Improving access to financial services is on the agenda of central banks and development-focused organisations around the world. Yet, in many cases, efforts to reach unbanked individuals – around two billion – collide with outdated regulations and policies. Antonio Separovic, Founder and CEO at Oradian, believes regulators must embrace innovation to solve financial inclusion challenges.
In light of new technology, the financial services sector is undergoing rapid transformation and it’s time for regulations and policies to adapt as well. Regulators must embrace innovation and enable the sector to correct flaws in our current financial system that leave certain communities disconnected from the economy.
The case for digital financial services
Financial institutions are looking to digital financial services (DFS) as a way to serve individuals, many of whom live on less than $2 per day, in rural hard-to-reach communities. With DFS, essential banking services, most notably loans for small business, secure ways to save, convenient money transfers and bill pay become more accessible and more affordable.
Financial institutions that provide DFS also benefit. Unlike with cash and pen-and-paper accounting processes, financial institutions and their decision-makers gain accurate, digitised data that can be used to make data-driven, informed decisions. With digital financial services, leaders of financial institutions can know and control their portfolios.
Macro or micro?
Innovation in banking is occurring much faster than regulations are evolving. Central banks that regulate emerging markets are criticised for their preference to cater to the needs of Tier 1 banks over individuals who are excluded from the financial services industry.
More often than not, traditional banks do not meet the specific the needs of unbanked people, and leave these communities isolated from the global economic system. A study from Elixirr in 2015 revealed swathes of micro, small and medium enterprises (MSME) owners in Uganda held strong levels of distrust conventional banks. The focus group interview revealed that they were wary to use ATMs or online banking platforms, afraid that money would never reach the recipient. MSME owners in these regions can rarely afford introductory fees to open an account with a bank, and are often located only in large cities, far from isolated, rural communities.
Advances in payment technologies and cloud platforms have the potential to render these barriers to entry obsolete. In fact, cloud-based banking is now enabling an entirely new way of banking in many frontier markets. Because of cloud-based solutions for financial institutions like cooperatives, rural bank and microfinance institutions, the potential to reach rural areas with limited network bandwidth and low barriers to entry has never been higher. With new technology, non-bank financial institutions are enabled to become more efficient, grow and serve more individuals in their communities.
And given the lack of trust in commercial banks, out-of-reach pricing and inconvenient locations, non-bank financial institutions are often the most viable option for individuals seeking loans, savings accounts and microinsurance. Commercial banks often require collateral to secure loans, require government issued IDs, require a credit score and have high minimum loan sizes that aren’t suitable for microenterprises. Their requirements can block individuals from accessing their services. Because of the strict requirements from commercial banks, many individuals rely on non-bank financial institutions that cater to sectors that are excluded.
There is a remarkable opportunity for central banks to realign their focus on what microfinance institutions (MFIs) can do for unbanked communities by supporting digitisation through cloud-based technology. Yet regulatory hurdles persist in many instances.
Stringent regulations
Know Your Customer (KYC) requirements are a prime example of where regulations are poorly targeted to the needs of the unserved. While comprehensive KYC regulations have been effective for anti-money laundering campaigns, they present a stark problem on a micro-level: many individuals remain undocumented.
For instance, of 338 million citizens in the Southern African Development Community, 138 million lack authentic identification from national governments. Stringent KYC regulations in Africa can block unserved individuals from financial services by requiring credentials and documents that many don’t have.
What is clear is that central banks need an overhaul of regulations to meet the needs of the excluded. By reassessing regulations that restrict these communities’ access to financial services and encouraging further deployment of cloud-based banking platforms to users, financial institutions will finally be in place to help bank the unbanked and give them a chance of a better life.
A case study to model
In the last two years, regulators in Southeast Asia have pioneered new opportunities to reach unbanked individuals. Take the case of the Philippines, the Asian Development Bank and Cantilan Bank, one of the largest rural banks in the Philippines. Cantilan Bank, as announced in July 2017, will become the first regulated bank in the Philippines to move their core banking to a cloud-based system. To do so, Cantilan Bank collaborated with the Bangko Sentral ng Pilipinas (BSP), the body regulating rural banks, to get the necessary approvals on their innovative move. Cantilan Bank also successfully gained support for the project from the Asian Development Bank – a grant to finance the financial inclusion focused pilot project.
