Steven Cox, chief evangelist at FMP, shares his pay transparency advice with Finance Monthly.
Pay transparency has long been a controversial topic. According to research carried out by company review website Glassdoor, 70% of employees across the world believe that pay transparency is good for employee satisfaction. 72% think it’s good for business. And yet the question of who gets paid what remains a very taboo subject for many, particularly in the UK. Many business leaders feel that revealing staff salaries will only lead to division in the workplace, rather than a trusting and open business culture. Below, we examine when pay transparency works and how to implement it in your business.
Pay Transparency – The Pros
Looking at Glassdoor’s statistics, it’s clear that most employees want the companies they work for to reveal all staff salaries; but why?
Knowledge about job opportunity
The research also revealed that more than half of employees believe they need to find a position elsewhere in order to obtain a significant increase in salary. This perhaps illustrates one of the advantages of pay transparency. If staff salaries are public knowledge, employees can easily recognise their financial worth within a company. They can see what the person in the position above them is being paid, and therefore what they can potentially aspire to.
Trust and openness
Another big plus is that pay transparency leads to an open and trusting business culture. Wondering what colleagues and seniors are being paid can quickly create a toxic work environment, as staff members conclude – rightly or wrongly – that they are being paid less than they are truly worth. When one employee feels undervalued, they will likely confer with others, which can then lead to discontent and low morale. In this case, employees are unlikely to put 100% of their effort into their work and may even seek to leave.
70% of employees across the world believe that pay transparency is good for employee satisfaction. 72% think it’s good for business.
Attracting new talent
It’s clear that employees want companies to be transparent with their pay, so companies that do offer this are arguably more likely to attract new talent. Having knowledge of the salaries of all staff is likely to make a new recruit keen to work and progress, as well as work hard from the outset under the clear understanding of their financial worth in a company.
Pay Transparency – The Cons
In spite of the positives of pay transparency, many company leaders argue that the negatives outweigh them, for a number of reasons.
Highlighting pay differences
There are a significant number of companies that do pay different salaries to staff members, even if they perform the same duties. This can happen when a promising applicant negotiates a higher salary, or when budgets change as the years go past. In these instances, if salaries are public knowledge, those on lower salaries are likely to become upset and put less effort into their work - or seek new employment.
Revealing information staff don’t want to share
Another problem can occur when salary details are shared when employees don’t want them to be. Many people feel that their salary should be confidential, and that it almost represents their worth in society. Therefore, if it becomes public knowledge, they may feel exposed and even betrayed by their employer.
Employees may not appreciate all types of compensation
Pay transparency gets even more complicated when you also consider other types of compensation, such as company benefits in kind. These can be anything from a company car to health insurance and may be offered as part of a salary package or negotiated by the employee. Pay transparency tends only to relate to the sharing of salary figures, but some members of staff may also enjoy particular benefits which others don’t. If a company does not share this information too, there is more room for ambiguity and potential doubt about fairness.
[ymal]
Is Pay Transparency Right for Your Business?
The most helpful way to determine if pay transparency is right for your business is to ask yourself if you are comfortable with the salaries you pay your staff. If you know that people in the same positions are paid different amounts, you need to be confident in explaining the reasons why before sharing the information.
Most businesses find that pay transparency leads to a content and trusting work environment, in which staff understand their part in the company cog. It’s not only about weighing up colleagues’ financial worth to a company, but also about appreciating the bigger picture. If a company’s budgets and spend are common knowledge, everyone knows where they fit into the overall goals and future of the business.
If you do decide to implement pay transparency, it’s vital to ensure that the information is communicated clearly and accurately. If it will be a new policy, make sure all staff are aware and have had time to digest the memo, and approach management with concerns.
Dion Travagliante, Head of North America at Hoptroff, outlines the importance of MiFID II compliance in ensuring UK firms remain internationally recognised.
Announced on Christmas Eve, the Trade and Cooperation Agreement – better known as the ‘Brexit Deal’ – leaves lots of question marks for those in financial services. Before anything else can be decided, the EU must first accept that Britain’s financial regulations are “equivalent” to those in the European Union: the Markets in Financial Instruments Directive (MiFID II).
