When it comes to financial investment, whether it's in supply chains or your employees, business decisions are an everyday chore. If you add Brexit, hurricanes and fluctuating stocks to the mix, planning for uncertainty can become tedious. Here Lena Shishkina, head of finance, EMEA and APJ at Workday, provides Finance Monthly with some insight into planning for uncertainty.
The level of uncertainty that businesses have to deal with today due to various political, social and economic forces is almost unprecedented. From fluctuating currencies and political leadership to other disruptive events such as Brexit, there are plenty of reasons for a degree of global anxiety. The reality is that the effects of these things are still unknown. Business leaders are in a state of flux, questioning how this instability will affect trading, regulation, policies, and markets, for instance.
This level of uncertainty is impacting the finance world most. Now more than ever striking a balance between executing the day-to-day and future planning is critical. Unfortunately, not everyone has this mastered just yet. Despite the advent of tools such as big data and predictive analytics, recent figures show that 50 percent of businesses cannot create revenue forecasts past the next six months.
When uncertainty strikes, the c-suite tends to revert to requesting more frequent forecasts and adopting a ‘what about now’ mindset. While this tends to be a knee-jerk reaction, finance planning is only effective if it is based on relevant, real-time data.
Expecting the unexpected
It’s probably from personal experience that most financial professionals know that an annual budget can be rendered useless in the space of a few days. This is due to the unexpected nature of market volatility and political changes for instance that can shape the future of companies.
This is why continuous planning is being widely adopted by organisations, as it allows them to have the ability to re-run forecast predictions based on these kinds of changes. And it works: businesses that have already adopted this methodology claim to be almost twice as likely as their peers who haven’t accurately forecast earnings between plus or minus 5 percent.
Another benefit is that this kind of approach can create and develop the authority of the finance department. In fact, the same study found that respondents were three times more likely to report increased stakeholder confidence, and finance leaders were four times more likely to be able to respond more quickly to market disruption.
Despite the clear advantages of this methodology, why do many so companies still choose not to go down this path? A lot of businesses continue to rework forecasting on outdated budgets, which breeds inaccuracies and further trepidation. Financial professionals need to rethink their forecasts and look beyond financial data to ensure their projections are robust, accurate and of the highest quality.
Continuous planning and the importance of non-financial data
Non-financial data has traditionally been left out of forecasting largely because it is not as quantifiable or predictable, but executives can no longer get away with that thinking. A recent report found that executives who make better use of non-financial data are more than twice as likely to be able to forecast beyond a 12-month horizon.
Take workforce costs, for example. This is typically an organisation’s greatest expenditure and relies on much more than just financial data for an accurate forecast. That includes everything from anticipated salary to recruitment plans as it paints a more comprehensive view that teams can then use for an accurate look at the future.
A robust data set is one thing. But being able to adjust forecasts in real-time as changes arise at the last minute is just as vital. This is where continuous planning can be truly valuable as it adds context from across the organisation, helping to involve more stakeholders and providing deeper visibility into plans and real-time revisions. A rolling model means the business is in a much better position to react quickly to external factors and give the organisation the visibility they need when these changes arise.
Innovation is key
In theory, continuous planning is a saviour for financial services professionals. However, the reality is most organisations do not have the infrastructure or technology in place to support it in practice. Embracing new technology is the only way organisations will be able to seamlessly bring together rolling forecasts and non-financial data.
The fragmented way finance teams currently work is stifling operational agility. All too often, they are using a mixture of legacy tools from a variety of vendors, which makes it difficult to integrate data sets and make educated decisions. Organisations can no longer afford to base their decisions on luck; they have to start rethinking their technology and the foundation it’s built on. It is the only way to achieve real transformational change. A visionary CFO and a highly engaged finance team will see that and be well placed to usher in this new era.
Determining the future
The only constant in this world is change. And as this time of uncertainty shows no signs of slowing, continuous planning is the only antidote. The combination of rolling forecasts alongside both non-financial and financial data is a significant step in effectively predicting future business outcomes. As a finance professional, you’ll no longer feel like you’re being asked to gaze into your crystal ball, you’ll finally have the answers.
New report from national law firm Mills & Reeve highlights the defiant ambition of the mid-market despite serious challenges, and demands for sustainable growth finance.
Mid-market businesses remain ambitious and confident in their growth prospects despite an unstable economic landscape, the impact of Brexit and an unsupportive funding environment, according to new research from national law firm Mills & Reeve.
The study, ‘Defying Gravity’ - based on the opinions of 500 leaders of medium-sized businesses in the UK – reveals that 83% of mid-market businesses plan to increase turnover in this financial year (2017/2018) by an average of 22%, and two thirds of leaders aiming to grow (62%) are willing to bet their house on meeting this target. This is not unrealistic, with the new research also revealing that two thirds (66%) of medium-sized businesses grew turnover last year, at an impressive average of 20%.
However, mid-market businesses face serious challenges to growth. Three fifths (59%) of mid-market business leaders do not believe that the economy is strong and stable. Two thirds (64%) of mid-market boards are concerned that there is now a real risk of recession, and that economic uncertainty will disproportionately affect the mid-market (66%).
With single market access “critical” for three fifths (60%) of mid-market businesses, Brexit looms large on leaders’ list of concerns. Three in five (61%) mid-market leaders are concerned that the UK failing to reach an agreement with the EU would cause “significant damage” to their business, and 60% are concerned that regions outside London will be disproportionately affected by Brexit. More than half (55%) of leaders are concerned that implementation of Brexit is a serious threat to their ability to recruit both specialist and low-cost talent.
The external funding needed to supercharge growth is also found to be lacking: almost three in five mid-market leaders (58%) say that their company can’t achieve its growth potential without better long-term finance options. More than half (56%) of business leaders stated that mid-market finance is not “fit for purpose”, with two thirds (63%) believing that the UK funding environment is great for start-ups, but not for mid-market firms.
Claire Clarke, managing partner at Mills & Reeve, comments: “Despite very real challenges, it is encouraging to see mid-market leaders remaining defiantly ambitious about growth, determined to beat market conditions and to hold their position as the driving force of the British economy.
“But these businesses are being hindered in their efforts to realise their ambitions. Accessing growth finance suited to mid-market needs is a significant challenge, and the unstable economic and political landscape is causing some businesses to refrain from making the investment necessary to grow.”