The process included the BSP, in collaboration with Cantilan and Oradian, to operate in a sandbox environment, as to explore and review policies that regulate technology within rural banks in the Philippines. The Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. said: “The pioneering introduction of cloud banking in the Philippines is a key moment in solving the challenges of financial inclusion. Cloud technology can upgrade the competitiveness of rural banks and enable them to provide affordable, high quality financial services.”
The project aims to make Cantilan Bank the first rural bank in the Philippines to use cloud-based core banking technology in its operations and can set the tone for the future use of the model in other parts of the Philippines and the greater region in the future.
Advice to regulators and financial institutions
Financial institutions that are working in underserved communities know their business needs and which technologies will enable their operations to reach more individuals. Financial institutions know how to boost financial inclusion. For this, regulators should be receptive to innovations that financial institutions are leading.
Regulators are in the unique position to support their efforts to implement new technology – either by refreshing policies to allow new technologies to be implemented or with additional resources like grants for change management and technical assistance. Non-bank financial institutions must push for attention, support and change.
New entrants to the banking market — including challenger banks, non-bank payments institutions, and big tech companies — are amassing up to one-third of new revenue, which is challenging the competitiveness of traditional banks, according to new research from Accenture (NYSE: ACN).
Accenture analysed more than 20,000 banking and payments institutions across seven markets to quantify the level of change and disruption in the global banking industry. The study found that the number of banking and payments institutions decreased by nearly 20% over a 12-year period – from 24,000 in 2005 to less than 19,300 in 2017. However, nearly one in six (17%) of current participants are what Accenture considers new entrants — i.e., they entered the market after 2005. While few of these new players have raised alarm bells among traditional banks, the threat of reduced future revenue growth opportunities is real and growing.
In the UK, where open banking regulation is aimed at increasing competition in financial services, 63% of banking and payments players are new entrants – eclipsing other markets and the global average. However these new entrants have only captured 14% of total banking revenues (at £24bn), with the majority going to non-bank payments institutions. The report suggests incumbent banks will likely start to see a significant impact on revenues as leading challenger banks are surpassing the 1 million customer threshold and 15 fintechs have been granted full banking licenses.
“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, senior managing director for Banking and Capital Markets, Accenture Strategy. “With challenger banks and platform players reducing traditional banks’ competitiveness and the threat of a power shift looming, incumbent players can no longer rest on their laurels. Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models to cement their relevance with customers and regain revenue growth.”
In Europe (including the UK), 20% of the banking and payments institutions are new entrants and have captured nearly 7% of total banking revenue — and one-third (33%) of all new revenue since 2005 at €54B. In the US, 19% of financial institutions are new entrants and they have captured 3.5% of total banking and payments revenues.
Over the past dozen years, the number of financial institutions in the US has decreased by nearly one-quarter, largely due to the financial crisis and subsequent regulatory hurdles imposed to obtain a banking license. These factors have made the US a difficult market for new entrants and a stable environment for incumbents. More than half of new current accounts opened in the US have been captured by three large banks that are making material investments in digital, while regional banks focus on cost reduction and struggle to grow their balance sheets.
The research appears in two new reports: “Beyond North Star Gazing,” which discusses how industry change is shaping the strategic priorities for banks, and “Star Shifting: Rapid Evolution Required,” which shares what banks can do to take advantage of changes.
The reports found that many incumbent banks continue to dismiss the threat of new entrants, with the incumbents claiming that (1) new entrants are not creating new innovations, but rather dressing up traditional banking products; (2) significant revenue is not moving to new entrants; and (3) new entrants are not generating profits. To the contrary, the reports analyze where revenue is shifting to new entrants and identifies examples of true innovation happening around the world that can no longer be dismissed. Accenture predicts that the shift in revenue to new entrants will continue and will start to have a material impact on incumbent banks’ profits.
“Most banks are struggling to find the right mix of investments in traditional and digital capabilities as they balance meeting the needs of digital customers with maintaining legacy systems that protect customer data,” said Alan McIntyre, head of Accenture’s global Banking practice. “Banks can’t simply digitally enable their business as usual and expect to be successful. So far, the conservative approach to digital investment has hindered banks’ ability to build new sources of growth, which is crucial to escaping the tightening squeeze of competition from digital attackers and deteriorating returns.”