Since its implementation in January 2018, MiFID II has transformed financial services with policies that promote transparency and trust across processes within the industry. As Britain navigates a new economic arena, many are hoping to avoid further instability by conforming to the existing internationally respected regulations.
Synchronising time under MiFID II
The MiFID regulations were implemented after the global financial crash of 2008 for a very simple reason: to prevent another crisis. The rules cover areas of financial practice that most people have never even considered. This means that British businesses are currently following an extremely clear and thorough guidebook that protects them from financial damage.
The rules on time synchronisation are one notable example of this. Accurate time is at the heart of electronic trading – but all clocks naturally drift. It might not matter if the time on your phone is a few seconds out, but it does matter if the time is wrong on a busy server that transfers thousands of pieces of data every second of the day. If your server’s clock is wrong, data logs can become confused, transactions may be cancelled, and you will be vulnerable in the event of a dispute.
Accurate time is at the heart of electronic trading.
This is where MiFID II comes in. Article 50 restricts every server that is an active market participant to a maximum divergence of between 100 microseconds and 1 millisecond (depending on the type of trading) from the benchmark of UTC (Universal Time).
MiFID II is vital in protecting the best interests of British businesses, but the importance of the regulations go even further. As British financial services look to recover from the shock of the COVID-19 pandemic, Britain must do everything it can to stabilise its position in the global economy.
Amending MiFID II is a threat to this stability, as international trust in a country’s financial market is dependent on the extent of its regulations. This was made evident last February when the pound dropped sharply against the US dollar following suggestions of a MiFID “shake up” by the ESMA.
Smarter regulating solutions
In the past, some groups have been resistant to upholding financial regulations because it has been expensive to do so. To get precision timing, companies had to install and maintain a satellite receiver at every active trading venue, secure access to a grandmaster clock, and spend resources on monitoring and verifying their data logs.
Recent technological developments have made this reluctance redundant. Smarter solutions have entered the market that make carrying out the best financial practice a lot easier and more cost-effective. Traceable Time as a Service (TTaaS) is the premier network-delivered solution for time synchronisation. The software product synchronises your clocks and monitors data for you; no hardware or maintenance is required.
Financial firms across Britain have spent the past three years implementing processes that adhere to MiFID II. Instead of “shaking up” the rules once again, consistency is needed as the industry moves forward.
[ymal]
Ever since its inception, MiFID II has played an essential role in rebuilding trust in the financial markets. Regulations like those placed on time synchronisation ensure that these markets are both reliable and protected and they have never been more easy or cost-effective to implement. This trust is something that Britain should not take for granted as the world enters an extremely turbulent economic period.
At a time of crisis, logic would say that heritage brands should fare better, but counter-intuitively, the COVID crisis has in many ways validated the digital model. While the immediate lockdown reaction of fear and uncertainty may have played into the hands of traditional financial institutions, the ensuing weeks and months have shown why fintech providers are here to stay. Louie Sumpter, founder and strategy director at creative agency EveryFriday, tells Finance Monthly about how fintechs and traditional institutions will fare coming out of the global health crisis.
Although the future looks bright for this new generation of digital start-ups, the COVID-19 pandemic is the first major economic crisis that these players have had to contend with.
To examine how fintechs and heritage institutions will fare through the COVID-19 crisis, EveryFriday interviewed eight senior marketers at a number of leading financial institutions. In doing so, we sought to understand: would the advantages that have benefited fintch providers to date see them through this crisis? Will consumers instead turn to big, established brands that offer greater scale and a sense of security?
As we’ll see, COVID-19 has rewritten the definition of trust and opened up a window for new and better.
COVID-19 has accelerated existing behaviours
As consumers seek advice from multiple sources, the role of financial institutions as authorities has begun to shift. The reliance on digital tools to constantly check and manage money is deepening the trend of banks becoming similar to other app-based utilities.
These changes are indicative of a wider cultural shift towards self-sufficiency. Today, people need to see and experience things for themselves; they don’t want to rely on being told that everything is okay.
As consumers seek advice from multiple sources, the role of financial institutions as authorities has begun to shift.
