, whatever the eventual EU exit bill - €65bn or a net €42bn cost (or lower) – it’s going to take time to agree. Or continue to not agree.
Both sides have set out their negotiating stalls; the UK is looking for a parallel track (let’s talk about the terms of the exit and the bill together) vs. the EU (pay your bill first.) This will take months to resolve, even without the French and German elections. The sign off process will be arduous in the extreme as no individual will want to go down in history as the person who got it wrong. Agreement on what ‘Exit 2019’ looks like is a long way off.
The biggest losers of this head to head are businesses who need to plan for what the 2019 exit will mean for their operations. Employees will also suffer, due to the continued uncertainty surrounding EU workers right to remain, reduced investment spend and lower associated hiring as firms delay strategic investment.
What should businesses do now? We’re encouraging them to assign Brexit responsibility to an individual in the firm; to review Brexit through the firm’s lens; to establish a reporting procedure to keep the CEO/Board/entire business + employees up to date on the changes Brexit may bring. And to create Brexit Key Performance Indicators. What can be measured can be improved – so we’re helping business start that measurement process.
Businesses must navigate Brexit by accepting continued uncertainty and actively tracking the possible implications.
Markus Kuger, Senior Economist, Dun & Bradstreet:
Although Article 50 has been triggered, it's still far too early to say how the negotiations will unfold - particularly as the general election results in June could change the government's priorities. Currently, it's clear that the UK is keen to present a firm negotiating stance and avoid any political damage from the prospect of a hefty Brexit bill. It's almost certain that some compromises will need to be reached, but where the UK will make concessions, and the size of any potential settlement, remain to be seen.
Positively, real GDP growth is still reasonably solid, labour market conditions sound and stock markets are rallying. However, forward looking indicators have deteriorated somewhat over the past months, pointing towards more challenging operating conditions as Brexit negotiations unfold. As a result, we are maintaining our DB2d country risk rating, down from the DB2a before the referendum, and the 'deteriorating' risk outlook. The best advice for businesses is to monitor the progress of negotiations and use the latest data and analytics to assess and manage risk during this period of uncertainty, and identify any potential opportunities for the post-Brexit world. A careful and measured approach to managing relationships with suppliers, customers, prospects and partners is key.
Charles Fletcher, Head of Analysis at Cogress:
The UK is caught in the midst of uncertainty surrounding Brexit, now compounded by Theresa May’s snap election. Brexit is unfamiliar territory and presents potential risk to the future of the UK, but so far the economy has remained resilient and this should continue to instill confidence in the country’s future. Papers have been reporting various figures for the UK’s so called ‘Brexit Bill’ ranging from 50bn to 100bn euros, but this remains conjecture as no hard facts have been made clear yet.
Until more information about the nature of the negotiations is released, the exit cost will remain a guessing game and potentially a dangerous one, as speculations on the Brexit bill can only fuel unnecessary anxiety around the future of the UK economy.
However, I would argue that although the "divorce bill" will be one of the most sensitive points during the negotiations - at least for the general public - it's the trade deal that the business community will be watching closely. As a safe harbour in a storm, the property market has always shown great resilience especially at times of uncertainty, and some foreign investors might even benefit from more favourable exchange rates. However Brexit may well cost other sectors dearly, especially those such as manufacturing which can afford uncertainty the least.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Last week Governor of the Bank of England and Chairman of the G20's Financial Stability Board, Mark Carney said London is “effectively, the investment banker for Europe.”
Many believe companies and financial institutions should move their trading to the continent, while others believe this is non-sensical given London’s capital position globally and in the markets. Some companies, such as Goldman Sachs, HSBC and UBS, have already confirmed the eventual moving of staff and trade abroad, once the UK leaves the EU.
At the same time, the UK is faced with a lack of skilled labour, and due to the uncertainty surrounding changes in immigration law and the movement of employees or recruitment across the continent, bosses of big companies such as Barclays are calling for the freedom to recruit freely outside of the UK.
This week Finance Monthly hears Your Thoughts on the moving of business to the EU post-Brexit, and below are some comments from reputable sources within the business sphere.