“As the banking industry experiences radical change, driven by regulation, new entrants and demanding consumers, banks will need to reassess their assets, strengths and capabilities to determine if they are taking their business in the right direction,” McIntyre said. “The future belongs to banks that can build new sources of growth, including finding opportunities beyond traditional financial services. They can’t afford to blindly follow the path they originally set out at the beginning of their digital journey. However, as the report clearly shows, there is no single answer and each bank needs to truly understand the market it is operating in before charting a path forward.”
More than a third of financial institutions (37%) find that legacy data platforms are the biggest obstacles to improving their data management and analytics capabilities, according to research from Asset Control. Whereas, for 31%, the cost of change is seen as the biggest hindrance to progress.
The poll of finance professionals, conducted through Adox Research Ltd., also revealed that for more than half of financial institutions (56%), the integration of legacy systems is the biggest consideration as they plan investment in future data management and analytics capabilities.
“What we’re seeing is financial institutions being held back by legacy data management platforms which they have acquired or developed over the years. These systems can slow down organisations as they are costly to maintain, miss audit or lineage information, often cannot scale to new volume requirements, and do not quickly and easily provide business users the data they require. While businesses recognise there is a need to update their data management systems they are sometimes reluctant to do so due to cost of change and perceived difficulties of integrating their systems with new solutions. Although I understand where these concerns come from, businesses also see the risks posed by inertia,” says Mark Hepsworth, CEO, Asset Control.
However, when it comes to considering new data management and analytics capabilities, firms remain focused on the fundamentals. More than a third (36%) of respondents cited ease of use and flexible deployment as their top business consideration, while 41% deemed ROI to be the biggest determiner.
“It is clear that while firms are currently being held back by the cost of change and legacy systems, they can see that both these challenges can be overcome with the right solution. While ROI is, of course, important in any business, these organisations must also consider how much their current data management systems are holding them back by delaying processes, lowering productivity and causing data discrepancies because they lack a clear and comprehensive view on their sourcing and validation process,” adds Hepsworth.
(Source: Asset Control)
John Kissane is the NY Area President and a Health & Welfare practice leader at Arthur J. Gallagher & Co. - one of the world’s largest insurance brokerage, risk management and consulting services firms with operations in 34 countries and client-service capabilities in more than 150 countries. Founded in 1927 by its namesake, Gallagher fosters a differentiated culture that reflects the company’s roots as a family business and the focus on delivering top-tier capabilities to clients. Below, John speaks to Finance Monthly about the employee benefits services that the company offers and tells us how employers can succeed in an increasingly difficult labor market.
Tell us more about the employee benefits services that Gallagher provides?
At Gallagher, we work hard to understand our clients’ industries, the markets in which they operate, and the unique constraints and opportunities that can affect their success. Rising healthcare costs, workforce issues, hiring challenges, legal risks, competitive positioning, financial strategy, compliance requirements—all of these factors impact employers’ ability to reach their full potential.
We are driven by a desire to help our clients - it’s something that all insurance companies strive for; better outcomes from better performance. That’s why we’ve developed Gallagher Better Works℠, our holistic approach to employee and organisational wellbeing. A better workplace attracts, engages and retains top talent at the right cost. This approach centres on strategic investments in employees’ health, financial wellbeing and career growth. It utilises data to gather insights and apply the best practices that promote productivity and growth.
Through the delivery of Gallagher's comprehensive approach to benefits, compensation, retirement, employee communications and workplace culture, our clients can optimise their annual talent investment, mitigate organisational risk and maximise profitability. Best of all, they gain a competitive advantage as a workplace that simply works better.
What trends are you seeing in the current health insurance and benefits landscape and how do you intend to keep up with these?
Healthcare costs continue to rise and we have seen an increase in creative funding mechanisms focused on bending the trend. Reference-based pricing, gap plans and split-funding products are a few examples. The need to control the cost of care and manage the health risk of employee populations has led to an explosion in solutions over the years. Gallagher is a trusted adviser to our clients. As such, our focus is on solving their challenges and recommending solutions that make sense for their specific organisational goals and objectives. This allows us to be entrepreneurial, and through our global network of professionals, we are connected to a vast array of vendors that can help meet our client’s needs.
What is the biggest challenge that employers face today? What would be your solution?
Attracting and retaining employees is a huge challenge, made more urgent due to the strong economy. Cultural and technological dynamics add to this – younger employees resist the idea of building a long career at one company, while at the same time they require proper skills and training to be productive while there.
