Velshi & Ruhle grade the economy's performance under President Trump.
With the introduction of the Insurance Act 2015, everything changed, and one year ahead of its implementation, Tanmaya Varma, Global Head of Industry Solutions at SugarCRM, tells Finance Monthly about the impact it’s had on the market, its insurers and customers.
It’s no secret that the insurance industry is one of the most cut throat when it comes to customer loyalty. With competitive rates available at the click of a button on price comparison websites, customers have the freedom to pick and choose their providers with minimal effort, from the comfort of their homes. The abundance of insurance companies in the market means they are on a constant uphill struggle to provide not only a competitive price, but a customer experience that sets them apart from the rest. With Gartner estimating that 89% of organisations now compete solely on this, this is the new benchmark of success for insurers.
In a competitive market, retaining that loyal ‘golden customer’ is challenging. Insurers need to show they are evolving to meet the needs of modern customers, and are not just companies who do little more than churn out cheap holiday or housing cover. Research from The Institute of Customer Service revealed an increase in customer satisfaction from July - December 2016 compared to the six months before it, with a number of insurers listed in the Top 50 organisations for customer satisfaction, such as LV and Aviva. Despite this, the sector still experienced a 9.9 point drop in Net Promoter Score, a figure which summarises the overall neglect and disconnect between insurers and their customers.
So what are insurers already doing to address this, and what more can they do to improve customer loyalty?
Changing laws
It’s clear that how insurers treat their customers is being monitored at the highest level. Prior to 2016, the insurance industry had been left to stagnate. In a sense, it was an industry complacent with its low retention rates and poor customer service. This changed last year with the introduction of the Insurance Act 2015 which set a new precedent – with BIBA marking it the “the biggest change in insurance laws in 100 years.”
The introduction of the Insurance Act promised to deliver greater transparency between companies and consumers. In an industry notorious for false claims, well-hidden small print and poor customer service, the shift was a much needed one. With this new act underway, it’s now more essential than ever that insurers have access to up-to-date data.
Providers were also instructed to improve communications across all channels to ensure clarity at all points in the customer journey. There is also an onus on customers to ensure they’re providing the correct information, and understand the policies they are signing up to.
Turning to technology
The right technology is of paramount importance to any customer-facing business. Insurers must harness tech to empower employees to work more efficiently. One way this can be done is through customer relationship software systems, which allow customer data to be collected, stored and managed to deliver a 360-degree view of the customer.
By giving employees everything they need at the press of a button, this can help alleviate lengthy, confusing calls and improve the customer experience. An easily-accessible system can deliver increased efficiency, better communication and happier customers. If we consider that in a survey conducted by Realwire 68% of questions asked digitally are inaccurately answered, it’s essential that insurers become more digitally focused and capable.
Some insurers are already adopting a digitally forward stance. The insurer Lemonade, for example, developed a virtual assistant at the start of 2017 called Jim who is able to process insurance claims in seconds. This virtual assistant reflects the advancements of AI and how some insurers recognise the power of tech. Realwire’s study concludes that with 91% of consumers saying good digital customer service from insurers makes them more loyal, it’s essential that insurers can deliver this.
The importance of the human touch
The benefits, and potential, of technology as part of the customer experience are endless, but have their limitations. Yes, there have been significant advancements in Artificial Intelligence (AI), and the rise of the chatbot is a forever trending topic. But despite a continued integration of AI in to customer service, research by Vanson Bourne concludes that 91% of respondents still preferred to contact a real person.
AI is great in automating mundane tasks, and taking care of repetitive jobs where humans don’t add value. But, so far, a robot can’t empathise with a distraught traveller half way across the world who wants to check the small print of their holiday insurance policy. That’s something that only a human can do at present. This is proven further through SugarCRM and Flamingo’s research, that found that three quarters of people surveyed still aren’t happy with talking to chatbots – a figure which clearly translates across all industries.
The future of the customer experience
Machines are great at automating repetitive tasks, and chatbots are undoubtedly becoming more sophisticated – and at a growing rate. But the real benefits of technology appear when it aids and empowers employees, and helps customers be autonomous in self-service functions where the human touch isn’t needed.
For an industry that, according to Realwire, saw a 47% decline in performance in 2016, it’s essential that insurers act quickly to evaluate the customer experience they offer at every touchpoint. The insurance industry has generally been slow to adopt a better digital approach, but, when customer dissatisfaction is often rife, it could be the difference between keeping or losing a customer.
Analytic software firm FICO recently released an interactive map of European card fraud, which shows that card fraud losses for 19 European countries hit approximately €1.8 billion, a new high. The UK saw the highest losses at £618 million, a 9% rise over 2015, topping the previous peak in card fraud, set in 2008 after the introduction of chip and PIN.
Card not present (CNP) fraud has gone from 50% of gross fraud losses in 2008 to 70% in 2016. Ten countries saw an increase in fraud losses, while eight saw a decrease. The map is based on data from Euromonitor International, with additional information from the UK Cards Association.
“The growth in online spending and CNP fraud brings new challenges for banks and retailers, as criminals thwarted by chip & PIN have moved to a less risky channel,” said Martin Warwick, senior consultant for fraud at FICO. “Hiding amongst the growth in online purchases is great from a criminal point of view, but finding and stopping fraudulent transactions just gets tougher. Spotting the ‘needle in a haystack’ requires new behavioural analytics and artificial intelligence, combined with enhanced information from outside the traditional data contained within a purchase.”
In 2015 the UK’s card fraud rise was the highest in Europe, but in 2016 two countries saw higher rises — Poland (+10%) and Sweden (+18%). The UK’s rise from 2015 to 2016 was just half of that from 2014 to 2015.