Bertrand Lavayssiere, Managing Partner, zeb:
For those institutions with EU clients in their roster, it is more than likely that they will have to move to the EU post Brexit. However, there are a few buts…
One of the critical aspects is ‘passporting’. At present, banks can operate within the EU under UK regulations with relatively light approvals required from local regulators. This is of key importance for large sectors of the industry, such as asset management, where more than a trillion GBP is under management for EU-based investors, corporate lending, reinsurance and securities trading platforms, to name just a few. If this is maintained - which seems unlikely today - then the need to move is not crucial.
The long-standing cooperation between EU and UK regulators could ease some of the pain if governments agree that joint efforts to maintain alignment will help the overall goal of financial stability. Furthermore, many of the pertinent regulations are global anyway - those from the Basel Committee or the IASB, for example.
With regards to the London market, there are a number of platforms for specific product lines (foreign exchanges, swap contracts, equity derivatives, etc.) to facilitate compensation, settlements of trades among market players, and volumes to ensure liquidity. In simple terms: London is the place for such platforms. Disagreements have already taken place with regards to whether those platforms could remain in London. If the decision is yes, it will be business as usual. If, however, the answer is no (the most probable outcome), then the trading platforms and back offices of stakeholders have to move. This includes the day traders and market makers who are crucial for the liquidity of the market.
There is a whole list of further variations on this issue. But all in all, it is essential that a financial institution with clients based within the EU considers its strategic options as of now. Establishing a presence in the EU needs at least 18 months from a regulatory stand point. As many EU regulators require a fully-fledged decision making unit through proper governance, the analysis of the changes in delegation of authority schemes and the assessment of potential human resources impacts must be considered early on in the process.
Paramount in the decision-making process should be the institution’s business potential, to follow their customers, and ongoing requirements, rather than solely the regulatory aspects.
Ben Martin, Founder, The Brexit Tracker:
Moving your business away from the UK is a major undertaking. Perhaps you were considering this prior to the Brexit referendum or more likely, you believe leaving the EU will make your business operations untenable. But before taking action, we suggest you calculate and monitor the financial impact of Brexit on your firm and compare this to the emotional ‘pull’ of moving to the EU.
Here’s our 5-point plan:
- Calculate how Brexit has already impacted your firm. From over 390 economic indicators we’ve reviewed, the biggest market-related change has been GBP Sterling dropping 15% (now 12% weaker.) How has this impacted your business?
- Continually assess and record how new facts surrounding the UK/EU relationship will impact your £ calculations
- On relocation – consider how you will continue to serve your UK customers. With a weaker GBP, your UK sales are likely to be worth 12% less
- A move will impact your business banking. UK banks/lenders will need convincing of the merits of a move (and the enforceability of their security) to continual their financing
- Consider your existing and new competitors – will a move provide an advantage to you or them?
In summary, firms need the full “Brexit facts” before undertaking a move to the EU – as the facts are in short supply, they should start their own Brexit monitoring system.
Oliver Watson, Executive Board Director for the UK and North America, PageGroup:
As is to be expected, multinational businesses are more cautious than UK SMEs when it comes to hiring in post-Brexit Britain – and, as I see it, there are two reasons for this.
With a variety of other investment opportunities elsewhere across the globe, large international businesses – who are under no obligation to invest in the UK – have the ready option to divert investment to other more certain markets. As a result, their talent acquisition will naturally become focused in a different direction or geographical location.
However, where SMEs generate the bulk of their revenues in the UK don’t have that option – they just have to get on with it. This means while multinationals are feeling cautious about UK hiring, for SMEs it is often business as usual. This is a pattern we’ve seen time and time again in the face of uncertainty.
Mary Wathen, Partner and Head of Agriculture and Rural Affairs, Harrison Clark Rickerbys:
The Agricultural sector relies heavily on EU workers. Around 15% of the total workforce is from outside the UK. The uncertainty around the status of EU workers threatens to hit the agricultural sector hard if the status of EU workers isn’t clarified.
Despite the uncertainty, there are steps which savvy agricultural employers can take now to minimise the disruption. Taking action ahead of time will help maintain the flow of workers for each harvest, protecting both the business and the livelihoods it supports.