The findings are released today ahead of a series of reports from Mills & Reeve championing the mid-market and exploring the current challenges faced by business leaders.
The research goes on to reveal a perceived lack of support from Government, with two thirds (65%) of medium-sized business leaders frustrated that the Government “keeps presenting obstacles to mid-market growth”. Three-quarters (74%) cite a lack of targeted policy support, with 61% concerned that Brexit will distract Government from supporting regional development and infrastructure.
Jayne Hussey, head of mid-market at Mills & Reeve, adds: “The mid-market is the unsung powerhouse of the UK economy, and we are hopeful that medium-sized businesses can continue to overcome the barriers to growth formed by uncertainty. The events of the recent past may have rocked the nation’s confidence, but the resilience, strength and ambition of mid-market business leaders appears to remain intact.”
(Source: Mills & Reeve)
Joseph Camilleri, Executive Head Business Development & Corporate Services at BOV Fund Services, talks to Finance Monthly about Malta’s fund industry, Brexit and the hurdles that the fund services sector is faced with in a scenario of on-going regulatory developments.
Within the context of a highly regulated fund industry, how is Malta coping in ensuring that it keeps pace with bigger fund domiciles?
I trust we’d all agree that the fund industry is increasingly becoming overcrowded with regulation, well intended as that may be. We’d also agree that such poses challenges to all stakeholders, be they investors, investment managers, service providers and fund domiciles too of course. Malta is in no way an exception to this.
The challenges may seem somewhat bigger and more difficult to address if the domicile is a relatively new and upcoming one; particularly if the domicile has built its fund and fund management industry on the small and medium sized funds and fund managers, as is the case for Malta, which by the very nature of their size, are impacted to a larger extent by the over-regulation in the industry.
Notwithstanding the above statements hold true, Malta has in my view, weathered the storm in a convincing manner. The key word here is “adopting” rather than adapting to new regulation, and ensuring that its pre-emptive stance pays dividends. The island’s positioning as a fund domicile has seen it consolidating its strengths in particular niche areas which it has continued to develop over the past few years. All of this further underpinned by the pro-active mindset of stakeholders (service providers in particular) in ensuring compliance to new regulations through the timely provision of additional services to the industry, in a cost competitive backdrop.
Malta’s fund industry has established itself as a domicile of choice to many start-up hedge fund managers. Its highly competitive package, the pro-business approach and accessibility of Malta’s single regulator, the robust yet flexible regulatory framework for deminimis (out-of-scope) funds in terms of the AIFMD, the efficient process for licensing, as well as the presence of several service providers on the island, within the context of a cosmopolitan lifestyle have and are attracting several investment managers to our shores.
Within the AIFMD realm, Malta too has identified its own niche segments: the past couple of years have been characterised by full scope AIFMs, whether based in Malta or other EU member states, structuring fully compliant AIFs having diverse strategies. Most notable, we have seen a growing number of AIFs being set up investing in real estate and other real assets, we have seen Private Equity funds being set-up, as well as the emergence of loan funds. Thus funds that require depo-lite services, as opposed to fully fledged depositary services, have been very conspicuous in Malta’s development of its fund industry.
The recently introduced Notified Alternative Investment Fund (NAIF) has thereagain been an innovative and positive contributor to the growth of the industry in the AIFMD space. Full scope AIFMs across the EU now can have their fund structures, SICAVs, Contractual Funds, Limited Partnerships, or Unit Trust Funds up and running within 10 working days of notifying the regulator. A far cry from passing…
How do you see the Brexit realities impacting Malta’s fund and fund management industry?
Difficult to tell given that the Brexit realities are still an unknown. The shape of things to come post conclusion of negotiations between the parties is still to be seen. Having said that, we’re already seeing major cities within the EU taking rather aggressive approaches in an attempt to position themselves in time (particularly should all go the hard Brexit way) to attract London-based businesses their way.
To a degree, I tend to think that attempts at unseating London as Europe’s main financial services centre is rather delusional. There’s likely to be a repositioning of course, yet London is London and will remain a major player, not necessarily very different to what it is today.
The way Malta is looking at Brexit is quite different; rather than adopting a vulture approach, as seems to be the case for the other EU contenders for the top spot in financial services, Malta’s approach is a softer one - one that augurs for a strengthening of the legacy relationship between the UK and its former colony Malta.
Malta is in fact in an ideal position to act as a bridgehead for UK-based businesses (and not limitedly to financial services businesses at that) to access the wider EU market.
There are various reasons why Malta sees it differently; apart from the legacy relationship mentioned earlier, there are other realities that are worth mentioning that render the relationship one based on mutual respect and understanding:
- English being an official language of Malta.
-The island’s membership and active participation in the Commonwealth.
-The British business ethics deeply rooted in Malta’s own conduct of business.
-The similarities in the socio-political make-up of the two countries.
It is thus of no surprise that we are seeing London-based operators teaming up with ManCo and Super ManCo platforms in Malta to explore alternative solutions for different Brexit scenarios that would allow them access to the EU market. Others are setting up their own “lean” fund management operations in Malta, as UCITS managers or AIFMs, to carry out the risk management function for their fund vehicles, whereas the day-to-day portfolio management activities are outsourced back to base, in London.
Malta’s way of looking at the opportunities coming out of Brexit are of the win-win sort; and it is precisely this that is elevating Malta’s stature in the eyes of UK-based operators.
What are the major challenges for a company like BOV Fund Services in a scenario of on-going regulatory developments?
There are various facets to regulation: some see regulation as a safeguard to investors, others to the system itself, some see it as an overkill and an unnecessary money drain.
Whichever line one might take, it is indisputable that regulation presents both challenges and opportunities for service providers, particularly fund administration companies. BOV Fund Services is in this space, and it too is not immune to such.
Regulation has predominantly meant additional and extensive reporting. In view that most fund data is held by fund administrators, it follows that the latter are in such scenarios are best placed to provide additional services to funds and their fund managers, thereby enabling these to comply with the newly introduced obligations.