France had the highest basis points at 8.9 (ratio of fraud losses to sales) among the 19 European countries, compared to 7 basis points for the UK. However, French card spending is half that in UK, making UK losses much greater. Together, the UK and France account for 73% of the total loses among the 19 countries in 2016, followed by Germany, Spain, Russia, Italy and Sweden.
Fighting Back with AI
FICO is working with banks to advance the use of machine learning and artificial intelligence to identify fraud faster. The key, Warwick says, is to spot anomalies without putting friction into the transaction.
“It’s no longer just about identifying patterns that are unusual for the customer — we’re also looking at anomalies at the mobile device, IP address and merchant level,” said Scott Zoldi, FICO chief analytics officer. “All of these have ‘behaviors’ just as individuals do, and we’re using our 25 years of experience in artificial intelligence to identify those.”
Mobile analytics is an important area here, said Zoldi, who developed or co-developed half of the company’s 70 patents in artificial intelligence and machine learning. “FICO has developed archetype analytics that taps into the rich source of mobile context such as advanced geolocation, allowing us to use that information in FICO Falcon Fraud manager to make real-time decisions during a transaction,” Zoldi said. “These analytics draw on our patented work with customer behaviour archetypes.”
Banks and card issuers are also beginning to step up their use of real-time customer communication. “Contacting consumers early using automated two-way SMS is a key solution to making sure the transactions are valid,” Warwick said. “If this is fully automated and tied into the fraud solution — as it is with FICO Customer Communication Services and the FICO Falcon Platform — then cases can be closed without human intervention and consumers can be allowed to continue to spend when and where they want.”
(Source: FICO)
The financial services sector tops the table in deals between large organisations and UK SMEs. Since April 2016, there have been 452 deals, known to have exceeded £6.2bn. This accounts for 41% of the national total volume.
Economic data, released today by national law firm Bond Dickinson, explores mergers and acquisitions, joint ventures and minority stake purchases in UK SMEs from both domestic and international corporates.
Over the last four years, there were 1,864 financial services deals, known to have totalled in excess of £31bn.
Seen against the 7.2% that financial services and insurance contributed to UK GVA in 2016, the intense focus on collaboration with SMEs mirrors the sector's drive to exploit the opportunities presented by fintech.
Across all sectors, between 2013/14 and 2016/17, large organisations are known to have invested over £102bn in 5,447 deals with UK SMEs. This exceeds the £62bn corporates invested in UK research and development between 2013 and 2016*, and represents more than a seventh of the £683bn total UK business investment.
Based on analysis of four tax years of deal data, the findings are detailed in Close Encounters: The power of collaborative innovation.
Ben Butler, Partner at Bond Dickinson, comments: “Partnering with startups has become a key element to the digital transformation strategies which are now of vital importance to the financial services sector’s prospects. Large firms’ ability to innovate can be held back by dependence on legacy systems, while dynamic young SMEs have the advantage of developing from scratch. These partnerships combine the best of agility and scale to deliver improvements for customers and the sector as a whole.
“Despite complex and changing regulation, such as the Open Banking Initiative and PSD2, financial services has faced disruption head-on, embracing the advantages of collaborative innovation and startup incubation. The challenge now is to keep this up and not be distracted by political uncertainty.”
2016/17 fall
Bond Dickinson’s study goes on to reveal that the total number of financial services collaborative deals dropped by 22% in 2016/17.
Deal volume rose from 406 during the 2013/14 tax year, to 426 in 2014/15, to a peak of 580 in 2015/16, before falling to 452 in 2016/17.
However, the financial services sector is slightly more robust than others, as the average dip across all sectors, including energy, insurance, manufacturing and chemicals, real estate, retail and transport was 28%. This is striking considering the possibility of a disproportionate impact of Brexit on financial services.
A move away from M&A
In the majority of sectors, M&A remains the most popular collaboration vehicle between SMEs and large organisations. However, in financial services, minority stake investments made up three quarters (75%) of deals since 2013/14, three times as many as M&As (25%).
Of the 2,409 minority stake purchases conducted between large organisations and UK SMEs between 2013/4 and 2016/7, almost 60% (1,390) involved financial services firms. £14.3bn was invested in these minority stake deals. This mirrors strategic investments in accelerator funds, startup events and incubators, amongst banks in particular, which together create an ecosystem for collaborative innovation.
Ben Butler adds: “The popularity of minority stake purchases, rather than full acquisitions, shows financial services has found an alternative to the traditional model of buying up startups and attempting to integrate them. This is a new way of harnessing the value of long-term relationships with dynamic startups. A wariness of investing in tech entrepreneurs with fast exit plans could well see this turning into a wider trend in other industries.”
(Source: Bond Dickinson)
Outsourcing spend by UK financial services firms reached £769 million in 2016, an 11% rise year-on-year, as businesses boosted investments in back-office transformation, according to the latest Arvato Outsourcing Index.
The research, compiled by business process outsourcing (BPO) provider Arvato and industry analyst NelsonHall, revealed that spending on BPO contracts rose sharply across the sector last year with companies procuring outsourced services in policy services, HR and property and casualty claims processing.
The Index found that BPO agreements worth £621 million were signed across the sector in 2016, up 87% on the previous 12 months.
The research revealed that the boost in back-office spending contributed to the rise in deal value agreed in the industry last year. Contracts signed by financial services firms accounted for 12% of the overall UK outsourcing market in 2016, according to the findings. Only government (42%) and telecoms and media (19%) accounted for more spending.
Patrick Quinn, CEO of Arvato Financial Solutions UK & Ireland, said: “The financial services industry remains under pressure to transform, both in terms of improving services for customers and finding new cost savings.”