Employers need to ask themselves some key questions about their workforce:
- how many migrant EU permanent or seasonal workers do you have?
- how many are key staff, responsible for driving production, harvest or sales?
- how many have been in the UK long enough to acquire permanent residence?
- How many of your workforce are committed to remaining in the UK?
For smart agricultural employers, the so-called crisis provides an opportunity to build their employer brand. Employers are enhancing their working relationships with key employees who meet the requirements for permanent residency and want to remain – introducing them to specialist agricultural immigration advisers and supporting employees through the application process.
But this isn’t the solution for the seasonal workforce shortage. The fruit-farming industry employs 29,000 seasonal workers, who go back to their home countries after six to nine months in the UK. They won’t be eligible to apply for permanent residency. Virtually all of them come from the EU, mainly Romania and Bulgaria, but also Poland and Hungary. If the Government ends freedom of movement, a return to the old-style permit scheme seems the only option to protect the harvest and UK agriculture.
Richard Thomas, Employment Partner, Capital Law:
One key issue for the forthcoming Brexit negotiations will be the issue of EU Immigration following our exit from the UK. There is no doubt that the UK Government will seek to put in place some form of “controls” on EU immigration after the UK leaves the EU but it is entirely unclear as to what form these controls will take and/or who they will apply to. Will the controls apply to unskilled, semi-skilled or skilled EU migrants? Who makes the decision as to what constitutes a semi-skilled or skilled role? Is there any appeal against this decision?
It has also been suggested that the UK will allow all current EU nationals working in the UK to remain in the UK after the UK leaves the EU but it is not clear whether this will be indefinitely and whether it will apply to non-working spouses and/or children. Ultimately no promises have been given and it is a matter for negotiation between the EU and the UK, although it is hoped that the issue will be resolved quickly.
In addition, in April 2017 the UK Government introduced the Immigration Skills Charge imposing a charge of £1,000 per year for employers sponsoring a worker from outside the EU. It is quite possible that the UK Government will extend this charge to EU workers who do not have rights of permanent residence once the UK leaves the EU.
Given the current uncertainty and potential cost the best advice to SME’s with EU workers who have been working in the UK for at least 5 years is to get them to make an application for Permanent Residence as this should provide a guarantee of an individual’s continuing right to work in the UK.
However, individuals making the application will have to complete an 85-page form and provide huge amounts of supporting documentation confirming what they have been doing in the UK for the last 5 years. This is an arduous process to say the least but there appears to be little alternative as (unlike some EU countries such as Germany) the UK has no central register of the identities or even the numbers of EU citizens currently working in the UK. The Home Office has stated that it is looking to use an online application process but there does not appear to be any additional funding for this.
Katherine Dennis, Associate in the Employment, Pensions and Immigration team, Charles Russell Speechlys LLP:
The EU referendum has caused a lot of uncertainty for EU nationals and their employers as to what their position is in the UK and what will happen when the UK exits the EU. This is clearly an important issue for many SMEs, especially as sponsorship of overseas workers through the UK’s points-based system becomes increasingly expensive.
Importantly, free movement will continue to apply until the UK formally leaves the EU. This process was started on 29th March 2017 by the UK government giving notice under Article 50 of the EU treaty. There will now follow a two-year negotiation period, which could be extended by agreement of all member states. The earliest the UK would leave the EU is therefore the end of March 2019. Until then, EU nationals are still free to work in the UK.
The UK government has clearly stated that it wishes to control migration from the EU, while still attracting those whom it considers have the most to offer the UK. It is highly likely therefore that the UK will introduce measures to restrict free movement. It is also therefore likely that it will be harder for employers to recruit EU nationals and it may be difficult for EU nationals to work in the UK on a self-employed basis.
At the moment, there is no firm indication as to the type of system which might be put in place and much depends on what the UK government is able to negotiate with the EU.
Possibilities include a new work visa system for EU nationals or expansion of the current points based system, which enables employers to sponsor skilled workers in the UK (although it is currently limited to professional roles at a certain salary). It is unlikely visas will be required for short business trips. Other possibilities include retaining limited free movement with measures to cap numbers, such as quotas or temporary ‘cooling-off periods’. Concessions may be made for sectors where there is a recognised labour shortage.