FinTech start-ups have capitalised on this shift in expectation. When COVID-19 struck, these start-ups were better positioned to pivot and adapt. Many were able to continue providing a best-in-class experience with virtually no impact on customer service or communicability. In fact, research from Capgemini shows that over a third (36%) of consumers have found a new financial services provider during the COVID-19 pandemic, with “digital disruptors the destination for many of these consumers”.
As Alessandro Onano, Chief Marketing Officer at Moneyfarm, puts it, “As a digital company, we reacted with flexibility and velocity. We immediately started to produce a daily video and market update, which relayed information to customers in a simple way.”
Large financial services institutions, on the other hand, which employ tens of thousands of employees across multiple geographic locations, have found it harder to flex to this new environment. “A well-established company, on the other hand, doesn’t have this level of flexibility. Big corporations can’t communicate as quickly or immediately release new features and tools for their customers. That’s something only a small, digital company can do,” Alessandro concludes.
This crisis, then, has accelerated a key difference between fintechs and heritage institutions: speed to market, flexibility and the enablement of self-sufficiency.
Understanding the role of trust in financial services
With change afoot, it’s important to understand the role trust plays in the consumer decision-making process.
When it comes to money, trust has been (and seemingly always will be) the bedrock of customer acquisition and retention in financial services. In the past, trust was intrinsically linked to heritage. These financial institutions, with hundreds of years of experience, boast qualities such as security, stability and confidence. Customers have felt safe and secure trusting their money with these companies, because they’d seemingly “always been there” and “always would be there”.
When it comes to money, trust has been (and seemingly always will be) the bedrock of customer acquisition and retention in financial services.
In recent years, however, fintech providers have re-written the rules of trust. To these players and their customers, trust is not dependent upon years of heritage in the marketplace. Instead, trust is built upon a new layer of foundational principles: customer experience, transparency, accessibility and consumer control.
As Melanie Palmer, CMO at Nucoro, says, “Our mission is to make sure that people have financial control. COVID-19 has caused a lot of stress for people. Imagine a scenario where you can’t easily log into an app, you haven’t been communicated to, so you’ve called customer service and been put on hold for what feels like five hours. All of this impacts your mental health, as well as your financial stability.”
The notion of handing control back to the consumer should not be understated, particularly during a time of marked uncertainty and panic. Melanie continues, “Financial control means transparency. It means being able to see things you need – in exactly the moment when you want to see it.”
In our current reality, boasting centuries of experience is only one component in addressing consumer trust. Being able to communicate seamlessly with customers, to offer instant answers, to provide clarity and to allow transparent access to money is arguably more important for practical, short-term consumer needs.
The tension between functional and emotional trust
As we emerge from the worst of the COVID-19 crisis, brands have a unique opportunity to take stock of new consumer attitudes. This crisis has emphasised the need for features such as transparency and control, which enable people to make decisions on their own terms. This is an aspect of functional trust – digital platforms are better set up for this, because their tools enable practical decision-making.
Functionality can be described as a “bottom-up” approach to building trust, because it builds from the day to day experience up. This is a brand building strategy that emphasises how products deliver accessibility, transparency, control and ease-of use.
[ymal]
But there is another form of trust that is equally important – that is emotional trust.
Heritage brands are more adept at tapping into emotional trust. This approach leverages the heritage, scale and personality of a brand, which is built over years of experience. In this sense, traditional players are more skilled at communicating trust from the “top-down”, which aligns with higher-level, aspirational feelings.
While early indicators suggest that COVID-19 may well validate the new digital model, this is the first real challenge that fintech providers have faced. For many, it may well be a defining moment of truth. As some digital start-ups furlough staff and others make wide-scale redundancies, the smart brands will employ a communications strategy that addresses both the functional and emotional aspects of consumer trust.
On the flip side, heritage brands face a sharp wake-up call: address functional values of transparency, control and accessibility, or risk losing customers due to platforms that boast superior self-sufficiency. As Melanie notes, “If social distancing continues, digital should be fundamentally important. Are you going to deal with a bank that sends you letters in the post and has a branch you can’t visit anymore? Or one that has a really cool, slick app? It hasn’t occurred yet, but I can imagine that if this becomes a normal behaviour, then we’ll see this shift happening.”