This has been true for AIFM Annex IV reporting, FATCA, CRS and others. So has regulation impacted all fund administrators in the same manner? The short answer to this question is no. There have been winners and losers in the game; the winners where those service providers that ensured a level of preparedness in good time. The ones losing out on the other hand have been the laggards, those that considered the aforementioned regulations as the Managers’ and the funds’ problems. In effect, such regulations place obligations, sometimes onerous ones, of the funds and their managers.
Yet, fund administrators that evaluated the regulations as their draft versions were published, that understood the implications, and that geared themselves up to provide timely solutions in a cost competitive environment, not only ensured that their clients were compliant as from d-day, but they also consolidated the loyalty from their client base as well as created new revenue streams for themselves.
BOV Fund Services is in this second category. It has invariably sought to be ahead of the curve in terms of assessing the likely requirements of its client base emanating from new regulation. It invested heavily in its IT infrastructure and entered into agreements with system providers to automate reporting.
This has ensured that the company consolidate further its market leadership in Malta as the island’s number 1 fund administration firm (in terms of Assets Under Administration as well as number of Malta-based funds administered by the company), within a context of crowded market of 27 fund administration firms operating from Malta.
What has the AIFMD meant to your clients in the alternative space?
Essentially there are three categories of clients that we service, and for whom the AIFMD and its implications came to the fore.
When the initial draft of the AIFMD was published, it was quite evident as of those early days, that the directive had two core outstanding features:
- Albeit purporting to be intended to address systemic risk, it was largely perceived as being an EU protectionist measure, and
- It was bound to negatively impact small-sized alternative fund managers and fund domiciles that catered for this segment of the market.
Malta’s financial regulator, the MFSA, thanks too to the listening ear, lends to the local operators in Malta, wisely decided to defend its territory. As mentioned earlier, Malta had by then attracted a relatively large community of international small and medium sized fund managers to structure their fund vehicles in Malta. It was thus imperative that the goose that laid the golden eggs be safeguarded from the overarching burden that the new regulation was set to bring to the table.
In effect, rather than replacing the old with the new, MFSA introduced a new fund regime, the Alternative Investment Fund rule book, as distinct from the already existing Professional Investor Fund rule book. This latter regulatory platform for alternative funds, with its inbuilt flexibility within a robust framework, had enabled hundreds of fund managers (several of whom small-sized) structure their alternative strategies, ranging from hedge funds, to private equity, real estate, fund of funds, distressed debt, high frequency trading funds to a myriad of others.
It was inconceivable that this segment should be burdened by the heavy regulatory baggage that the AIFMD promised to introduce. In view that the directive’s provisions become mandatory for alternative managers having in excess of Euro 100 million in AUM (leveraged funds), it followed that those below the threshold should be given the opportunity to retain the status quo in terms of the regulation they were subjected to.
Now that the directive has been up and running for a number of years, it is clearly evident that retaining the PIF regime was a wise decision: alternative funds subject to this rule book continue to grow year-on-year.
Back to the three categories:
- The deminimis fund managers and the below threshold self-managed funds were given an option to sign up for the regulation, be subject to all its provisions, and on the upside, benefit from the EU passport. In most cases, they opted to stay put!
- A second category was made up of those that actually “went for it”, driven by one or two factors: the growth potential arising from the passport, and/or the fact that their AUM was just short of the threshold, so it was a question of time for them to adhere to the regulation.
- The third category consisted of those that were captured by the directive due to their respective AUMs (which were already in excess of the threshold). This segment had no other option but to comply, and make the most of it through the passporting rights.
In conclusion, I’d say that Malta’s regulations for the alternative strategies is such that enables acorns to grow into oak trees, without imposing upon them at the early stages of their lives, the rigours of over regulation that the AIFMD seems to be riddled with.
Website: https://www.bovfundservices.com
As part of Finance Monthly’s brand new fortnightly economy and finance round-up analysis, Adam Chester, Head of Economics & Commercial Banking at Lloyds Bank, provides news and opinions on UK and global markets touching on the Bank of England, Brexit and currencies.
The pound fell to an eight-year low against the euro over the past week, pushed by ongoing signs of momentum in the Eurozone and concerns over the outlook for the UK economy.
Sluggish wage growth has also fuelled concerns about the strength of the economy as a whole.
The Office for National Statistics reported that average weekly earnings grew by 2.1% year-on-year in the three months to June - equating to a 0.5% fall in real wages.
While there can be little doubt that the fortunes of the Eurozone have improved, despite Brexit uncertainty, the fall in the pound looks overdone and the UK’s position could now be shifting.
Signs of improvement
The jury remains out on the extent to which Brexit uncertainty is weighing on sentiment, but earlier indications of a sharp slowdown in economic growth have given way to signs of stability.
Undeniably, the economy slowed sharply in the first half of this year. Quarterly GDP growth averaged a below-trend 0.3% across the first six months of 2017, compared with 0.6% in the second half of 2016.
As the third round of Brexit discussions gets underway however, reports including CBI industrial trends, purchasing managers index (PMI), labour market and even retail sales are all showing signs of improvement.
While plenty of downside risks remain, for now, households and businesses are in the main managing to cope with the challenges.
Employment and exports climb
Take the latest employment report, for example.
According to the ONS, total employment rose by a further 125,000 in the three months to June, pulling the unemployment rate down to 4.3% - the joint lowest rate since 1975.
Separately, the CBI reported last week that industrial orders rose this month, approaching the 29-year high seen in June. The trade body stated that a rise in both domestic and export orders was behind this rise, with the latter fuelled by the drop in the pound and the turnaround in the Eurozone’s fortunes.
Improvements didn’t stop there. The latest UK public finances data were also better than expected. July’s public finances were back in the black for the first time since 2002, thanks to surging tax revenues.
The beleaguered retail industry also saw a return to stability. Sales rose by 0.3% in both June and July, though this could prove temporary, as the latest CBI retail trades survey suggests renewed weakness in August.
Brexit and the Bank of England
Despite these signs, Brexit uncertainty still looms large.
At its policy meeting earlier this month, the Bank of England remained studiously agnostic on the implications of Brexit. For forecasting purposes, it assumes a “smooth transition” post March 2019, but makes no judgement about what form the UK’s eventual relationship with the EU may take.
It’s clear, however, that uncertainty continued to weigh heavily on the minds of UK rate-setters when they left the bank base rate unchanged again this month by a margin of 6-2.