“It’s clear from the research that a growing number of companies across the industry see outsourcing as a viable strategy to address these challenges through introducing new innovations and ways of working. There are some very positive signs for the sector’s health looking forward, with a high proportion of first-time outsourcing deals (57%) procured last year.”
The Arvato UK Outsourcing Index is compiled by leading BPO and IT outsourcing research and analysis firm Nelson Hall, in partnership with Arvato UK. The research is based on an analysis of all outsourcing contracts procured in the UK market during 2016.
Outsourcing deals worth a total of £6.2 billion were agreed in the UK last year.
(Source: Arvato UK)
Customer services dominated the UK outsourcing market in 2016 while the sector remained stable in the face of high economic and political volatility, according to the Arvato UK Outsourcing Index.
The research, compiled by business process outsourcing (BPO) provider Arvato and industry analyst NelsonHall, revealed customer services contracts accounted for 17% of UK outsourcing spend over the year, with a total value of £1.04 billion (2015: £449m), up from 7% in 2015.
The majority of the deals were to be delivered in the UK, with just 4% of agreements going to offshore locations, compared to six% in 2015.
The findings suggest that integrating digital and traditional contact channels remains a key driver for customer service deals, with the vast majority (87%) of contracts signed last year featuring multi-channel delivery, compared with 59% in 2015.
Media and telecoms businesses were the most active buyers of outsourced customer services in 2016 spending £707 million, followed by retail firms which were responsible for £194 million.
IT application and network management were the next most popular service lines outsourced in the UK market, with deals agreed worth £906.7 million and £503.3 million respectively, according to the findings.
Debra Maxwell, CEO of CRM Solutions, Arvato UK & Ireland, said: “The findings of the latest Index reflect the fact that excellent customer service is a key differentiator for businesses serving an increasingly digital customer base. With customers now also in the driving seat when it comes to how they communicate with brands, providing a seamless approach to the customer journey has become the norm. A growing number of businesses are partnering with specialist providers to deliver a multi-channel service which brings together both digital and traditional channels.”
The overall UK outsourcing market remained largely stable in 2016, according to the research. The findings revealed a 7% year-on-year rise in the number of outsourcing deals procured across the UK last year, despite the overall value of the market falling by 5% over the period. Outsourcing deals worth a total of £6.2 billion were agreed in the UK over the period.
The research partners say there has been a shift away from the traditional large, multi-process contracts towards procuring smaller, more focused deals. Overall, average UK contract values fell by 11% year-on-year in 2016, with the average length of deals signed remaining constant at 53 months.
Outsourcing growth among financial services businesses.
The financial services sector saw strong growth in outsourcing activity in 2016, with the value of contracts procured reaching £769 million, up 11% on the previous year.
According to the research, the rise can be attributed to a sharp increase in BPO spending as businesses turned their attention to deals in policy services, HR and property and casualty claims processing. The findings show BPO contracts worth £621 million were signed across the sector last year, up 87% on 2015.
Patrick Quinn, CEO of Arvato Financial Solutions UK & Ireland, said: “The financial services industry remains under pressure to transform, both in terms of improving services for customers and finding new cost savings.”
“It’s clear from the research that a growing number of companies across the industry see outsourcing as a viable strategy to address these challenges through introducing new innovations and ways of working. There are some very positive signs for the sector’s health looking forward, with a high proportion of first-time outsourcing deals (57%) procured last year.”
The Arvato UK Outsourcing Index is compiled by leading BPO and IT outsourcing research and analysis firm Nelson Hall, in partnership with Arvato UK. The research is based on an analysis of all outsourcing contracts procured in the UK market during 2016.
(Source: Arvato UK & Ireland)
82% of executives surveyed worldwide experienced a fraud incident in the past year compared to 75% in 2015, according to the Kroll Annual Global Fraud and Risk Report.
Fraud, cyber, and security incidents are now the "new normal" for companies across the world, according to the executives surveyed for the 2016/17 Kroll Annual Global Fraud and Risk Report.
The proportion of executives that reported their companies fell victim to fraud in the past year rose significantly to 82%, from 75% in 2015 and 70% in 2013, highlighting the escalating threat to corporate reputation and regulatory compliance.
Cyber incidents were even more commonplace, with 85% of executives surveyed saying their company has suffered a cyber incident over the past 12 months. Over two-thirds (68%) reported the occurrence of at least one security incident over the course of the year.
The threat from within
Despite widespread concerns about external attacks, the findings reveal that the most common perpetrators of fraud, cyber, and security incidents over the past 12 months were current and former employees.
Six out of ten respondents (60%) who worked for companies that suffered from fraud identified a combination of perpetrators that included current employees, former employees, and third parties. Almost half (49%) said incidents involved all three groups. Junior staff were cited as key perpetrators in two-fifths (39%) of fraud cases, followed by senior or middle management (30%) and freelance or temporary employees (27%). Former employees were also identified as responsible for 27% of incidents reported.
Overall, 44% of respondents reported that insiders were the primary perpetrators of a cyber incident, with former employees the most frequent source of risk (20%), compared to 14% citing freelance or temporary employees and 10% citing permanent employees.
Adding agents or intermediaries to this "insider" group as quasi-employees increases the proportion of executives indicating insiders as the primary perpetrators to a majority, 57%.
Over half of respondents (56%) said insiders were the key perpetrators of security incidents, with former employees again the most common of these (23%).