Fintech players now have an unparalleled opportunity to prove the value of a digital-first strategy, but only if they are able to address the balance between functional and emotional trust.
Last year, the United Nations declared that 55% of the global population lives in cities. By 2050, it is predicted to increase to 68%. Population increase is widely recognised as the primary cause of this.
North America and Europe are among the two most urbanised areas in the world. The UK has seen massive growth in terms of urban dwellers, with Liverpool’s population growing by 181% between 2002 and 2015.
How will cities cope with a continuous growth in residents? Smart City planning could provide the solution. Using technology and data, local authorities across the globe are working to create dependable infrastructure for urban areas. And many designers have started to include blockchain in the process.
Below, we list the main reasons why.
Transparency
Blockchain records are unalterable – any transaction details can be viewed with complete transparency. Equally, private accounts are only accessible for cryptographic key holders. Both aspects can benefit any investor – especially one that wants to outsource to a third party.
Take local authorities and governments, for example. In hiring architects and labourers that buy through blockchain, they can see exactly where money goes. And so, it could maximise asset management.
In addition, project leaders will be able to measure costs against plans. With the ability to do this throughout the process, high costs can be avoided immediately. Payment documents could be used to reduce spending in the future, too.
Blockchain’s transparency can simplify the process of city planning – and could make it a great deal smarter.
Infrastructure
The term “Smart City” applies to all aspects of a metropolis, from infrastructure to public services. In regard to the latter, easy access to blockchain advice centres could be immensely helpful for many city residents.
The digital ledger has become popular with several people in the UK. In December 2018, 32 million Britons were reported to own Blockchain wallets. And this amount could very well increase. Some experts even describe this as the answer to all money problems.
City authorities looking to “Smart” plan, therefore, might want to take this statistic into consideration. Cities that supply blockchain help and information sources could make everyday transactions far easier for a lot of citizens.
In turn, this could strengthen the reliability of the city – one of the key principles of Smart City planning.
Property Industry
There are several advantages to living in a smart city. This is largely because it aims to offer straightforward daily services, from public transport to financial transactions.
The London Infrastructure Plan, for example, has been designed to enhance the ecological and economical effects of the capital, as well as its safety. Urban areas that are set for improvement often attract prospective property buyers.
If a local authority seeks to include new homes in its Smart city plan, blockchain records could entice investors. With full details on how living spaces have been built, people may be more inclined to invest.
And higher levels of investment could generate money for local projects and schemes that can benefit the city and its community.
Technology has already transformed how money is exchanged. And thanks to blockchain, it may revolutionise urban life throughout the world. Could this be a smarter way to spend than traditional payment methods? More to the point, will it determine how our living spaces are built?
Nearly 50% of 2017’s Initial Coin Offerings are currently failing, and one serious factor in this lack of success comes from the lack of trust in a business. Investing in ICOs is risky. Little regulation results in a vulnerability to fraud, and is putting off people from contributing - and rightly so, why would you want to just throw away money?
With that said, ICOs can prove an incredible investment opportunity, with huge potential for growth starting at the pre-sale; and if a potential contributor has trust in a project, there is absolutely no reason for them not to invest.
So how can you earn investors’ trust? This week Tomislav Matic, CEO of Crypto Future, provides Finance Monthly with his top five ways to incite trust in potential investors.
1. Be transparent
One key factor in convincing others of your legitimacy is through being as transparent as possible. Of course, not every detail can be given away, but letting potential contributors understand the inner workings of your company can go a long way to showing them all the work being put into your ICO.
Being transparent develops a unique relationship with investors. Show them you align with legal compliance - you could even go as far as showing off clips of on-site testing; whatever it takes to show the world that you are genuine in your efforts, working hard to make this project a success - it goes much further than you might think.
2. Go social
On average, people spend 116 minutes of their day on social media - just under two hours checking what other people are doing. Only a fool would miss out on this opportunity for both exposure, and a chance to involve future contributors.