Alongside this decision, the bank published its inflation report, containing modest downward revisions to GDP predictions for this year and 2018. Inflation is expected to remain above its target of 2% over the next three years.
Judging by the reaction, these latest communications have been taken as evidence that UK interest rates will remain on hold for a long time.
The markets are not priced for a first quarter-point rise until mid-late 2019, and the rate is expected to be below 1.0% in five years’ time.
Potential rate rise earlier than expected
But this looks overdone.
Market participants seem to have focused on the most dovish aspects of the Inflation Report, ignoring the explicit warning the rate may rise more sharply than the market yield curve expects and forgetting the implications of the ending of the Term Funding Scheme (TFS).
The programme has been in place since last August to help provide cheap finance to the banking system.
It would be odd to increase rates while at the same time mitigating the impact through TFS, so when it ends next February an obstacle to an early rate rise will have been removed.
On balance, the recent scaling back in UK interest rate expectations, and the corresponding impact on the pound, may have gone too far. There remains a significant risk that the first rise comes earlier than the market expects – possibly by early next year.
Much will depend on how Brexit negotiations develop. One thing is certain, the markets will be watching closely for any signs of progress.
With the ups and downs of global uncertainty in today’s markets finding a buyer can prove difficult. Here Finance Monthly hears from Lord Leigh of Hurley of Cavendish Corporate Finance LLP on his five key tips to ensuring a business gives itself the best chance of attracting an overseas buyer.
The UK continues to be one of the most attractive markets for foreign direct investment (FDI) and inbound M&A activity. According to Ernst & Young’s 2017 ‘European Attractiveness Survey’, the UK was named the second most attractive market for FDI while Lloyds Banking Group’s June Investor Sentiment Index revealed that UK investor sentiment remains at near record levels, with overall sentiment up 3.87% compared to the same period last year.
Both these indicators are positive signals for potential overseas buyers of British companies and a fall in Sterling has also helped to make UK businesses more attractive, though the continued robustness of the UK economy and the performance of the corporate sector also underpin healthy M&A activity. Mergermarket reports that in H1 2017, the UK was responsible for 22% of all European M&A inbound activity, with UK activity totalling £46.6bn and Europe totalling $211.1bn.
Despite this encouraging backdrop, uncertainty, largely surrounding the outcome of Brexit, still persists, so it’s important for British businesses to take all the steps they can to ensure they are as attractive as possible to foreign buyers, who typically pay a premium compared to domestic buyers when acquiring a UK company.
- Understand your buyer
The more aware you are of the foreign buyers’ motive for purchasing your business, the more value you will able to demonstrate to the prospect. There are typically four reasons an overseas buyer would be interested in a UK business: it provides access to the British market, or an entryway into European and international markets, it has attractive tech and intellectual property potential, or the business is able to merge with one of the foreign buyers’ existing businesses to generate cost savings and efficiencies. Identifying a buyers’ intention before engaging in the deal process will significantly increase your chances of selling and achieving maximum value for your company.
- Develop a post-Brexit strategy
Although the UK is currently well positioned for FDI, the EY 2017 Attractiveness Survey reveals that a number of respondents think that, in the medium-term, the UK’s attractiveness as an FDI location will deteriorate, with 31% of respondent investor’s worldwide saying they expect this to be the case in the coming three years, although 32% say they expect it to improve. One can assume that this is potentially due to the uncertainty around Brexit and the UK’s access to the European single market.
To counter this scepticism, it is important for businesses to develop a post-Brexit strategy. For companies who do not export outside Britain, they will need to demonstrate that they have the capabilities to survive and grow solely in the UK market. Companies that do export outside of the UK will need to show that they can continue to easily sell their goods in the EU and have potential international markets they can access if selling in the EU becomes more problematic. A good example is the recent sale of smoked salmon producer John Ross Junior, a company with a Royal Warrant, which we advised. The company proved its international capabilities by highlighting the 30 countries they supply and the opportunity for future growth in other regions, which were key factors in the decision of publicly listed Estonian company, PR Foods, to buy the business.
- Foster key relationships
Foreign buyers want to see a highly connected UK business, and having strong networks is key for sealing contracts and fostering growth. Prospective buyers want to be reassured that the company does not have particular reliance on any one customer and should they purchase the business, there will be high retention rate among customers, employees and suppliers.
- Update your books
The extent of the due diligence that the buyer will undertake depends on the sector, the buyer’s existing knowledge of the target company and the laws of that country. English law states ‘caveat emptor’ or ‘buyer beware’, meaning that the buyer alone is responsible for checking the quality and suitability of the company before a final sale is made. Having updated financial statements and a strong finance team to help respond to the likely multiple queries a potential buyer will have, should ensure a smooth and speedy process when engaging with a prospective buyer.
- Appoint an advisor with specialist expertise
Selecting the right advisor for a sales process is key, especially when an overseas buyer is involved. Compared to domestic M&A, foreign deals demand an understanding of cultural differences, state versus domestic laws, and regulatory approval processes. Engaging an advisor with specialist expertise in your sector, the mid-size market and that has a global reach to find potential acquirers will optimise the sales process and ensure that the deal executed will be the best outcome for your business.
(Source: Investec)
HR leaders in UK financial services firms are finding themselves caught between a rock and a hard place. Here, Steve Girdler, Managing Director EMEA at HireRight, looks at the future of FS firms in the UK and discusses the issue of skill shortage and migration of business.
On the one hand, the financial services (FS) sector is heavily reliant on the skills, diverse experience and local knowledge of the European workers who help make London a thriving international financial centre – a talent pool that’s at serious risk of drying up post-Brexit.
On the other hand, London’s historic advantages, which extend beyond its access to talent – factors like specialised infrastructure and even its geographical position between mainland Europe and the US – make it very hard for firms to conceive of a finance hub anywhere else in the continent that could rival the City, at least in the short term.
It is now a delicate balancing act, as firms look at hedging their bets to safeguard themselves against the potential risks of leaving the EU, while also keeping one foot firmly in the UK. With the challenge very much at the feet of HR departments, the approach taken over the months ahead will not only help to define what the future looks like but also determine how successfully and profitably their firms navigate through it.