The UK government has stated that it intends to consult with businesses and communities to obtain the views of various sectors of the economy and the labour market. It is therefore crucial that employers and business-owners who are concerned about the impact of Brexit on their workforce respond to the government’s consultation when it is issued.
In the meantime, EU nationals who are eligible to apply for permanent residence (i.e. those who have been resident in the UK for five years or more) or British citizenship should do so now to ensure their continued right to work in the UK. EU nationals who have not reached the five year point when the UK exits the EU are in a more vulnerable position. It is sensible for those EU nationals to apply now for an EEA Registration Certificate, which confirms that they are currently living and working lawfully in the UK under EU provisions, in case this fact becomes important in any future transitional arrangements.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Business insurance firm Hiscox recently produced a resource that might be useful for businesses pre- and post-Brexit. It is a side-by-side comparison table of the UK, France and Germany and displays how easy it is to do business in each country.
It features all the main tax rates, employment laws, costs and incentives in each of the three biggest economies. The resource is designed for those businesses in the UK considering relocating to an EU country after Brexit.
You can view the full table in a pdf here.
(Source: Hiscox)
Financial passporting enables businesses across the EU to operate throughout member states without needing specific authorization for each country they trade in or provide cross border services within. Craig James, CEO of Neopay, explains to Finance Monthly that the EU stands to lose if financial passporting is revoked, and how a deal could be the best outcome.
Since the country voted for Brexit in June last year, there has been uncertainty about what the future holds, both for Britain and the EU. But, with Article 50 expected to be triggered anytime now, the next 24 months will be dominated by negotiations between the UK Government and the remaining 27 EU nations.
A major sticking point will be the role the City of London continues to play in the financial world in Brexit Britain – particularly when it comes to e-money and passporting. It goes without saying that the UK is considered the financial hub of Europe – most nations looking to do deals across the EU use London as a means of access – not to mention that as one of the world’s largest economies, our financial sector plays a big role in the rest of the world.
No matter what happens, or what deals are put on the table in the next two years, what is essential is that the Government recognises how important the UK’s ability to passport to the rest of the EU is to the wider economy – £27 billion in annual revenue according to Oliver Wyman.
The benefits of passporting for businesses and the economy are obvious.
Through the regime, firms can operate across the European Economic Area (EEA) with a single licence, from one jurisdiction, as long as the regulator is informed by the firm of their intention to use the licence to passport.
Whether Britain remains a member of the European single market could be a determining factor as to whether the country can remain a hub for passporting across the EU bloc, as being a member is a requirement for accessing the benefits this process brings.
If the UK withdraws from the single market, which the Prime Minister has indicated will likely be the case, it will signal the end of the established passporting regime, and could result in a US style arrangement where firms are required to register in each individual state.
However, while this would be a cause for concern in the UK economy, it could be a much bigger problem for the rest of the EU. As the fifth largest economy in the world, Britain will remain a nation that most e-money and payment businesses will want access to.
One of the reasons the UK is a preferred destination for firms looking to passport financial services is that the Financial Conduct Authority (FCA) has made it simpler for this to happen in the UK compared to the rest of the EU. This is not to mention that once the UK is free to make its own decisions on trade and regulations, it will have the ability to make itself an even more attractive prospect for firms.
The UK is also considered a pathway to the rest of the world outside of the EU, significantly including the US, so would likely remain a central destination for firms looking for efficient passporting.
On the other side, the EU would be required to establish a new finance hub. Some reports have suggested Luxembourg or Frankfurt could be gearing up for this role, but neither has the regulatory convenience of the UK and are far behind in developing these arrangements. That leaves the option of registration in individual nations, which again, increases the bureaucracy and is a convoluted and cumbersome regime for a fast-moving and technologically-developed market.
Considering that simply setting up a bank account in a foreign jurisdiction is already problematic and will cause significant delays, it will remain in the EU’s general interest to retain the status quo and allow the UK to remain the passporting destination for the wider union.