How can employers succeed in an increasingly difficult labor market? You start by building a better workplace – one that truly engages key talent. Organisations must align their people strategy with their business goals. By focusing on the full spectrum of organisational wellbeing – and supporting their employees’ physical and emotional health, talents, financial health and career growth ‒ employers are able to realise a better return on their benefits investment.
What do you find businesses commonly fail to consider when it comes to employee benefits?
Far too often, companies fail to take a holistic, long-term approach to their benefits and compensation programs. In the struggle with managing healthcare costs, the “just get through the next renewal” mindset still exists. A recent survey of employers shows that 68% consider benefits and compensation cost management a top priority, yet 64% don’t have an effective strategy in place to achieve that goal. With multiple priorities, competing for employers’ attention, many turn to familiar tactics that no longer work.
A multi-year strategy that encompasses the entire total reward proposition and leverages insights, data analytics and best-in-class tools can lead to reductions in costs without sacrificing the value of the benefits offered to employees and their families.
Earlier this month Z/Yen published their global financial centres index which stated that for the first time in 15 years, New York has overtaken London as the world’s top financial centre. The report focused on a number of factors including infrastructure and reputation and was combined with a survey to show the most attractive financial cities. To follow on from this, job search platform Joblift looked into the financial job markets in both London and New York to find out if these results matched or contradicted the Z/Yen conclusions. While New York may have become the most attractive worldwide financial centre, Joblift’s results show that the crown still lies with London when it comes to job availability and growth.
London has more than twice the number of vacancies and three times as much job growth
According to Joblift, 124,788 financial job vacancies have been posted in London in the last 12 months. In comparison, New York has been the location of 49,526 financial vacancies in the same time period, around 2.5 times less than in the UK’s capital. To further bolster London’s claim as the financial job market top spot, vacancies in the capital have increased at three times the rate of New York’s. While the US city’s financial job market increased by 1% each month on average in the last 12 months, London’s market saw a 3% average rise.
Both cities share the most in-demand professions and top employers but vacancies in new york were more secure
Despite the differences in number of vacancies and job growth, the financial job markets in the two cities have a lot in common. Accountants are the most in-demand professionals in both cities, making up 12% of the job market in London, and 9% in New York. They are followed by Finance Managers in London (11%) and Economists in New York (6%), with these professions switching in each location as the third most in-demand – Economists in London (4%), and Finance Managers in New York (6%). Additionally, while not in the same ranking order, JP Morgan, Goldman Sachs and Morgan Stanley were the top employers in both New York and London. However, while the same professions are in demand, jobs in New York were more secure. In the last year, 87% of the finance vacancies advertised in New York were for permanent contracts, while postings offering the same contract type in London made up just 75% of the capital’s financial market.
(Source: Joblift)
Pensions are a crucial part of life but a dreaded concept for many millennials. However, saving for a pension may not be as complicated or as demanding as you think. Here, Paul Farrugia, Partner and Chartered Financial Planner at Equilibrium Asset Management, explains how easy it can be to start saving into a pension today.
Dubai and Abu Dhabi in the United Arab Emirates (UAE) could soon join London, New York and Hong Kong in the world’s top 10 global financial centre rankings, thanks to new government laws affecting expatriates.
This is the bold message from Nigel Green, the founder and CEO of deVere Group. The observation comes as the UAE cabinet on Sunday approved new legislation that allows expatriates to remain in the country long after they retire.
Mr Green affirms: “Dubai and Abu Dhabi are perennially popular destinations for ambitious expatriates looking to embark upon or further their careers because of the incredible possibilities offered in terms of finance, trade and commerce, plus the famous ‘can do’ attitude and the low tax environment in these destinations.
“But they will become even more attractive locations for overseas talent thanks to the government passing these new laws that allow expats to stay on in the UAE long after they retire.”
He continues: “With Dubai and Abu Dhabi becoming ever-more appealing relocation destinations, recruiting more top talent here will inevitably become easier for companies that are based in these emirates.
“In addition, I believe that it will help drive further driving confidence in the UAE as a place for overseas firms to do business and invest.”
Mr Green goes on say: “Dubai is already recognised as one of the most powerful financial centres in the world. But this new legislation will not only galvanise this position, but significantly strengthen it.
“This confirms my view that over the next decade, we can expect it to become one of the world’s top ten international financial hubs to rival and more aggressively compete with stalwarts such as London, New York and Hong Kong.