Navigating the storm
Recent research from Deloitte shows that 47% of highly skilled UK workers – the lifeblood of the financial sector in London – are planning to quit the UK in the wake of Brexit. Inevitably, being highly skilled also means being highly sought after and these workers are not short of options if their future in the UK exceeds their appetite for risk and uncertainty.
But amid the storm clouds gathering over the City, there remain a few rays of sunshine. A recent study we conducted among over 2,500 HR leads around the world found that in the UK’s financial services sector, optimism remains. Almost two thirds (63%) of HR teams within UK FS firms expect their workforce to grow in the coming year. In contrast, only 4% are even discussing stopping recruitment in the UK in reaction to Brexit.
How not to gamble on the future
However, hiring in the UK will inevitably become more complicated as the government starts to dig into the specifics around which regulations to hold onto and which to scrap. This will be needed to keep us suitably in line with best practice on the continent, and identify what is likely to be tweaked to give the UK greater global appeal. These aren’t questions that it’s wise or even safe to try to assume answers to, because getting it wrong could prove costly.
Instead, a lot of companies are taking a middle approach, by trying to walk the line between cost efficiencies and covering all eventualities. A good example is the increase in UK FS giants opening up satellite units with head office potential in places like Frankfurt. In the current regulatory environment, it can take as long as two years to get an office fully functional in some European markets, so waiting to see what happens isn’t an option. If the UK becomes less hospitable, the escape route has been readied. If not, then the loss is limited to the short term maintenance of an additional office. Expensive, but not a disaster.
For HR teams the challenge is even more complicated. Reining in hiring of European workers may seem like the safe option to offset risk, but doing so en masse would bottom out the jobs market and speed up the exit of those talented foreign nationals. On the other hand, leaving themselves too reliant on the skills of non-UK workers comes with its own risks, especially if any form of “hard Brexit” becomes a reality.
No margin for error
One thing that’s immediately apparent is that any hires that are made need to be as risk free as possible, which means two things: trusting a candidate’s credentials – their ability to do the job honestly, fairly and diligently – and remaining compliant whatever the situation.
This calls for a high level of due diligence to be performed on all significant hires, or indeed anyone with access to sensitive information. Whichever way the regulation goes, backtracking from the recent Senior Managers Regime, where all senior staff must be thoroughly vetted, seems unlikely.
However, compliance with the FCA is only part of the picture. With budgets stretched by policies trying to offset risk, and growth restrained by uncertainty, a costly reputational scandal becomes an even greater concern, even if it’s not accompanied by a hefty fine.
A fork in the road
It’s going to be difficult for firms to know what the best course of action is with so much uncertainty ahead and no obvious stability on the radar. To come out the other side in the best shape, they need to forecast ahead to the regulatory landscape over the next few years.
But whether the UK develops its own unique position as a regulatory pioneer – as has been the case within the EU – or whether it aims to make itself more competitive by relaxing regulations, maintaining security precautions around the individuals at the top is one thing that’s almost guaranteed. Removing these measures would directly make banks more susceptible to malpractice, scandal and fraud, at a time when the UK is more worried than ever about its international reputation as a “strong and stable” finance hub.
Below Finance Monthly hears from Peter Snelling, principal systems engineer at leader in analytics, SAS, who has various ideas on border management that the UK and EU should look to approach.
This, and the more outward looking post-Brexit era we're facing, are just two reasons why I believe a different approach to border management, and indeed many of the activities of the Home Office and Customs, would transform efficiency. With the following capabilities in place, we’ll create a future where the departments can rate and prioritise risks in real-time, as they change, and take pre-emptive action, rather than reactive. As an example, let's apply the following ideas to the challenges of smuggling and trafficking.
The answer’s in the data
One of the major improvements the border agencies can make is to apply advanced, predictive analytics and deploy real-time risk-scoring models. Building them on historical data allows strategists and front-line operatives to apply the models’ learnings to enhance their own experience and strategies.
The alerts raised by these models can then be visualised as networks, timelines and maps – and enhanced with contextual information and intelligence. Applied in this way resources can be better managed and frontline staff can interdict high risk goods or people promptly. As importantly, low-risk goods and people can be processed far more swiftly. To find the needle it's sometimes easiest to reduce the size of the haystack.
Support that capability with what-if scenario testing, and the border agencies within Home Office and HMRC – and indeed other central government organisations – will be able to model different decisions and predict their outcomes against their cost and relative merit.
A winning combination: efficiency, accuracy, affordability
However, with many millions of people and shipments moving in and out of the UK every year, some people will wonder how quickly all this analysis can happen. The answer: In a matter of minutes. Certainly, with SAS. That’s because our analytics engine is made for the big data age and can screen billions of rows of data per second.
If your next question is, "Can the analysis be thorough at speed?" the answer is a resounding yes. Take global banking giant HSBC as an example. You’ll see that SAS anti-fraud analytics screens millions of debit and credit card transactions around the world, every day. Consider the fallout you may have experienced from just one personal experience of card fraud, and you’ll know what an incredibly value-generating capability this is - both on a human level and a financial one.
For the Home Office and Customs to achieve their efficiency targets and improve operational effectiveness, advanced analytics and visualization solutions have become essential.
Craig James, CEO of Neopay, believes the financial sector must remain priority for Brexit negotiations. Below he explains to Finance Monthly why.
It is now 13 months since the UK voted to leave the EU.
With Brexit negotiations underway and Britain’s political position now more uncertain following June’s general election result, the impact for European business and finance remains similarly uncertain.
Much has been made of the fear that a United Kingdom outside of the EU’s single market would suffer economically, and that may be true – at least in the short term.
But it is also the case that losing the world’s fifth largest economy would be detrimental to the EU, particularly as political uncertainty and the instability of the Euro continues to cause disruption to Europe’s collective economy.
Recently, it was reported that a delegation from the City of London, led by former City minister Mark Hoban, had visited Brussels – independent of the government – to lay out a plan for a future trade deal between the UK and the 27-nation bloc.
The group, it was claimed, was particularly concerned about preserving the financial sector’s relationship with the single market, especially when it comes to “passporting”, the current system which enables businesses to export and import financial services under one licence.
Costly restructure
It is in the UK’s and EU’s best interests that a mutual arrangement continues after Brexit, and is something the government needs to focus on as it is something that is very achievable – and a likely outcome of negotiations.