To highlight this point further, a Freedom of Information (FOI) request we filed with the FCA has revealed that as many as 75% of new payment firms authorised in the UK in the last eight years, including many from the US and outside the EU, have used the passporting regime to export their services. This is significantly higher than the number of firms looking to enter the UK from Europe and suggests the EU stands to lose out more than the UK if a deal is not reached to retain the current passporting regime.
Questions also need to be asked about the future of e-money and financial services with regards to passporting, especially in the area of expanding the market beyond the borders of the EU.
As a single entity, the UK would arguably be in a better position to negotiate deals with other nations to expand passporting rights. This would be an attractive prospect as emerging markets in the Middle East continue to grow.
While it could be argued that the UK’s financial market could be in a better position post-Brexit than the EU if passporting rights are revoked, it makes more sense for those involved to compromise on this issue above others.
No matter what the future outside of the EU looks like, or the EU’s without the world’s fifth largest economy on board, it is essential businesses can retain the ability to operate across borders as efficiently as possible, and retaining the one licence agreement is the best way to ensure that. Failing to establish this primary principle could lead to long term unrest and a detrimental business environment far beyond the two year negotiations ahead of us.
The European Commission has prohibited the proposed merger between Deutsche Börse AG and London Stock Exchange Group under the EU Merger Regulation. The proposed merger would have combined the activities of the two largest European stock exchange operators, Deutsche Börse AG (DBAG) and London Stock Exchange Group (LSEG), who own the stock exchanges of Germany, Italy and the United Kingdom, as well as several of the largest European clearing houses.
The merger would have led to a de facto monopoly in clearing of fixed income instruments (bonds and repurchase agreements) in Europe, where the parties are the only relevant providers of these services. This monopoly in clearing fixed income instruments would also have had a knock-on effect on the downstream markets for settlement, custody and collateral management. In addition, the merger would have removed horizontal competition for the trading and clearing of single stock equity derivatives.
It is the responsibility of the parties to address competition concerns either by rebutting them or by proposing adequate remedies. To be effective, remedies have to address all of the Commission's competition concerns and be viable long-term. As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit this merger.
The Commission also decided today to register the 'Minority Safepack' European Citizens' Initiative, inviting it "to improve the protection of persons belonging to national and linguistic minorities and strengthen cultural and linguistic diversity in the Union", starting a one-year process of collection of signatures of support. If it receives one million statements of support within one year, from at least seven different Member States, the Commission will have to react.
The Commission had previously refused to register the 'Minority Safepack' Initiative in 2013, as it included proposals outside the frame of the Commission's legal powers. This Decision was annulled by the General Court of the European Union, and the Commission has now reassessed the proposed Initiative, and decided that it can be registered and statements of support can be collected on the basis of 9 out of the 11 proposals submitted by the organisers, which do meet the criteria of the European Citizens' Initiative Regulation.
(Source: European Commission)
The European banking industry has been struggling for years. The key issues that it suffers from have been known for some time. Indeed, many of them contributed to, and were highlighted by, the financial crisis which began in 2008. Yet they still need to be addressed. Here Anthony Duffy, Director of Retail Banking at Fujitsu UK and Ireland, talks Finance Monthly through a few considerations.
Some banks are still too big, others are undercapitalised and profitability is constrained. Low economic growth, pressure on margins (not helped by negative interest rates existing in some countries), and further regulatory change have combined to impact bank performance. The European Banking Authority reported that average return on equity for European banks was 5.7% in June 2016, down by more than 100 basis points in a year, while total operating income fell by 8.8%.
Of particular concern is the level of non-performing loans (NPL) plaguing already fragile banking systems across the region.
Who is Europe's sickest man?
The European Central Bank estimates that the total stock of NPL in the EU is estimated at over €1 trillion, or 5.4% of total loans. This ratio is around three times higher than other major regions of the world, such as the United States or Japan. Currently, ten of the twenty-eight member states have an NPL ratio above 10%. The worst performers are Greece and Cyprus, where almost half of all loans are under-performing and where the NPL ratio stands at 46.6% and 49% respectively. Yet, despite the size of the problem being known, progress in addressing it remains painfully slow.