Tommy Helsby, Co-Chairman, Kroll Investigations & Disputes, commented: "This year's Kroll Global Fraud and Risk Report shows that it's becoming an increasingly risky world, with the largest ever proportion of companies reporting fraud and similarly high levels of cyber and security breaches. The impact of such incidents is significant, with punitive effects on company revenues, business continuity, corporate reputation, customer satisfaction, and employee morale."
"With fraud, cyber, and security incidents becoming the new normal for companies all over the world, it's clear that organizations need to have systemic processes in place to prevent, detect, and respond to these risks if they are to avoid reputational and financial damage."
Increasingly complex threats
The vast array of perpetrators and ever-evolving nature of incidents reflect an increasingly complex risk management environment for businesses.
Every category of fraud has seen a marked increase between 2015 and 2016. The greatest increases were in the areas of market collusion (15%) and misappropriation of company funds (11%). Theft of physical assets remained the most prevalent kind of fraud suffered in the past year (reported by 29% of respondents), followed by vendor, supplier, or procurement fraud (26%).
A broad range of cyber incidents were reported. The single most common type of incident reported was a virus or worm infestation, reported by one-third of all companies (33%), followed by an email-based phishing attack (26%).
In the age of big data, nearly a quarter (23%) of respondents said data breaches resulted in loss of customer or employee data, while 19% reported loss of IP, trade secrets, or R&D. More than one in five (22%) suffered data deletion or corruption caused by malware or system issues, and 19% were victims of data deletion by a malicious insider.
Theft or loss of intellectual property was the most common type of security incident, cited by 38% of those who experienced a security incident in the last 12 months.
Fraud and security concerns impact overseas expansion
Over two-thirds (69%) of executives say their companies have been dissuaded from operating in a particular country or region due to fraud concerns and just under two-thirds (63%) because of security threats.
The road to resilience
While insiders are cited as the main perpetrators of fraud, they are also the most likely to discover it. Almost half (44%) of respondents said that a recent fraud had been discovered through a whistle-blowing program, and 39% said it had been detected through an internal audit.
Indeed, three in four respondents indicated that their companies (76%) have adopted employee-focused anti-fraud measures such as staff training or whistle-blowing hotlines. 82% of respondents have adopted anti-fraud measures focusing on information such as IT security or technical countermeasures, and 79% have implemented physical security measures.
The most commonly reported cyber risk mitigation action was conducting in-house security assessments of data and IT infrastructure, implemented by 76% of survey respondents' companies.
Dan Karson, Co-Chairman, Kroll Investigations & Disputes, commented: "Companies' greater use of technology and their increasing reliance on international supply chains means they are more at risk from fraud than ever before. In our experience, this risk can be mitigated against by adopting a conscious and proactive approach. Many of the challenges organizations face could be reduced through the implementation of employee and partner education programs or a tighter set of policies that help remove avoidable errors and poor business practices."
(Source: Kroll)
Industry made overall gains of 7.40% through the year, the highest annual performance seen since 2013. The Preqin All-Strategies Hedge Fund benchmark posted returns of 7.40% in 2016, marking the best performance year for the industry since 2013 and more than tripling the gains made through 2015 (+2.03%). Despite a volatile start to the year which caused some performance difficulties, hedge funds rebounded to post positive returns in nine of the final 10 months of the year. This strong period of performance for the asset class sees three-year annualized returns stand at 4.83%, while five-year annualized gains have reached 7.47%.
Event driven strategies hedge funds saw double-digit gains in 2016, returning 12.47% for the year. This marks a sharp contrast from the previous year, when event driven funds were the only leading strategy to suffer losses (-0.78%). Overall, all leading hedge fund strategies posted positive returns across 2016, and only relative value funds saw their 2016 returns (+4.74%) fail to match 2015 performance (+5.65%).
Other Key Hedge Fund Performance Facts:
Smaller Funds Post Higher Gains: According to Preqin’s size classifications*, smaller hedge funds were able to generate the greatest returns in 2016. Emerging and small hedge funds saw gains of 8.18% and 6.40% respectively in 2016, while medium and large vehicles posted performance of 5.53% and 4.63%.
North American Funds Rebound: After making gains of 0.45% in 2015, North America-focused hedge funds returned 10.20% in 2016. Funds focused on Europe (+2.89%) and the Asia-Pacific region (+1.68%) struggled through the year, but strong gains in Latin America saw emerging markets funds return 9.96%.
Discretionary Funds Succeed: Hedge funds following a discretionary trading methodology returned 7.51% in 2016, improving on 2.51% gains made in 2015. By contrast, systematic funds saw their annual performance fall from 5.46% in 2015 to 4.44% the following year.
CTAs Struggle: Despite a strong start to the year, CTAs did not enjoy sustained gains through 2016, and returned 0.91% for the year. This an improvement on the 0.15% recorded in 2015, but remains a long way short of the double-digit returns CTAs posted in 2014.
Funds of Funds Lose Ground:
Funds of hedge funds recorded five months of losses in 2016, and only returned more than 1.00% in July. As such, annual returns for funds of hedge funds fell to -0.25% in 2016, their lowest performance year since 2011, when they saw losses of 3.98%.
Amy Bensted, Head of Hedge Fund Products at Preqin says: “2016 showed that hedge funds were able to cast off performance struggles that hampered them in 2015, and they posted the best performance year for the industry since 2013. Fear over China’s economy in Q1, the Brexit vote at the end of Q2 and the US presidential election in Q4 drove the narrative in 2016; and although there were some high- profile losses, the associated volatility created opportunities for hedge funds to produce significant returns for investors. Looking ahead to 2017, the continued consequences of these geo-political events are likely to remain key determinants of industry performance.