If the UK is outside of the single market, that automatically puts an end to current passport rules, and while this could be detrimental to Britain, it also presents a problem for the EU’s financial market.
Mark Hoban is right to say that it would cost the EU if the UK leaves without a deal as it would mean the EU’s financial institutions would have no access to services in London, which will likely remain a key business and finance hub even outside the European Union.
A report by the Association of Financial Markets in Europe (AFME) which represents the financial services sector in the EU, recently published a report suggesting the UK’s exit could create €15bn worth of restructuring costs for the industry, and potentially €40bn to meet the concerns of regulators.
The impact on EEA and UK consumers would also be prohibitive. In a no deal scenario, millions of consumers could find themselves, at least temporarily, without access to some of their financial services if passporting arrangements cease without any mutual agreement or transitional arrangements.
And then there’s ancillary effects, for instance the impact on Financial Intelligence Units and their work, if the current regime were to end without any deal in place.
While minority areas in the EU may see Brexit as an opportunity, it is widely understood that the City of London carries substantial benefits due to its established reputation, size and strength in the global market, as well as offering cheaper and more efficient access to financial institutions.
No deal Brexit is not likely
While this recent City delegation has reportedly visited Brussels in concern over the potential of a poor deal – or no deal – after Brexit, this outcome is highly unlikely as the EU is aware of the damage it will do to itself by punishing Britain for the sake of it.
Even if the UK makes a clean break from the single market and the current passporting regime ends, it is likely that some form of mutual access agreement – like that reportedly being pushed by the City delegation – will be reached, enabling financial groups from the UK and the EU to operate in each other’s markets.
At the very least, a transitional period will need to be agreed to allow enough time for adaptation and prevent UK and European financial services falling into confusion with the resulting impact on consumers, businesses and our economies.
Financial services businesses looking to set up within this region will always look to London first as a base of operation. It remains to be seen what will come of Brexit negotiations for this sector, but a suitable trade deal and appropriate transitional period remains the most likely outcome for both sides.
According to Forbes, voters concerned about immigration helped swing both the Brexit vote and the election of Donald Trump to the winning ends, but this goes beyond the UK and US’ big socio-political decisions. In many countries now workers are putting pressure on lawmakers to oppose the perceived threat of immigration.
This in turn allegedly affects regional and sector markets and the global economy a great deal. This week Finance Monthly heard from several specialist sources on the various ways immigration changes and public opinion on immigration are or aren’t shaping local and global economies.
Tijen Ahmet, Immigration Specialist, Shakespeare Martineau:
Positive news about migrant workers is often overlooked. As immigration is regularly at the forefront of news and political debate, migrants - whether filling highly-skilled or low skilled jobs - often bring benefits to their host country that directly impact on global business.
The invaluable knowledge and talent from the highly skilled, and the filling of key occupations by the low skilled, can decrease unemployment and increase income capacity with no negative influence on public finances. Most significantly, migrants allow businesses to expand their workforce to meet their growth potential.
UK corporates across the retail, IT and financial services sectors in particular, are beginning to seek their migrant workforce from new markets that they would not have ordinarily considered, forming alternative relationships with fresh customer markets.
There is an assumption that all migrant workers are low skilled and this just isn’t the case. Migrants from a global arena not only fill talent deficits in the host labour market, but can also offer a diverse skillset that may be lacking in the host country. Such skills can generate more cross-border new business opportunities by opening communication up to new markets, while knowledge transfer can assist in upskilling existing co-workers.
Due to restrictions of free movement between the UK and EU global businesses have the opportunity to select the most suited candidate from a much wider pool of talent by casting the net more widely.
With Brexit negotiations unfolding, it is likely that immigration laws will continue to change frequently and directly impact global businesses as a result. Such quick changes to immigration laws, such as those revealed in the Queen’s Speech can cause significant instability in currency markets, causing drastic fluctuations.
Although businesses with bigger profit margins are less sensitive to currency fluctuations, increased exchange rate volatility combined with the complex structures of most global businesses, means that monitoring trading activity is now essential, no matter the size or scale of the business.
The UK’s decision to exit the EU, where immigration was a commonly considered factor for the leave campaign, provided a strong example of fluctuating currency rates. For example, immediately after the Brexit vote there was a sharp drop leaving GBP to EUR 15% lower than pre-Brexit and GBP to USD and AUD down 17%, having a significant direct financial impact on global business.
Guilherme Azevedo, Associate Professor in Business & Society, Audencia Business School:
In December 2015, Prime Minister Justin Trudeau went to Toronto’s airport to receive Syrian refugee families. When handing them winter coats, he repeated many times: “Welcome. You’re safe at home now”. Refugees to Canada arrive as permanent residents and receive support to become full-fledged citizens as swiftly and smoothly as possible. The families are sponsored by local communities, bodies of government, churches, and individuals who provide them with money and housing for one year. Many of them become economically autonomous and start to give back to society before that year is over.
Trudeau’s statement goes further than expressing the values of solidarity that most Canadians cherish. It makes good economic sense. The integration of migrants into the fabric of a nation has net economic advantages—and even more so to developed economies with low birth rates. Research shows that those who move to a new country in the pursue of a better life work harder, are more entrepreneurial, create more wealth, and even win more Noble Prizes than the rest of the population.
Of course, the results are not so positive when immigrants came to do backbreaking work but receive virtually no rights—as, for instance, those coming to Germany following the 1950’s and ironically called Gastarbeiter (meaning ‘guest-workers,’ as if guests should be expected to do the hard work). Or when, despite French Law and the very principle of égalité saying otherwise, the grandchildren of colonial wars returnees continue to be perceived as second-class citizens. In these cases, full integration will take much longer. But suitable integration helps the host economy to remain vigorous and innovative. Just look at the business, the cultural, and the scientific landscapes in the U.S. and you see the power of first-, second-, and third-generation immigrants. They are the ‘American dream.’
Hence, when it comes to immigration, what is bad for economy is misinformation and ignorance. Trump’s election and the Brexit voting have been the result of populist maneuvers. The Polish plumber, the Mexican rapist, the Islamic fundamentalist, and etcetera (remember the greedy Jew from the Nazi?), are xenophobic fabrications without empirical relevance to national economies. They are mere rhetoric puppets and scape goats.