“Dubai and Abu Dhabi are helped in this regard by having an independent regulator, an independent judicial system, a global financial exchange, a stable, pro-business government, a high proposition of high net worth individuals, a dynamic business community, world-class infrastructure and telecommunications, English as its defacto business language, and their enviable geographical location and time zone.”
The deVere CEO concludes: “We fully welcome this progressive policy shift by the UAE government. It will encourage even more people to come, stay and invest for the long-term in the country, which will further boost its sustainable economic growth.”
Earlier this year, Dubai was revealed as the number one city for graduates seeking a career in financial services, whilst London didn’t make the top ten, in an annual deVere Group survey.
Of the findings at the time, Mr Green noted: “This survey highlights that the next generation of financial services professionals are open to look beyond the traditional and more established global financial hubs.
“It underscores how cities like Dubai, Barcelona and Cape Town are increasingly important international financial centres.
“The fact that Barcelona this year is second-placed and London – currently the world’s most important global financial hub – does not make the top ten is interesting.
“Could it be that the respondents believe mainland Europe’s international financial centres offer more opportunities than post-Brexit London?”
(Source: deVere Group)
Financial terminology is continually thrown around as we navigate through the different stages of our lives. The need to entirely acknowledge and comprehend what some financial terms mean becomes most apparent when making difficult financial decisions such as how best to climb onto the property ladder and selecting the best saving account or investment product that could provide the greatest return in the future.
With words and phrases in areas such as banking, savings, investments, pensions and mortgages more than likely to feature heavily in an individual’s handling of their personal finances – the expectation would be for them to have a firm grasp of common and recognisable financial jargon. Unfortunately, this does not seem to be the case, as 31% of Brits have shockingly admitted to signing a financial contract without knowing some or all the terminology according to research by Norton Finance.
Interested in financial competency, Reboot Online Digital Marketing Agency analysed findings from YouGov, who surveyed 1,916 British adults to see how confident they were with the meaning of a range of financial words and phrases.
Reboot Online found that ‘savings account’ is the financial term that most Brits are confident about at 92%. Thereafter, 78% claim to be assured by what a ‘cash ISA’ is. In third position, 74% of Brits feel confident enough to know what a ‘building society’ represents and can differentiate it from a normal bank.
Interestingly, despite regularly featuring in the small print of advertising mediums for potentially significant purchases like cars, only 64% of Brits are entirely confident about what a ‘fixed or variable annual percentage rate (APR)’ truly is. Information for immediate release Reboot Online Digital Marketing Agency.
Focusing specifically on the different types of mortgages and the terms related to it - Brits seem most confident knowing what a ‘fixed mortgage’ (72%), ‘mortgage deposit’ (63%) and ‘tracker mortgage’ (49%) is. Contrastingly, Brits are apprehensive about how a ‘shared equity mortgage (58%)’ and ‘offset mortgage’ (57%) respectively work.
On the other end of the scale, the British public were least confident about a ‘spread betting account’, with an overwhelming 67% unsure about its proper connotation. Closely by, 65% are shaky about what ‘corporate bonds’ are. 64% of Brits were equally unclear by a ‘tracker fund’ and ‘self-invested-personal-pension’.
Shai Aharony, Managing Director of Reboot Online commented: “Jargon specifically related to certain sectors and subject matters can be a mind field. Individuals can therefore often get lost in translation when trying to decipher them. Despite this, considering the fact that numerous financial terms have a substantial impact on minor as well as major saving and spending intentions, Brits should be more accustomed to them. This research certainly shows that Brits currently lack the knowledge and confidence to correctly understand a handful of financial terms in a range of important areas such as mortgages, pensions and savings. Going forward, there should be a real drive to educate Brits from an early age on the different aspects of the financial world that will more than likely affect their personal and business matters in adulthood.”
(Source: Reboot Online)
Financial education is a crucial part of any child’s development. However, with research revealing that the UK’s debt levels rising year on year, it’s beginning to look as though not enough is being done to ensure a future of smart spenders.
Financial Literacy
The concept of ‘financial literacy’ has once more become a cause for widespread debate in the UK, with millennials and those following them now being labelled ‘generation debt’.
While there are services and support in place to help Brits better understand how to manage their money, a culture of easy-access finance and convoluted contract leasing terms has left many people in a position where it’s unlikely they’ll ever be totally debt-free.