“Despite the marked improvement in performance, hedge fund managers will be aware that in recent years returns have still fallen short of other alternative asset classes and public market indices. This is especially pertinent in the wake of some high-profile investors announcing the reduction or elimination of hedge fund investments from their portfolio. As a result, firms will be eager to sustain the momentum built over the latter part of 2016 and to prove their worth as investments capable of generating non-correlated, downside-protected performance.”
*Preqin size classifications: Emerging (less than $100mn); Small ($100-499mn); Medium ($500-999mn); Large ($1bn plus)
(Source: Preqin)
Zhaopin Limited recently released its 2016 White-Collar Worker Year-End Bonus Survey Report. The report found that more than 50% of white-collar workers in China did not get year-end bonuses in 2016. More than 11,500 white-collar workers participated in the survey.
According to Zhaopin's survey, 50.9% of survey respondents did not get any year-end bonus in 2016, down from 66% in 2015. 39.5% of white-collar workers had received their bonuses by the end of 2016, much higher than 13.4% in 2015.
Cash is still the most common form of year-end bonus for white-collar workers. Some companies offered physical gifts as annual bonuses, including company-made products, cameras, liquor, pork, fish, fruits, sauna coupons, inflatable dolls, rice cookers, tissue paper, and lottery tickets.
White-collar workers' satisfaction with year-end bonuses in 2016 remained at a low level of 2.18 (measured from 0 to 5, with 5 as the highest), although slightly higher than 2.07 in 2015, Zhaopin found. Employees in state-owned enterprises had the highest satisfaction score at 2.46, while workers at private companies had the lowest satisfaction score of 2.07.
In terms of work experiences, employees with less than one year's experience had the highest satisfaction (2.45) with the annual bonus, as their expectations were relatively low. The satisfaction with year-end bonuses declined as work experience increased because more experienced white-collar workers had higher expectations, said Zhaopin experts.
The average year-end bonus for white-collar workers in 2016 was RMB12,821, higher than RMB10,767 in 2015, but lower than RMB13,613 in 2014, according to Zhaopin's survey.
The finance industry offered the highest average year-end bonus in 2016, at RMB17,241, followed by RMB16,839 for the real estate/construction industry. The eEducation/arts and crafts industry had the lowest average year-end bonus at RMB7,433.
White-collar workers in Beijing got the highest average year-end bonus, at RMB15,846, followed by RMB14,640 in Shanghai and RMB14,605 in Shenzhen.
The more work experience, the higher the year-end bonuses for white-collar workers, Zhaopin found. The average year-end bonus for employees with more than ten years of experience was RMB20,471, compared with RMB5,675 for employees with less than one year of experience.
Among different types of companies, state-owned enterprises had the highest average year-end bonus at RMB17,318, while private companies had the lowest average year-end bonus, at RMB11,271.
The average year-end bonus for senior-level managers was RMB28,639, compared with RMB10,009 for ordinary employees.
In terms of occupations, white-collar workers in marketing/PR/advertising had the highest average bonus at RMB16,354, followed by RMB14,850 for R&D. Employees working in administration/logistics had the lowest average year-end bonus of RMB8,144.
(Source: Zhaopin Limited)
After the New Year, the UK pound and FTSE 100 made significant progress, and according to reports, UK business confidence is at its highest in 15 months, eluding Brexit doomsday predictions.
BDO’s Optimism Index, which indicates how firms expect their order books to develop in the coming six months, increased from 98.0 to 102.2 in December, above its long-term trend. This signals that businesses are continuing to stay resilient following the referendum result, the pre-2017 declining value of sterling and volatility in the global economy.
Finance Monthly reached out to numerous sources this week, to hear their thoughts on the pivotal pushes behind this increased confidence, reasons behind the inaccurate predictions of how the Brexit referendum may have affected UK business, and how this situation may progress in 1Q17.
Alister Esam, CEO, eShare:
Personally, this turnaround wasn’t unexpected – I didn’t buy into the doom and gloom that surrounded Brexit at the time. When we leave the EU, the UK will have a GDP of nearly 25% of the EU and it’s hard to take seriously any worries about us not having a trade agreement. The UK is a great country for business that will soon be released – Europe will remain struggling with inefficiency and a currency that doesn’t work.
People are finally thinking clearly about Brexit and what it means for business. Because the referendum result was so unexpected, people hadn’t really thought through the consequences. Those that did were positive in the first place, and others are starting to see that too, now they have been forced to consider what the implications and opportunities are.
I think people originally focused on the negatives. Now it is really happening they have had to focus on their own plans with positivity and find the not-insignificant opportunities this brings in being able to define our own rules, set our own taxation etc. Furthermore, the negatives were false – people argued leaving Europe meant we couldn’t trade anymore, which was daft. By definition, we will be the most EU-aligned of non-EU countries so we will trade with the EU more than any other non-EU country in the world.
I believe we will still have a tough ride in the short term. There remains uncertainty about how exactly everything will fall into place, and leaving the EU was never good in the short term. – it’ll take time for the benefits to emerge.
The on-going uncertainty is likely to affect UK business optimism over the coming months. European leaders failing to get down and solidify a deal, dragging out negotiations to steal pennies from the UK at the cost of pounds and Euros to both. It’s in no-one interests for negotiations to drag on so let’s hope it can be resolved as quickly as possible.
John Newton, CTO and Founder, Alfresco Software:
A positive side effect of global uncertainty is that it helps to push business resiliency. Enterprises will be open to new competition in a deregulated environment driven by significant political change. This, in turn, will positively force corporations and governments to establish new models, based on best practices.