Populism depends on people believing that a simplistic plan will solve a complex problem, which can only happen if there is misinformation and ignorance. Irresponsible journalism also carries a share of blame on both Trump’s election and the Brexit voting. In the first, the Democrats-inclined media (mostly CCN) gave extraordinary coverage to Donald Trump since the very beginning of the primaries because it was good for the audience rates. When the bad joke went too far, they couldn’t stop it anymore. (But, again, can we consider democratic an electoral system that is so anachronic and so scandalously influenced by big capital?) In the case of Brexit, the British media remained oddly silent for at least a decade of demagogues blaming the fictitious lazy Europeans for their domestic problems. Here goes the simplistic promise: “If your life is not as good as you wished, just exit Europe and the problem will be solved”. Well… that’s not so elementary my dear Watson.
Finally, if we step beyond analyses of national economies and look at the global business, the conclusion remains the same, just more obvious: barriers to migration (as well as barriers to flow of capitals and goods) create distortions to currency fluctuation and to markets’ values, not the other way around. Closing boundaries is a path leading back to economic obscurantism and stagnation.
Bottom line: perceived economic threats due to immigration are hugely overstated. The real problems are ignorance and populisms, which can be solved through decent education systems, responsible journalism, and freedom of speech.
James Trescothick, Senior Global Stretegist, easyMarkets:
In recent times, nothing has provoked more debate or in many cases fear in the general populous more than the immigration topic. In fact, in 2016 we saw two major surprises, first the Brexit result and then Donald Trump winning the US election. Many believe the reasons for these surprise outcomes were that voters making their decision based upon their concern about immigration control.
But let’s answer this question; is immigration really a burden or is it actually a benefit? The answer is it can be both, but it leans towards being a benefit.
How many times have you heard the outcry of “they take our jobs” from those of the public who tend to fear migrants coming into their countries? Let’s face it, it is often the first protest we get. But statistically speaking this is more than often not the case as the jobs that migrants take are the jobs that no one wants or are in totally different fields. The economic impact of migrants can be calculated but looking at the taxes and other contributions they make and deduct the benefits and services they receive.
If of course they receive more than are putting into the economy then they do indeed become a burden, but more often than not, countries have benefitted from immigrants and have seen expansion in economic output in the long term.
When it comes to currency fluctuations and the markets, there is no short-term impact from immigration, as the markets perform based on current and projected economic performance. The outcome of increased immigrants would not show signs if they are indeed a burden or benefit for many years.
Immigration is really a tool for politicians to spark debate and win votes and not a driving a force for the markets.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
As falsified information spreads, more people tend to believe it, and sooner or later, it’s the common knowledge and understanding. This in turn affects how we see and think, about what we buy and what we invest in, where we place our vote and how we want Brexit to turn out. But what if we’re just causing unnecessary damage in the long run?
Fake news, news with zero credibility, isn't new. But it's re-emerged as a monster during the past few years. So much so that world leaders are falsifying commentary which they believe to be true. What's worse, it's sneaked into our everyday lives with such subtlety most people don't know it's there. Adverts published by media outlets and social networks warn everyone to watch out for fake news, but when the mediums themselves are used to facilitate misleading information, things start to get confusing.
When it's used to infiltrate a country's political and economic structure, it's what Bath University's professor of sociology explains as, “An extraordinary scandal that this should be anywhere near a democracy.”
Most intelligent of people associate the word fake with something either false; fictionalised or to be untrue. In short, a lie. Propaganda, fake news, misinformation – is there any real difference?
You could call the people we trust to run our nation’s experts on creating, aggregating and perpetuating fake news, their lies published for all to read. Like teenagers, they use things like social media to smear the opposition. If it wasn't so serious it would be funny. It's caused more than a ripple in American politics, with obvious ramifications on its economy.
False claims, politics and the economy
The Leave campaign [for the EU referendum] spurred a dangerous political game by promoting several misguided financial promises. The most protruding were the campaigns claiming that EU was costing the UK £350 million a week, and “separating” meant the money saved would be spent on the NHS. However, In March, shortly after the referendum results were announced, the agenda involving the pledge forgotten about. Earlier this year Teresa May admitted that the money pledged to the NHS would not happen.
The Telegraph reported that in 2015, the UK paid the EU £250 million a week, £100 million less than what was claimed by the Leave campaign.
Perhaps then, false claims, which certainly contributed to the win, were seen as good enough to use again to conclude the outcome of the snap general election – Teresa May has recently been accused of shaking the ‘magic money tree’ after her £1 billion deal with the Democratic Unionist Party (DUP). After May’s U-turn on social care pledges and the money she told the NHS, she doesn’t have, the nation is left wondering whether any of the financial pledges she has made in her manifesto will suffice.
May has accused the Financial Times, the Mail on Sunday and Jeremy Corbyn of creating fake news about her manifesto. Perhaps, it’s something unconsciously picked up from President Trump. After all, he has reprimanded most of the World's press, saying they all report fake news about him and his administration. The BBC got a special mention. It turns out, President Trump knows a thing or two about how influential digital information is, and how to use it. CMC Markets said, “For all the new President’s promises that a plan is on its way he continues to devote his energies at depicting the press as purveyors of “fake news”. If he devoted anywhere as much energy towards his new fiscal plans as he does in portraying himself as a victim there would in all probability be a lot less uncertainty around the prospects of the global economy than there currently is at the moment.”
Sometimes news is purely and intentionally fake. Click bait headlines to grab attention, generate traffic, and earn thousands in advertisement revenue. This kind of news can get so much traffic it trends, is picked up by major media outlets and then relayed as real news. How does that happen?
Buzzfeed's Craig Silverman said, “A largely credible outlet might see it and quickly write something up...The incentive is towards producing more and checking less.” If an enemy relies on weaknesses, unchecked content is payday.
“Checking less” certainly happens with editorial staff as breaking stories mean traffic and revenue. Southend News Network, run by Simon Harris, experienced this when a story published on yourbrexit.co.uk, a website connected to SNN, published a headline that said Jeremy Corbyn and Labour were happy to foot a £92 billion Brexit bill, after thousands of social media shares and even the likes of The Standard running the story, it emerged that Corbyn did not say anything of the sort and his words were taken out of context. Harris said he didn’t have time to fact check everything, so begs the question: in a world where we fight for information, whose responsibility is it?