Take Italy, where NPLs amount to some €350 billion, represent around 16.6% of the country’s loan portfolio and form about one third of the EU’s entire stock of bad debts. The country’s government and financial sector have spent the last eighteen months trying to address the problem. But the two “bad bank” funds created to help clean up bank balance sheets - Atlante I and Atlante II - have proved to be too small and underfunded to rise to the challenge. The funds are losing value, as the assets that they have bought continue to deteriorate. Italy’s two biggest banks, Unicredit and Intesa Sao Paolo, have written down their investments in the funds. This may, in turn, discourage others from providing fresh funds to be used to bail out problem banks, which means that further help is limited and so industry weakness continues.
Can the EBA be a game-changer?
One area of possible NPL progress could come from the European Banking Authority. Earlier this year, its chairman called for the creation of an EU-wide “bad bank”, to buy at least some of the underperforming loans which sit on the balance sheets of European banks. Andrea Enria suggested that banks would sell their non-performing loans to an asset management company at a price reflecting the real economic value of the loans. This would likely be below the book value but above the current market price. The asset manager would have up to three years to find other investors and sell on the assets.
If the scheme were implemented, it would probably mean that the banks would have to accept some losses. Should the final sale price turn out to be lower than the initial transfer price, a guarantee would protect the asset management company against potential future losses. These are commonly by the member state of each bank that chose to transfer loans to the asset management company in the first place.
Enria argues that such a scheme would remove the notion of a country’s citizens “bailing out” the banks. Any difference between the market price paid and the price the banks receive for their underperforming loan would be covered by Europe’s taxpayers, rather than national ones.
Such thinking is long overdue.
Time is of the essence
So what is to be done? It’s time to tackle the issue of NPLs head on. Further stress testing should be undertaken to identify weak loans and loan portfolios, which banks should then be required to divest via appropriate secondary markets. The impact of underperforming loans, both on the industry and on wider economic confidence, should not be underestimated. By ignoring the urgency of this, the overall structure of the European banking market has been weakened. It has also undermined the concept of a European banking system.
Instability within the European banking sector has been a feature for some time now, and it will be for some time to come. To date, too little has been done to address underlying key factors. This has to change. And, if not now, when?
With GDPR just around the corner (May 2018), the new EU rules are probably something you want to start thinking about, and companies could risk serious vulnerability in the face of data protection. But do the rules require you to hire a data protection officer? Richard Henderson, global security strategist at Absolute, provides Finance Monthly with the expert tips you’ve been looking for.
In just over a year the EU’s General Data Protection Regulation (GDPR) comes into effect, with part of it stipulating that some organisations will need a data protection officer (DPO). Impacted companies that haven’t already assessed their data protection technology, policies and processes against the regulation’s mandates, need to take action now to address any shortcomings.
The regulation may have been four years in the making, and amended throughout the process, but what has been clear from the start is that it intends to define an era where lax data management is not tolerated. The letter and spirit of the regulation reflects an expectation that data protection should be a priority, not an afterthought. Individuals’ rights around their data will be strongly upheld and companies found wanting will face tough punishment.
In this, the financial services sector has some experience. Despite being responsible for a relatively small percentage of the total security breaches reported to the Information Commissioner’s Office (ICO) in 2015-16, it attracted a third of the financial penalties the ICO pursued. With fines for data protection non-compliance set to rise significantly under GDPR (up to four per cent of annual global turnover), the industry cannot afford not to take note and to prepare.
The overall aim of GDPR is to make EU privacy laws fit for the 21st century. While there is a major emphasis on enforcement it also introduces mandatory data breach reporting requirements, in some cases within a challenging timeframe of 72 hours.
The role of the data protection officer
The requirement to appoint a data protection officer (DPO) is summarised as being in the case of “public authorities,” “organizations that engage in large scale systematic monitoring” and “organizations that engage in large scale processing of sensitive personal data”.
Organisations meeting these requirements will need to make someone responsible for data protection. It will be extremely important to have the right person for the job so legal advice should be considered when hiring.