Use Facebook, LinkedIn and Twitter - and other social media sites too - to give people regular updates on product details, blog posts, interviews, information; anything you can think of. Frequent updates through a channel that people will be checking regardless go a long way to making investors feel involved in the progression of the project, connected and valued - that extra insight only helps towards bridging that relationship.
3. Introduce your team
By now, contributors feel the platform is safe, they know the inner workings of your product, and they feel involved with the project; it’s time to show them the team behind it. It’s all well and good having a brilliant product, but if you’ve got someone running the ICO who isn’t capable of delivering it, how can an investor trust it?
Roll out the blogs, the interviews, the Q&As, and get their social media accounts active too. Does your CEO have an incredible track record of getting ICOs off the ground? Shout about it. And an inexperienced leadership team isn’t necessarily a bad thing either - you just need to show to contributors why they are in the position they hold.
4. Create an extensive whitepaper
Not everyone will go through the entire whitepaper from front to back, but having a detailed outline of everything to do with your project gives contributors access to any specific information they might need.
Having a strong, comprehensive whitepaper in place allows investors to complete their due diligence at their own leisure. It’s a recurring theme: access to information. The more access, the more allowance you give for trust to blossom.
5. Outlining a clearly defined roadmap
Actions speak louder than words, but if you’re showing future contributors exactly what you’re planning and how you’re going to implement that plan, and then following through on it, there is absolutely no reason for them to believe that you can’t continue in that vein.
Outlining your strategy is a brilliant way of proving that you follow up on promises, and if you can do it before the ICO even starts, even with the smallest steps, investors will be more inclined to put their faith in you once the sale has kicked off.
Building trust is by no means easy, but it is incredibly vital to aiding your ICO’s success. It can without doubt be the difference between an ICO that hits the ground running, and one that flops completely.
The process starts early, and requires a huge amount of time and effort - much like building trust face to face - but the rewards are tremendous.
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/
With MiFID II looming, finance businesses across the UK will be reviewing their practices to ensure the way they work complies with the new regulations. Here, Alex Tebbs, Founder at VIA, explains what the regulations mean for the way we communicate as businesses, and how your business can comply come January 2018.
MiFID II is a targeted regulation update that aims to improve transparency and better protect both providers and customers of the finance sector.
In that sense, it exists to make things better for everyone; but with the January deadline looming and uncertainty still rife around the impact of Brexit on the update, many in the finance industry are still considering the best way to achieve compliance in their business.
It’s a regulation update made up of many facets, one being the requirement for businesses to record their communications in any instance where that conversation results in, or intended to result in, a transaction. Those communications must be retained - and be accessible when called upon - for five years after the event.
Creating a post-MiFID communications plan
In many ways, the communication requirements of MiFID II make a lot of sense. By recording our conversations, we can be sure that we are serving our customers in the best way, and that they are protected from any potential misunderstandings or misdemeanors.
But in today’s multi-device, multi-location business landscape, compliance isn’t so simple. While once we would have communicated on one device (likely a landline) and from one office, the reality of business today is that we often use multiple devices (and even encourage colleagues to bring their own devices) and operate across multiple locations, including remote working from home, offices in different countries and communications on the move.
This presents a challenge for finance professionals. How do we achieve compliance in this complex communications landscape?
The best place to start is with a review of your existing communications plan as a business. You’ll need to work out what platforms and devices are used to communicate, and make a record of all of those, as they will need to be included in your recording strategy. Be aware that this mightn’t be as straightforward as it sounds, and it’s likely to take time to uncover all the comms platforms in use.
The next step is then to work out how best to record those communications. On a landline, this would require hardware such as a microphone plugged into the handset. There are various apps that make it possible to record calls on a smartphone or via clients like Skype.
An alternative to this somewhat clunky process is to invest in a unified communications platform. This brings all your communication tools - smartphones, landlines, Skype, instant messaging, text - onto one platform which can be easily controlled from one portal, making recording and keeping those conversations a much easier, quicker process.
However you choose to manage your communications, one thing is clear; you will need to be able to both record, and keep, those conversations from January when MiFID II comes into play.
Security considerations in communications
It certainly won’t have passed by your attention that another sizeable regulation update is taking place in 2018; namely, GDPR, an update to data protection rules.