To put the situation in perspective, research conducted by credit reporting experts Credit Angel has found the following eye-opening personal finance stats:
- The average person in the UK owes £8,000 (this is on top of any mortgage debt)
- 50% of the UK’s population is considered financially vulnerable
- 25 to 34-year olds are the most likely to be saddled with debts
- Over 4 million people in the UK are thought to be in serious financial difficulty
- More than 6 million Brits don’t believe that they will ever be debt free
Is the UK Financially Illiterate?
Looking at these findings, it’s clear that something is missing from people’s understanding of financial management. This is a skill that should be taught from an early age and, as of 2014, the UK government introduced lessons on this very concept into the school curriculum.
While there is a lot of emphasis placed on the practical applications of students’ knowledge, 65% of UK teachers believe the current approach is ineffective.
As the way in which we interact with goods, services and the concept of money change rapidly – it’s leaving schools to play catch up. With this in mind, it’s not really surprising that during the first six months of 2017, 64% of calls to debt management charity StepChange were from people aged under 40.
Generation Debt
Education is inextricably tied to an understanding of personal finance, with a lot of peoples’ first experiences of debt coming from their time in university. For instance, many students from the poorest backgrounds, who often need more support in the form of loans, will graduate owing over £57,000.
As interest charges start as soon as the course begins, students will accrue, on average, £5,800 of additional debt by the time they have graduated. This is one of the many financial realities younger people are often not fully warned about when taking their first steps into adulthood.
From student debt to credit cards, the total UK credit card debt hit £70.1bn as of the end of 2017. That equates to £2,579 per household. For a card with average interest rates it would take a staggering 26 years and 3 months to pay off each household’s debt with minimum monthly repayments.
While it’s not an exclusively millennial problem, there is an undoubted trend towards people in that age range suffering the most in terms of financial issues. It’s clear that something needs to be done to practically educate children in the implications of financial products and the issues that can be caused by debt.
However, we may have to wait a while longer for a real solution. As of the start of 2018, net lending to individuals in the UK increased daily by £126.8m and the total amount owed out by Brits was £1.57bn. According to the Citizens Advice Bureau, they are dealing with almost 3,000 new debt problems each day.
As this trend towards the UK as a nation of debtors continues, it’s clear that steps must be taken to better educate Brits on money management from a young age to avoid a cycle of personal debt that will continue for generations.
Investors are voting with their feet and abandoning cash ISAs, according to the Q2 Investor Barometer from Assetz Capital.
The peer-to-peer lending platform canvasses the views of its investors every quarter, and while 52% of investors responding to the Investor Barometer had put money into cash ISAs in Q1, only 37% still do following the end of this year’s ‘ISA season’.
Q2’s data shows that 61% are making use of a Stocks and Shares ISA, 60% had an Innovative Finance ISA, while a small minority were invested in Lifetime or Help to Buy ISAs (4% and 3% respectively).
According to Defaqto, in March 2018 the average interest rate offered by a cash ISA was 0.70%. This is consistent with Bank of England interest data** on bank and building society general deposit accounts to March 2018, with sight deposits offering an average of 0.46% and time deposits an average of 0.90%. With inflation at 2.4% in April 2018, the rates currently offered by banks see consumers effectively losing money in real terms.
Stuart Law, CEO at Assetz Capital said: “Given our investors are familiar with peer-to-peer lending we’d expect to see more opt for an Innovative Finance ISA than the general public, but it is still notable to see this significant drop in cash ISA users.
“Our IFISA has grown steadily in popularity since launch. As of the end of May, almost £50m has been invested in our ISAs – over £12.5m of which has come from transfers. Around 75% of all investment in our ISA is new money on the platform and the average size of an ISA account is approaching £15,000, which is a lot higher than the industry average of £4,400.
“We believe much of this is driven by a movement away from cash ISAs and we expect this to continue as consumers look to make their money work harder for them. We also put this down to the secured nature of our peer-to-peer loans and our credible levels of net returns when compared to many of our competitors, according to AltFi Data market analysis, as well as our long track record in the industry.”
(Source: Assetz Capital)
An independent study commissioned by Dun & Bradstreet reveals a UK business community that believes it has already lost out due to the EU referendum. When asked how the Brexit process has affected business finances, 43% of business leaders say they have felt a negative financial impact since the Brexit vote. More than a third (37%) say they have lost out on potential revenue and, on average, businesses say 19% of their revenue will be put at risk by Brexit.