Has Brexit and the false news ripple in the American system infiltrated UK politics, finances, and the overall economy?
Brexit certainly prompted politically-false financial claims and pledges, but also brought to the forefront the problems within the system. The truth is, financial markets have long been affected by the scandal known as fake news.
Andrew Clare, a professor at London's Cass Business School, warned the Financial Times back in 2012 about how fake news can skew investor decisions. The consequences are clear: “These stories ultimately lead to losses for investors once the truth is uncovered.”
Clare's comments were in response to an author who was paid to write about ImmunoCellular Therapeutics and their development of an experimental cancer treatment. The article was published on Seeking Alpha, a respected go-to website for serious investors. Upon the article being released, share prices of the pharmaceutical company shot up from $42.8 to $155.2. After a clinical update on the cancer treatment, the share price dropped to an all-time low. Not only impacting investors but also a thriving economy.
Here is where things get complicated, fake news and false claims isn't a harmless, satirical concept. It's more than hoaxing celebrity deaths and whatever sells glossy magazines and advertising; tweaking information from a grain of its truth and using it to influence people’s decisions is otherwise known as propaganda. Spreading misinformation (to instill fear and gain power) infuses the divide and conquer and mindset. Nations divided over financial and political ideals and the belief of said information.
Author: Ron Short began his career as a portfolio manager working with FTSE 250 companies in the UK. He now lives in Spain, where he enjoys a career in financial writing.
By Paresh Davdra, CEO & Co-founder of RationalFX & Xendpay
It was 1961 when Britain flustered into an application for membership of the European Economic Community – an initial step in the direction of something that would, over the years, translate to being a part of the world’s largest single market and by 1973, Britain was officially a part of the EEC.
The blueprint of this vision for the European Union, one that would be intrinsically linked on socio-economic paradigms, existed way before it was officially enacted upon under the treaty of Maastricht in 1993. The main reason for a Union was seen as a preventive measure against the possibility of future rises of nationalism, and along with this came the economic benefits through collaboration between a few of the world’s most productive countries.
In some ways, it feels like Britain’s membership of the European Union has come and gone quickly; what’s passed even quicker is the year since the UK decided to end their relationship with the EU. The implication of this development has affected more lives than one can count and of course has made a significant impact on the business sector of both the UK and the remaining EU 27 countries.
The immediate impact of the referendum was felt in the local currency valuation – in June 2016, the pound witnessed shock market devaluation as investors lost confidence in the UK’s future economic outlook. A total devaluation of 17% was immediately priced into the pound. Since then, a lot has transpired – we have faced the turbulence of the US presidential elections, which in addition to the June vote, appeared to spell an uncertain future of the global economic outlook. This did not change much, as uncertainty at home and uncertainty abroad combined began to affect the global markets, leaving investors riding on speculative waves through the initial months of Brexit and the US Presidential elections.
Then there was the legal challenge to the UK government’s ability to trigger Article 50 without going to Parliament. This entire affair actively shaped the market outlooks through the few months of court hearings and market fluctuations, with numerous ‘remainers’ possibly hoping for a U-turn on Brexit. Of course, this would not be the case in any way, yet the court hearings would see valuations of UK companies and the pound change within the course of mere minutes. Furthermore, organizations throughout the UK raised concerns over uncertainty of access to the single market, especially in light of immigration and passporting rights for employees, an aspect considered crucial by most international organizations that are headquartered in the UK, this story however, is on-going and much clarity is yet to be delivered.
Through the Brexit year, consumers have had to endure the news that Marmite and Nestlé coffee would now be more expensive, in addition to few other FMCG’s. At this point, organisations had already started to price in the beleaguered pound, as market confidence refused to budge. However, there seemed to be some hope for a few sectors of the UK economy; for instance, the export sector enjoyed the priced down costs on the back of the devalued pound – while the manufacturing sector faced the brunt of rising costs due to the same reason.
After the court hearing on triggering Article 50, a vote and a general debate in parliament raised points on mandatory mentions of key issues within the official notification for triggering Article 50. Thus began the process to pen down the divorce bill that marginally touched on issues such as promises of securing rights for EU citizens in the UK. Even though the picture appeared to be one of a panic struck market, in the initial days of 2017, we somehow found ourselves amid a seemingly buoyant economy. As UK organizations amended their overarching business plans, the economic data releases spoke a much sturdy language – bringing back hope to the UK’s future prospects as an independent economy.
On 29th March 2017, the Article 50 notification was presented to president Tusk, officially invoking Article 50 and starting two years of negotiations to establish a deal for the UK’s exit from the Union. In the letter presented to Donald Tusk, the UK acknowledged the ‘four freedoms’, the main doctrines that lie at the heart of the EU and buttress the single market. The UK pointed out that goods, capital, services, and labour are inseparable and emphasized that we are not pursuing association with the single market. Nevertheless, the importance of “economic and security cooperation” was emphasized on along with a stern mention of a “bold and ambitious” Free Trade Agreement that would encompass sectors crucial to the two linked economies such as financial services and network industries.
By now the markets have priced in the uncertainty of Britain’s future relationship with the EU, Prime Minister Theresa May has, on several occasions, announced a new outlook towards the world with a vision for a more ‘open’ Britain. The new outlook has brought to light new aspects of economic ties that Britain is seemingly inclined on exploring, especially the ‘look east’ policy – scouring trade ties with India and the Middle-East, either of which have not yielded concrete results thus far. However, this may not be the main challenge for the UK currently. The ability to maintain a skilled workforce along with seamless cooperation between international associations such as the regulatory authorities and other associations maintaining consistent global standards could be the challenge that we must address for a sustained outlook towards a better future, with or without the EU.
One year on since the referendum, much of the mist still remains. The way forward does appear clamorous with much room for scepticism, but being at the cross roads many times since the June vote has strengthened the ones involved, though it may be difficult to distract ourselves from hard economic truths – the way forward certainly does require hard work in truly looking at an independent and ‘open’ Britain.
The bravery of the UK is deeply reflected in its economic strength and the belief in itself is the key driver for the near future, the markets have righteously shrugged off the shock and scaled themselves to absorb even more. We are not at a time and place where a wait and see policy would flourish.