With GDPR putting renewed emphasis on security - and with MiFID’s requirements for comms recording - security should be placed firmly atop the agenda of financial firms.
There are various options on how we achieve security in communications. The most universally relevant and powerful is that of end-to-end encryption; with the main risk of unsecured comms being that communications could be intercepted en route, end-to-end encryption removes this risk by making the information, even when intercepted, entirely useless.
For those businesses using a unified communications platform, encryption and many other security considerations are included as standard, with large investments being made by those companies into stress testing their platforms and removing any vulnerabilities as soon as they are considered as a potential risk factor. For those using separate communications channels, a strict security testing strategy will need to be in place to ensure all communications are safe and private.
In terms of retaining those recorded conversations, security is a concern once again. Secure servers and storage areas are a must; consider also who has access to these recordings, and ensure they have a signed agreement in place that complies with data protection rules, and that your business’ data protection processes are up to date - especially as GDPR hits in May 2018.
MiFID II and the communications landscape
There is much left unknown about how MiFID II will affect finance businesses in the long run, and it’s likely that the implementation of its regulations will uncover complexities that need to be clarified as we move into the new year.
With that said, the communications element is prescriptive; finance professionals must record and maintain a record of all communications, regardless of device, platform or location. Is your business ready?
There’s nothing so gratifying about the way democracies are run as when national politics influences public policy because of an outburst of public anger. Here Julian Dixon, CEO of Fortytwo Data, expresses his thoughts on the challenges of confronting issues of clarity in the reporting of events such as the Paradise Papers leak.
So it is a little unnerving to find such a muted response to the Paradise Papers data dump.
When the scandal’s predecessor - the story of the Panama Papers - broke with disgusted headlines around the globe, people actually took to the streets.
There has been no such outpouring of rage this time around. And that’s because people just don’t get it. But, it’s got less to do with the current revelations and more to do with what happened after Panama.
People take their cue from other public mishaps. They remember similar headlines during the MPs’ expenses scandal. And then they remember the (ex) MPs going to jail.
It was a public hanging of Westminster’s dirty washing, the likes of which we had never seen. Then, in the wake of the Panama Papers, the public also expected justice and change.
They didn’t get it, although the similarities are obvious. The amount of information disclosed in the cases of the Panama and Paradise Papers was similarly grand. It touched on many public figures. And in the reporting, the significance of the leaks was billed as equally earth-shattering.
So where are the prosecutions?
Yes, some politicians lost their jobs within days of the Panama Papers story breaking but that was politics. They weren’t departures that resulted from the considered response of prosecutors.
“The difference between illegal tax evasion and legal tax avoidance is as clear as mud”
Having been promised blood and justice for all, it all appeared to fizzle out.
This is how tax avoidance is a story without an ending. People are destined to relive the public-spirited angst that makes each data dump newsworthy, without the satisfaction of seeing real change. And there is one reason for this - bad laws.
To the average person on the street, the difference between illegal tax evasion and legal tax avoidance is as clear as mud. The public feel unable to ask for change because they cannot clearly see what is broken. And this confusion bleeds into the authorities’ response.
Google media reports of ‘Britons being charged with criminal offences in light of the Panama Papers’ and you find nothing.
Misleadingly, many of the reports carrying headlines cite appalling tax avoidance.
Even relatively sophisticated journalists don’t know where ‘avoidance’ ends and ‘evasion’ begins.
If people are to have faith in the system, then they need to see the authorities acting on tip offs and bringing prosecutions that live up to the hype.
My suspicion is that much mean-spirited behaviour is not criminal - but it should be. However, as the law stands now, the difference needs to be explained clearly to those not wealthy enough to need offshore accounts.
It is no small irony that just like fast cars and expensive watches, if you need to ask how much tax avoidance costs, you can’t afford it. It shouldn’t be this way.
While this confusion reigns, the country is doomed to a vicious cycle that results only in growing public disquiet. People know they should be angry about something, they just can’t quite put their finger on it.
Hysterical reporting of offshore banking becomes a distraction. Politicians relax when it turns out what people are doing is legal. Instead, they should be asking the question ‘shouldn’t it be illegal?’