Two years on from the vote, almost a third of business leaders (32%) reveal that their organisation has or is planning to reduce UK investment, and almost a quarter (23%) have already halted or slowed their plans for expansion in the UK. This suggests businesses could be considering moving activities elsewhere in the EU or beyond, or simply downsizing the scale of activities in the UK.
When asked about their initial reaction to the 2016 EU referendum in a previous survey, business leaders’ views mirrored those of the general population, with 42% saying it was positive and 41% negative. Despite this fairly even split of opinion initially, it appears that optimism has waned significantly since then. The recent study found only 23% of leaders feel that the impact of Brexit has been positive, with 42% citing that Brexit has had a negative influence on their business.
Political instability, including Brexit, has been the biggest challenge that the majority (51%) of businesses have faced over the past two years. Many are still unsure of how the negotiations and outcomes will affect their business and views remain split. Almost a quarter (24%) say leaving the single market will impact them most, followed by the regulatory landscape (18%), the length of the potential transition period (15%) and the settlement on migration (13%).
However, the research also highlighted that not all businesses believe Brexit will have an impact on their business, positively or negatively, and in fact, a fifth (21%) of businesses believe that Brexit will have no impact at all. Moreover, over half (51%) of business leaders feel the impact of Brexit has not been as negative as they first anticipated. Perhaps most critically, over half of businesses are confident that they will survive and thrive after Brexit.
Commenting on the results, Edward Thorne, Managing Director UK of Dun and Bradstreet said: “As we move closer to the Brexit deadline, it’s evident that there is still a high level of uncertainty amongst UK businesses about their future in a post-Brexit era. Our research suggests that businesses have already been affected financially and are still unclear about further impacts once the UK does leave the EU. How businesses get ahead and plan for Brexit will be crucial to their future success.”
(Source: Dun & Bradstreet)
Although the Markets in Financial Instruments Directive II (MiFID II) was implemented at the start of the year, work for the financial services industry to comply with this new regulation is far from over. Still remaining are a number of uncertainties, with multiple milestones and deadlines for specific requirements set throughout 2018 and beyond.
Hailed as one of the biggest overhauls of the financial services industry in decades, MiFID II introduced 1.4m paragraphs of rules and a number of new obligations for firms operating in the sector. These included new and extended transparency requirements, new rules on payments for research, increased competition in trading and clearing markets and guidelines to promote financial stability. With many of these rules being delayed or their introduction staggered over the course of the year, there is still a challenging path for the industry to navigate.
Below, Matt Smith, CEO of compliance tech and data analytics firm SteelEye, explains for Finance Monthly the key steps financial organisations should take over the course of the year to ensure they are meeting MiFID II’s demands.
Q2 2018: Best execution under RTS27 and 28
MiFID II has two major “best execution” requirements which must be met by financial services firms – regulatory standards RTS27 and 28. As part of their obligations, RTS28 mandates that firms report their top five venues for all trading. With a deadline of April 30, the purpose of RTS 28 is to enable the investing public to evaluate the quality of a firm’s execution practices. Firms are required to make an annual disclosure detailing their order routing practices for clients across all asset classes.
Obligations include extracting relevant trade data, categorising customers and trading activity, formatting the data correctly in human and machine readable formats, adding analytical statements and placing all of this information in a publicly available domain.
Limiting disclosure to five trading venues makes complying with these obligations relatively simple for small firms with straightforward trading processes. As a firm’s activity increases in complexity, however, so does its reporting obligation and managing RTS28’s data component could become a significant burden, as compliance departments spend time classifying trades, normalising data, formatting reports and completing administrative tasks.
RTS28 is followed soon after by RTS27, which will hit the industry on June 30. RTS27 requires trading venues to provide quarterly best execution reports, free of charge and downloadable in machine readable format, and is intended to help investment firms decide which venues are most competitive to trade on. All companies that make markets in all reportable asset classes that periodically publish data relating to the quality of execution will be required to comply with RTS27.
The necessary publication of these reports requires the gathering and analysis of a significant quantity of data, which must detail price, costs, speed and likelihood of execution for individual financial instruments. Investing in the right technology ahead of the June deadline will ensure firms have the solutions needed to help digest such data and analyse it to inform their trading decisions. As we move through 2018 and 2019 however, analysis of this data, rather than being an additional burden, should help firms refine their best execution processes and generate a competitive business edge.