However, it will be impossible to predict the next five years. Companies should be weary of being too optimistic and instead adapt to become more agile and resilient, whether trade deals are good or bad, inflation or not, and growth or not. Therefore, businesses must focus on bolstering digital core competencies and adopting new ways of thinking at the start of 2017. This will enhance enterprise organisations’ ability to deal with both new threats and beneficial opportunities as they arise. Platform Thinking, will help leading edge enterprises to thrive. It creates a single, scalable, central solution through which organisations can route information, automate processes, and integrate third-party innovation. Additionally, instead of building business plans, new digital enterprises should compose their business outcomes through Design Thinking, which puts the user first and solves problems for them. Using this approach will help enterprises design and adapt digital initiatives to respond faster and engage customers who also face uncertainty.
Deregulation is coming, and enterprises should adapt. For example, Blockchain is impacting our financial markets in the way that party-to-party contracts are managed. In the beginning of 2000, when companies weren’t getting their return on investment in the stock market, they turned to the power of data and peer-to-peer directives. Furthermore, asset-light industries (companies with fewer physical assets, and that tend to require less regulation), will emerge as the marketplace winners. While in the technology industry, computing platforms are evolving so rapidly that it is forcing architects and developers to almost relearn computer science. Cloud platforms, in particular, are changing at astounding rates. New concepts around microservice architectures, deep learning and new data, and compute techniques will again challenge the old way of thinking about things.
UK business optimism is set to be tested but there are huge opportunities for us to adapt and adopt digital transformation objectives. In the Fourth Industrial Revolution, it is no longer about who hasn’t adopted digital technology, but those who have digitally and fundamentally transformed their business, creating a new platform to connect with customers. Think AirBnB and Uber.
Owain Walters, CEO, Frontierpay:
Economic data releases have surprised to the upside in post-Referendum Britain, which is very encouraging to see. Nevertheless, the pound has actually been in steady decline since the result of the Brexit vote and is yet to make a turnaround. What we have noticed, is that the pound has plummeted whilst the FTSE100 has prospered as a result.
We must remember that the FTSE100 is full of companies that derive their incomes from outside the UK, and so as the pound has declined since the Brexit vote, their non-GBP earnings are now worth more. As a result, earnings of the GBP denominated stock in these businesses have improved, however, we must not confuse this with a turnaround in the pound.
I would certainly agree that the catastrophic predictions forecast on the immediate impact of the Brexit decision have been proven wrong. Unemployment continues to fall, GDP growth has continued, and we have even seen some high-profile announcements somewhat quashing forecasts of a halt of foreign interest in British business.
However, we can’t thank the pound for these encouraging developments. In truth, the fact that Article 50 has yet to be triggered means that Brexit has yet to have any significant impact on the UK. What we are currently seeing is a great deal of volatility in the markets as we wait to find out what kind of relationship the UK will ultimately have with the EU.
As long as the future of this relationship remains unestablished and the government continues to keep any details of a deal firmly behind closed doors, I believe it’s too early to tell if the predictions for Brexit will be wrong in the long term. That said, in at least the first quarter of 2017, I think we can expect to see further falls in the pound, a jump in inflation and steady GDP growth of around 0.5%.
Lynn Morrison, Head of Business Engagement, Opus Energy:
We recently surveyed 500 SME decision makers to find out how they had been affected by the Brexit referendum result. We found them to be unmoved, with 72% stating that their confidence was either unchanged or increased. Looking forward, it was extremely encouraging to find that nearly two-thirds of the respondents say they expect their income to increase and even expect to grow their business, in terms of headcount, by up to 20% in the next two years.
Considering the initial market reaction to the Brexit result, as well as the sharp decline in the value of the pound and initial drops in the FTSE250, this positive response may seem unexpected; especially given how many larger, more established businesses have been reporting otherwise. It’s likely that this reaction stems from SMEs’ focus on working within the confines of the UK borders. The Department for Business Innovation & Skills estimates that less than 10% of all small and medium sized businesses export directly to the EU, and only a further 15% are involved in EU exporting supply chains. This makes it easier for SMEs to embrace a new trading landscape, possibly less restricted by EU red tape, enabling them to continue with a ‘business as usual’ mentality.
Another source of SME confidence may be the fact that between the declining pound and the potential changes in our trade relationship with the EU, the UK is likely to look to its own businesses to help fill the gaps on products and services that had previously been imported.
Making up 99.3% of all private businesses in the UK, and with a combined annual turnover of £1.8 trillion, SMEs are the lifeblood of our country and their success is invaluable. I think it’s therefore hugely encouraging for the future of British business, and indeed our future relationship with the EU, that SMEs are expecting to not only survive the result of Brexit, but also to thrive in the coming years.
Salvador Amico, Partner, Menzies LLP:
Levels of business confidence were high before the Brexit vote in June 2016 and many businesses were optimistic about the future, bolstered by a strong Pound and UK economy. The Brexit vote result caught many by surprise and created shockwaves across UK businesses.
However, since the vote, it is evident that the world hasn’t ended and that things have moved on. Businesses, particularly those with extensive export operations, who were concerned pre-Brexit vote, have found renewed confidence brought on by the weak Pound and continuing enthusiasm by suppliers and customers to trade with UK businesses.
The UK economy is fundamentally strong and is still considered a world leader in many sectors such as tech and manufacturing. Even the property sector, which is often considered to be struggling in the UK, is benefitted from continuing inward investment, brought about by a weak currency.
Whilst the weak Pound has certainly helped boost business confidence, the UK has proven itself to be a good place to invest for quite some time. Low tax rates and a competitive market presence, combined with strong connections and a creative attitude have long made Britain an attractive place to do business.
Optimism indices have likely been affected by a general feeling that the world hasn’t ended post-Brexit vote, particularly with the majority of business owners who voted for Remain. Many of these businesses are now feeling that everything will be fine.