Accusing people of wrongdoing just because they bank offshore is unhelpful. There are many legitimate reasons why people do it and it’s not all about avoiding tax.
But there are just too many ways offshore tax rules can be legally exploited by people who just want to avoid paying their fair share.
You must be wondering by now why a guy like me who helps banks and others hunt down money launderers is that bothered about the tax affairs of a financial elite.
In our business, you can have the smartest computer in the world capable of identifying money laundering in vastly complex webs of transactions. But if you have millions of dollars being moved by thousands of transactions into dozens of offshore locations, that hide behind complex legal frameworks, it’s worthless.
As these transactions happen offshore - and, we as a species, are naturally hostile to the opaque nature of overseas financial centres and tax havens - it would be better if they were reduced and made more transparent.
If most forms of tax avoidance (not evasion) are wrong - as everyone seems to agree they are - I see the criminalisation of much tax avoidance as our best hope of being able to properly enforce the law in sheltered jurisdictions.
Clarity and a proper public, political debate that doesn’t just act as a smokescreen seems to be all that stands in our way.
Bermuda has won world approval of its tax information exchange practices with other jurisdictions.
A global body said this week that those practices comply with international standards.
Premier and Minister of Finance the Hon. David Burt JP MP responded to the announcement by thanking Bermuda government officials who have worked hard to make this a reality.
The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) said that Bermuda was among the countries screened under a new and enhanced peer review process aimed at assessing compliance with international standards for the exchange of information on request between tax authorities.
Bermuda, Canada, Australia, Cayman Islands, Germany and Qatar were deemed to be “largely compliant”.
The new round of peer reviews – launched in mid-2016 – followed a six-year process during which the Global Forum assessed the legal and regulatory framework for information exchange (Phase 1) as well as the actual practices and procedures (Phase 2) in 119 jurisdictions worldwide.
Today’s result means that Bermuda maintains the rating obtained through Phase 1 as a jurisdiction largely compliant.
Premier Burt said, “This is tremendous news and excellent for Bermuda. My thanks to all involved in securing this important outcome.
“This result is a testament to the hard work of the team in the Ministry of Finance.
“It is good news for local industry, boosting confidence in Bermuda as an international business centre.”
The 144-member Global Forum is a leading international body for ensuring the implementation of the internationally agreed standards of transparency and tax information exchange.
The Global Forum’s new peer review process combines the Phase 1 and Phase 2 elements into a single undertaking, with new focus on an assessment of the availability of, and access by, tax authorities to beneficial ownership information of all legal entities and arrangements, in line with the Financial Action Task Force international standard.
Global Forum members are working together to monitor and review implementation of the international standard for the automatic exchange of financial account information, under the Common Reporting Standard (CRS), which will start in September 2017. The monitoring and review process is intended to ensure the effective and timely delivery of commitments made, the confidentiality of information exchanged and to identify areas where support is needed.
The Global Forum is the continuation of a forum which was created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by non-cooperative jurisdictions. The original members of the Global Forum consisted of OECD countries and jurisdictions that had agreed to implement transparency and exchange of information for tax purposes. The Global Forum was restructured in September 2009 in response to the G20 call to strengthen implementation of these standards.
(Source: The Government of Bermuda)
There are just six months left until Open Banking phase two begins, when customers will be able to digitally access and securely share their bank transaction data to get the most from their finances.
The initiative will encourage financial service providers to offer high quality, targeted services and in turn boost competition.
Roger Vincent, Head of Banking and Innovation at Equifax, comments: “The banking industry is set for a huge customer-centric shake-up with the implementation of Open Banking phase two in January 2018. This exciting development will dramatically change the customer banking experience, helping consumers and businesses to use their financial transaction data to access products more easily and better understand their finances.
“The initiative kicked off earlier this year with stage one, where the ‘CMA9’ (nine banks mandated by the Competition and Markets Authority) provided improved access to information such as ATM locations and product listings. The second stage is the real game changer, with bank transaction data made available digitally for consumers and businesses to share securely, and only with their agreed consent, via open application program interfaces (APIs). Through the open APIs the data can be used by authorised third parties to build new high quality and targeted services, including new digital offerings, facilitating a more competitive environment.