Q3 2018: Increasing transparency under Systematic Internalisers
One of MiFID II’s main aims was increasing transparency in the financial services industry in an attempt to avoid repetition of the 2007-2008 financial crash. In order to do this, a number of new rules attempting to regulate ‘dark pool’ trading were implemented, allowing regulators to police them more effectively and bring trading onto regulated platforms.
This system of increased transparency is designed to be effected through MiFID II’s new expanded Systematic Internaliser (SI) regime, the purpose of which is capturing over-the-counter trading activity to increase the integrity and fairness of industry trading and reduce off-the-book trades. For a firm to become an SI, they must trade on their own account on a ‘frequent and systematic basis’ when executing client orders. However, it is currently unclear what precisely ‘frequent and systematic’ means and as a result, many in the industry have been left without the necessary guidance to be able to implement these new rules correctly.
In August 2018, ESMA is set to publish information on the total number and volumes of transactions executed in the EU from January to June 2018. Any firm that has opted in under the regime or that meets the pre-set limits for ‘frequent and systematic’ basis will thereafter be classified as an SI under MiFID II.
The deadline for SI declaration follows shortly afterwards in September, which is when investment firms must undertake their first assessment and, where appropriate, comply with the SI obligations, which will become a quarterly obligation from then on.
Firms’ reporting obligations will increase considerably should they be classed as an SI. They will be required to notify their national competent authority; make public quotes to clients on request for their financial instrument; publish instrument reference data, post-trade data, and information on execution quality; and disclose quotes on request in illiquid markets. Adopting an effective pre- and post- trade transparency solution can help any firm set to be classified as an SI in September meet their obligations well ahead of the deadline in four months’ time.
Q4 2018: The impact of the pricing of research
Another major change under MiFID II is the regulation’s new rules on payment for research, which had previously been distributed to fund managers, effectively free of charge, but paid for indirectly through trading commissions. The provision of equity research is now considered to be an inducement to trade and the sell-side is only able to distribute their research to fund managers that pay for it. Moreover, an extra burden of red tape and reporting is being introduced as, by the end of 2018, investment firms must have provided clients with detailed information related to the costs and associated charges of providing investment services.
Research has effectively moved from an unpriced to a priced model and fund managers are now having to find a budget for research, with most firms electing to absorb that cost, which will inevitably impact their bottom line. The sell-side meanwhile will have to grapple with how to price their research, an unenviable task, given JPMorgan’s strategy to grab market share from smaller rivals by charging $10,000 for entry-level equity research.
Even before the aggressive pricing strategy adopted by the investment banking behemoth, the sell-side was facing consolidation and significant analyst job losses as the shrinkage of overall payments for research services to investment banks continues and asset managers become increasingly selective about the products and services they procure from investment banks. What is already certain is that the pricing and quality of investment research will be subject to closer scrutiny than ever before, driving up competition among research providers and triggering fragmentation and innovation in the marketplace.
Q1-2 2019: The UK’s departure from the European Union
While the FCA has stated that Brexit – at least currently – will not have an impact on their enforcement of MiFID II rules, the UK’s departure from the EU still leaves considerable uncertainty for those in the market. One recent survey found that 14% of surveyed compliance professionals had no idea how Brexit would affect their compliance requirements.[1] There is speculation that the UK could opt for ‘MiFID II-lite’ in all or some areas in order to better align it with the UK’s financial markets. This could mean that, while the industry must comply with MiFID II for this next year, after April 2019 a whole host of new rules and amendments could come into force.
As one of the core architects of the MiFID II rules, including many of its record-keeping and reporting principles, the FCA is unlikely to favour watered-down standards that could see London regarded as a less safe or transparent marketplace. However, with so much still up in the air, preparations should be made in order to ensure a swift transition once Brexit comes into force.
The strength of the UK’s regtech and fintech offering means the City should be well-placed to adapt to whatever shape MiFID II takes post-Brexit. To help prepare, strategy teams should work on plans for various post-Brexit scenarios in order to help weather the challenges that the UK’s EU departure will bring. UK players will undoubtedly emphasise their strengths in financial talent, product development, AI, fintech and regtech, helping the UK retain its leading position in the European financial market.
[1] https://www.thetradenews.com/uk-compliance-managers-predict-mifid-ii-exemption-post-brexit/