There has been a real push from businesses in some sectors to break into new markets and to find new customer bases abroad. Whilst there is still much more work to be done, the sense of optimism brought about by a potential increase in competitiveness caused by leaving Eurozone, is hard to ignore.
Dropping tax rates along with the opportunity to introduce new policies to support UK businesses will further boost confidence across the board.
The effects that a weakening Pound would have were perhaps underestimated by some financial commentators, and in particular sectors such as manufacturing, businesses which export will currently be feeling very positive.
It is also important to note that it is perhaps too early to say that the predictions were wrong and we may find that a year down the line the UK economy will look significantly different. This was the case with the effects of the financial crisis in 2008, where it took several years for a ‘new normality’ to resume.
Once Article 50 is triggered it is possible that we may see a further slight dip in confidence if we see the Government move towards a hard Brexit, effectively closing off free access to the EU trade zone.
However, once negotiations begin it will be the media who will play a large part in controlling business confidence through the ways positive and negative news is reported in relation to specific business sectors.
We may see that the Pound is going to remain weak for some time and exporters should make the most of it while they can. There is also still a lot of activity in terms of inward investment coming into the UK and lots of parties looking to make deals and secure contracts. Capitalising on this investment, along with looking to secure the best talent possible – regardless of location – will be key for UK businesses in the coming months.
Problems faced across the Eurozone are very likely to have a knock-on effect for the UK economy and should not be overlooked. Upcoming elections in France and the Italian financial crisis, combined with any slow-downs faced by the EU economy could have a larger impact than many people realise.
The strength of the EU market will be particularly important for businesses selling goods abroad and if that market cools or becomes more turbulent, the ripple effect will be experienced by the UK economy.
Omar Mohammed, Operations and Financial Market Analyst, Imperial FX:
It was a turbulent year in terms of political turnarounds – the unexpected Brexit decision and the unexpected outcome of the U.S election made 2016 one of the most unprecedented years. That caused a lot of loses, suspension of business, re-planning of strategies.
The indices markets in UK and US were on record highs after the Brexit. For instance, FTEE100 is mostly American firms which mainly depends on USD, so whenever the Cable (GBP/USD) is down the FTSE100 is up.
Predictions wrong about the impact of Brexit because of inaccurate opinion polls; both the online and phone polls predicted the majority would vote to remain. The length of the polls needs to extend beyond three days in order to reach hard to reach voters. The less well educated are under-counted in the polls while graduates are hugely over represented.
The first quarter of 2017 expected to be volatile and complicated. The cause of this disarray could be that May herself is muddled. While vowing to make Britain “the strongest global advocate for free markets”, the prime minister has also talked of reviving a “proper industrial strategy”. This is not about “propping up failing industries or picking winners. Her enthusiasm for trade often sits uncomfortably with her scepticism of migration. Consider the recent trip to India, where her unwillingness to give way on immigration blocked progress on a free-trade agreement.
In coming months, UK business will be affected as they will be waiting mid-March for the EU meeting to triggered article 50 which involve heavily on free-trade market and the free movement of European citizens.
Markus Kuger, Senior Economist, Dun & Bradstreet:
Ever since the Brexit vote, the sentiment in the UK has been a melting pot of distinctly differing viewpoints. From Pro-Brexiters to remain campaigners, businesses have been expressing trepidation as the worldwide markets continue to fluctuate. The sterling may have recovered somewhat towards the end of 2016 but has quickly dropped in value, following Theresa May’s hint that the UK will be looking to secure a ‘hard Brexit’. The 14.4% rise that the FTSE 100 posted over the course of last year looks to be a distant memory for the UK; a reason for the end of year boost was arguably due to overseas businesses.
The plain fact is that Brexit has not happened yet and Britain has yet to leave the EU. Against his promise (on which our post-Brexit vote scenario was built on), David Cameron did not invoke Article 50 in the morning hours of 24 June but resigned instead, which has temporarily helped to minimise the effects of the Brexit vote. However, Dun & Bradstreet still expects the Brexit vote to have a significant negative impact on the British economy, especially as ‘hard Brexit’ is now the most realistic scenario.
At the moment, the export-orientated sectors of the economy are benefitting from the weak pound, while domestically-orientated businesses are still being supported by robust consumer spending. That said, the invocation of Article 50, expected towards the end of March, and a potential ‘hard Brexit’ will test the fragile stability of the UK economy, especially as sharply rising inflation rates will reduce households’ disposable income. We strongly recommend that businesses ensure they have the risk management measures in place to deal with the changes. Ensuring that the proper risk solutions are implemented will best prepare a business for any potential market fluctuations.
Although we now expect the government to lay out its Brexit roadmap in the coming weeks, uncertainty will remain high as it will remain unclear if the UK’s and the EU’s positions are compatible and whether a compromise regarding migration controls and market access can be found. Developments in financial services are likely to have a huge impact on the broader UK economy – the financial services sector, including professional services, makes up 11.8% of the UK’s GDP. The impact of firms looking to relocate outside of the UK could have a knock-on effect that leads to further disruption. Our own recent research indicates that 72% of senior financial decision-makers are planning for change post-Brexit. Against this background, we expect businesses to continue to operate smartly and cautiously, while overall prospects in the UK are likely to remain extremely unpredictable in Q1 and beyond.