“The ability for transaction data to be used for automated creditworthiness and affordability assessments, fraud detection and product accessibility is endless. Customers will be able to control how their financial data is shared digitally and provide a deeper picture of the way they manage their money. This could mean a quicker, more secure and fully digital mortgage application process or faster access to finance for a new business venture. For those currently underserved by the market, for example young people or the self-employed, it could mean the start of a journey to better financial health.
“Over the next six months, banks need to embrace the move towards a more transparent banking world. To do this successfully, preparations must focus on meeting the long-term practical benefits of consumer empowered data sharing rather than approaching this change as a tick-box compliance activity.”
(Source: Equifax)
Tax transparency is becoming the new norm as the OECD, European Commission and national governments demand more data from businesses. However, many companies do not have systems or resources in place to meet new requirements, according to EY’s report, entitled ‘A new mountain to climb: tax reputation risk, growing transparency demands and the importance of data readiness.’ The report is the third instalment of the 2014-15 Tax risk and controversy survey series, which surveyed 962 tax and finance executives in 27 jurisdictions.
Amid increasing scrutiny of business’ tax arrangements by government and other groups, companies are more focused than ever on tax risk and controversy, with 83% reporting that they regularly brief the CEO or CFO about the issue. For many tax professionals normally accustomed to primary focus on meeting legal and regulatory requirements, this heightened scrutiny is a new and unfamiliar challenge.
Notably, 94% of the largest companies interviewed think that global disclosure and transparency requirements will continue to grow in the next two years. Not surprisingly, 71% of all respondents expressing an opinion said that they would need additional resources in order to gather and provide the information required.
Jay Nibbe, EY’s Global Vice Chair of Tax, says: “We are at a critical stage as the global tax environment evolves. Increasing transparency readiness presents an opportunity not only to comply with new disclosure demands but also to proactively work to mitigate reputation risk. Getting prepared will require some additional investment in technology, data extraction capabilities, and new skills in people resources. It also involves increased awareness on how you think about your tax position, and how it could be perceived by a wide range of stakeholders.”
The European Commission has announced a package of tax transparency measures as part of its ambitious agenda to tackle corporate tax avoidance and harmful tax competition in the EU.
A key element of this Tax Transparency Package is a proposal to introduce the automatic exchange of information between Member States on their tax rulings.
Corporate tax avoidance is thought to deprive EU Member States’ public budgets of billions of euros a year. The EC’s Tax Transparency Package aims to ensure that Member States are equipped with the information they need to protect their tax bases and effectively target companies that try to escape paying their fair share of taxes.
"Everyone has to pay their fair share of tax. This applies to multinationals as to everyone else. With this proposal on the automatic exchange of information, tax authorities would be able to better identify loopholes or duplication of tax between Member States. In the coming months, we will put forward concrete actions to tackle such loopholes or overlaps. We are committed to following up on our promises with real, credible and fair action," said Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Tolerance has reached rock-bottom for companies that avoid paying their fair share of taxes, and for the regimes that enable them to do this. We have to rebuild the link between where companies really make their profits and where they are taxed. To do this, Member States need to open up and work together. That is what today's Tax Transparency Package aims to achieve."
Transparency on Tax Rulings
The central component of the Transparency Package is a legislative proposal to improve cooperation between Member States in terms on their cross-border tax rulings and it aims to mark the start of a new era of transparency. Currently, Member States share very little information with one another about their tax rulings. The lack of transparency on tax rulings is being exploited by certain companies in order to artificially reduce their tax contribution.
To redress this situation, the Commission proposes to remove this margin for discretion and interpretation. Member States will now be required to automatically exchange information on their tax rulings
The Commission proposes to set a strict timeline: every three months, national tax authorities will have to send a short report to all other Member States on all cross-border tax rulings that they have issued. Member States will then be able to ask for more detailed information on a particular ruling.
The automatic exchange of information on tax rulings will enable Member States to detect certain abusive tax practices by companies and take the necessary action in response. Moreover, it should also encourage healthier tax competition, as tax authorities will be less likely to offer selective tax treatment to companies once this is open to scrutiny by their peers.