The DPO must have expertise on data protection law and practices, is expected to keep their knowledge up to date and to report directly to the highest level of management. In short, this is not a responsibility to be taken lightly or to be tagged onto an existing role where the necessary level of expertise, knowledge and responsibility does not already exist. It is a professional role, expected to be accorded a sufficient level of seniority, with standing in the firm and the resources to maintain and build on knowledge.
DPOs will need to be supported by a thorough assessment and (where necessary) overhaul of policies, processes and procedures to ensure GDPR-readiness. A big part of their job will be ensuring the right technology is in place to prevent data breaches, while maintaining and reporting on security.
Enough is not good enough
The cyber-attack threat landscape continually changes, forcing businesses to evolve their security strategies and policies to keep up. The risk of non-compliance with GDPR is simply too high, not just in terms of potential financial impact but also corporate reputational damage from compromised data. A DPO will be central to safeguarding the organisation’s reputation, maintaining the right technology and ultimately, preventing a large-scale data breach.
GDPR recognises that situations have changed immeasurably since its preceding 1995 Data Protection Directive when the internet was still in its relative infancy. Today, larger volumes of data are not only created and stored but also widely transferred and held on mobile devices.
GDPR had to bring data protection enforcement up to date for the modern day. By setting the fines level for infringements at the level it has, it is sending out a clear message that ‘enough’ is not good enough. Companies need to make data protection part of the fabric of their organisation or pay the price for not doing so.
The price could be hefty indeed for UK business. If cybersecurity breaches stay at the level reported in 2015, fines could rise from £1.4 billion to £122 billion, according to the Payment Card Industry Security Standards Council.
Companies with limited IT knowledge and expertise may feel that punishments meted out after the event should be balanced by guidance and instruction on breach prevention, so that they can prevent falling foul of the regulation. While it is rightly incumbent on companies to adequately secure data, the options available to them to do this are matched only in their number and variety by the methods hackers have for getting in.
EU GDPR is incontrovertibly punitive but companies looking at it in full must see the opportunity the regulation gives to them to avoid incurring penalties.
Taking stock
By interpreting what the measures require companies to do, they can take action to keep data safe and thereby avoid non-compliance. This includes putting in place processes to provide data to subjects if they ask for it and to remove records if requested when it’s no longer necessary to hold them. It includes potentially putting in place the data protection officer and - perhaps above all - mandates ‘privacy by design’, meaning that data protection has to be built in to systems when they are designed rather than afterwards as an add-on.
This last measure is – if any were needed – the clearest indication of the regulator’s intention to instil into all companies a culture of data protection, one that drives systems and processes rather than the other way round.
A designated DPO dedicates a level of time and expertise that is required now for robust data protection. After all, 72 hours to report a breach is a short space of time and staying on top of policies and processes around data retrieval, access and removal is a big job. Organisations need the capabilities in place to manage data across their entire device estate. A single point of contact with specified responsibilities stands to help the company at the same time as helping the regulator.
Above all else, a dedicated data protection role will help companies prevent data issues, safeguard their reputation and avoid potential non-compliance.
For one particular part of the financial services sector, GDPR presents a specific opportunity. Strict new rules should mean the cyber insurance market will grow. With breaches set to be more widely reported under the new regulations, more data will be available to insurers to set premiums so we are likely to see an increase in the number and range of cyber insurance offerings.
Companies concerned by the length and breadth of the EU GDPR should step back and consider that, in simple terms it obliges organisations to put in place security measures appropriate to the risks. If a data breach occurs it will be hard for that organisation to argue that it had done this. Therefore, the goal will be then what it is now – to have in place the resource, policies, processes and technology to prevent breaches.
Companies should reassess how they detect suspicious activity on their network and consider options for persistent connectivity and encryption for systems, devices and data. The threat of higher fines certainly focuses attention on data protection but in reality, it must always be a top priority for the financial services sector.
No one wants to have their good company name smeared in the headlines because of a breach or incident that could have been avoided. It’s up to all of us in the security space to ensure that we are doing everything we can to keep the data entrusted to our protection safe from harm. We owe it to ourselves, our shareholders, and the public who trust us to steward their most sensitive of data.