For context, Dun & Bradstreet recently released a survey on business confidence after Brexit. The results showed that:
- 64% of businesses say the Brexit vote has negatively impacted their growth potential
- Over half (59%) believe that leaving the EU will be financially damaging to their organisation
- 19% of businesses have halted or slowed growth or expansion plans in the UK following the vote
- Nearly half (49%) of senior financial decision makers admit their business is likely to either leave the UK or reduce investment in the UK post-Brexit…
- …and more than one in ten (12%) admit this move is “highly likely”
- 19% of businesses have already seen a dip in deals with European partners and/or customers
(This November 2016 research surveyed 200 senior financial decision makers from medium and large enterprises in the UK.)
Kerim Derhalli, CEO and founder, invstr:
Positive initial data which emerged in the aftermath of the EU referendum has been the catalyst for an ongoing good feeling among businesses, with positive momentum offsetting any continuing political uncertainty.
The UK economy performed well in the run up to June 23, with GDP growth at 2.5%, which helped to cushion any perceived negative impact. Since then, businesses have been buoyed by positive consumer data which has remained broadly optimistic.
UK businesses focused on exports – many of which feature in the FTSE 100 – have enjoyed a boost from cheaper sterling, and are becoming more competitive overseas. Cheaper comparative labour is also having a knock-on positive affect for exporters.
In addition to this, the UK services sector contributed to a 0.6% growth in the economy in the three months following the Brexit vote, fuelling confidence through the end of 2016 and into 2017.
What many observers failed to recognise in the build up to, and immediate aftermath, of the Brexit vote, is that the UK and London in particular still remain highly attractive to international investors.
The core fundamentals that make the UK a good place to do business are still present, and will remain whether the country is within or out of the EU.
The City of London is a world leader in attracting business talent, legal institutions are among the most respected in the world, and UK universities lead the way in innovation and research, continuing to draw students from across the globe. Plus, the UK has the lowest corporate tax rate in the G7 – making it attractive for businesses – and the commercial property sector remains a desirable asset globally.
Predictions underestimated the strength of the UK economy, and the country’s role as a global provider of world-class goods and services. The UK has plenty of reasons to remain optimistic about the future.
Political uncertainty will be the main driver behind any lack of optimism for businesses in 2017. At the moment, the Government looks no closer to confirming any specifics around the terms of agreement between the EU and the UK and, if uncertainty drags on, it could prove a drain on confidence.
That said, a cheaper pound and better global growth prospects, as well as all of the positive business investments we have already seen throughout the end of 2016 and early 2017, will help to offset the uncertainty. This, in combination with the ongoing good data, will serve to strengthen business and consumer sentiment.
We would also love to hear Your Thoughts on this, so feel free to comment below and tell us what you think!
New figures published by City of London Corporation show that the total tax contribution for the financial services sector reached £71.4 billion in the year to 31st March 2016. This was a 7.4% increase on the previous year’s figures and the highest in the nine years that the report has been produced.
The contribution, which is the last set of financial services tax data to be published before Brexit negotiations commence, is 11.5% of total UK government tax receipts. It also shows that for every £1 of corporation tax paid – one of the largest direct taxes - there is another £3.83 paid in other direct taxes.
The report, which was produced by PwC, shows banks and insurance firms were the highest overall tax-paying sub-sectors, due to reforms in corporation tax and the bank levy. The analysis shows financial firms paid £8.4 billion in corporation tax, up from £7.6 billion (10.5%) on the year before, whilst the bank levy saw foreign and UK based banks contribute £3.4 billion in the last financial year – an increase of more than 25%.
Data from the report shows that the equivalent of almost a quarter (23.3%) of financial services’ turnover in the last financial year went straight to the public coffers.
For the first time since the data has been collected, the analysis compares the sector’s highest tax contributors - banks and insurers. Other than highlighting sector-specific levies and tax measures, the comparison shows that employment taxes make up over half of the contribution from banks but are less significant for insurers, where they make up less than a third of the contribution.
Overall, employment generates the largest amounts of tax paid into the public finances, accounting for 47.8% of total receipts. Financial services employs 1.1million people across the UK (3.4% of the workforce), while the study found average employment taxes per employee were over £32,000. Reforms on pension drawdowns, which came into force in April this year, are also represented in employees’ tax totals but is expected to level out in next year’s data.
Mark Boleat, Policy Chairman at the City of London Corporation said: “As the last set of data on financial services’ tax contribution before the Brexit negotiations begin, it is hugely important.
“In light of the UK’s decision to leave the EU, these new findings not only demonstrate the significant contribution made to Government revenues, but are also key in helping us to understand the potential impact of Brexit on different sub-sectors within financial services.
“As one of the UK’s biggest service exporters, it’s understandable the sector also contributes a considerable amount of tax. Despite this, the sector arguably stands most to lose as negotiations loom. It makes it clear the argument that Government should be engaging with firms as it approaches talks with the remaining EU 27, and the pulling of the political trigger.”
Andrew Kail, Head of Financial Services at PwC, said: "The City of London Corporation report shows the continued importance of the financial services sector to the UK Exchequer and the wider economy.
"Specifically, the report highlights an increasing reliance on tax receipts from banking and insurance firms. This is balanced against a backdrop of downward pressure affecting return on equity for the banks in particular, resulting from regulatory changes and the low interest rate environment.
"With the added potential adverse impacts of Brexit on the sector, the question arises as to whether the current levels of tax contribution are sustainable."
Indirect taxes – which companies collect on behalf of others, such as income tax collected under PAYE, employee tax and national insurance contributions – are 1.27 times the size of direct taxes, such as corporation tax and the bank levy. For every £1 of corporation tax paid by financial services companies there is another £6.01 in taxes collected. Employees’ income tax and NIC deducted under PAYE are the largest taxes collected, and together represent on average 65.4% of the total taxes collected.
(Source: City of London Corporation)
