News roundup: June 2018

Bank bosses want level regulatory playing field with tech firms. Plus, Carillion report blasts firm’s handling of financial instruments

Banking chiefs call for tech firms to be regulated like banks

Open banking could lead to significant disparities between how financial institutions and Big Tech companies are regulated, according to senior voices in the finance industry. A recent Financial Times article indicates that banking leaders are lobbying regulators for more equitable approaches. In their view, while tech firms are increasingly adding finance facilities to their service suites, they are not being regulated in the same way as banks. Yet banks do not have the same access to data as tech firms.

At a 23 May Brussels event held by banking lobby group the Institute of International Finance, BNP Paribas chairman Jean Lemierre said: “When a third party gets involved in the payments system, it is hard not to see a deposit-taking activity and we have done a lot of work to protect depositors in the past. The magic word here is ‘wallet’. For me, ‘wallet’ is close to deposit, so [watchdogs] have to take a view on this.” UBS chairman Axel Weber added: “We are not using the [customer] data to the extent that we could – or the extent that others are already using it – because we are banks.”

Under the open banking framework, banking leaders argue, they will be required to open up their data to third-party tech competitors without having reciprocal access. However, Basel Committee on Banking Supervision secretary general Bill Coen said: “We are reluctant to come up with any kind of regulation [for tech firms’ finance offerings] for fear of stifling innovation.”

Carillion report slams firm’s use of complex financial instruments

A report from two Parliamentary select committees into the failure of infrastructure giant Carillion has heavily criticised the firm’s use of complex, supply chain finance arrangements to hide accounting irregularities. In particular, the document takes aim at how Carillion deployed its Early Payment Facility (EPF), noting that Moody’s and Standard & Poor’s had both claimed that the mechanism had enabled the firm to conceal its true level of borrowing from creditors – leading to the misclassification of £472m.

“Carillion’s [use] of the EPF,” the report says, “was advantageous to its presentation of its finances in two main ways. First, presenting drawing on the EPF as ‘other creditors’ excluded it from total debt. It was consequently not incorporated in a debt-to-earnings ratio, which was a key covenant test between Carillion and its lenders. Carillion announced in its third profit warning on 17 November 2017 that it was likely to breach that covenant. Had [the] £472m been classified as debt, it would most likely have breached [the] test far earlier.”

Published by the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee, the report concluded: “Carillion used aggressive accounting policies to present a rosy picture to the markets. Maintaining stated contract margins in the face of evidence that showed they were optimistic – and accounting for revenue for work that had not even been agreed enabled it to maintain apparently healthy revenue flows. It used its EPF for suppliers as a credit card, but did not account for it as borrowing. The only cash supporting its profits was that banked by denying money to suppliers.”

Read the full report here.

Thousands of UK corporates failing to comply with PSC rules

More than 57,000 UK firms are not yet complying with new regulations that require them to declare People with Significant Control (PSC), according to Big Data and anti-money laundering specialists Fortytwo Data. Rules around PSCs were tightened a year ago, following their initial introduction in April 2016. Every UK company is now legally obliged to maintain a register of PSCs, and to file the details with Companies House.

PSCs are defined as people who either a) own at least 25% of a firm’s shares or finances, b) control at least 25% of its voting rights, or c) have a tangible say over board appointments. The PSC register is designed to reduce the ability of money launderers to store and funnel cash under the cover of seemingly legitimate entities. Failure to comply with PSC rules is a criminal offence, with penalties including steep fines for the relevant companies and two-year jail terms for culpable bosses.

Fortytwo Data CEO Julian Dixon said: “It’s staggering how many firms are still not meeting their legal requirements head on… Identifying fraudsters and money launderers is a complex and highly sophisticated process – but severe penalties and deterrents mean nothing without enforcement. Clamping down on those companies who are not recording their PSCs is a matter of national importance.”

Jury out among traders over success of MiFID II

Traders disagree over whether the MiFID II regulation has worked, according to a poll from Swiss stock exchange SIX. Some 70% of 174 European traders believe that trading has become more transparent: one of MiFID II’s key goals. But only 26% believe that dark liquidity will shift to ‘lit’ – ie, legitimate – markets, highlighting the failure of another key part of the package. Traders are also divided as to where they think dark liquidity on capped stocks will shift instead of lit markets, with their opinions spread evenly between large-in-scale dark pools (31%), systematic internalisers (23%) and periodic auctions (20%).

The research also revealed an overwhelming 87% of traders believe that the increased levels of volatility the profession experienced in the first quarter of 2018 will continue. Interestingly, 75% of traders stated that exchange-traded funds have contributed to the rise in volatility.

SIX London-office director, securities and exchanges, Tony Shaw said: “Despite the optimism of some traders, there is no consensus on whether MiFID II can be deemed a success. Our research demonstrates a large difference of opinion among market participants.” He added: “This variance in responses highlights the reigning uncertainty among traders. Over time, market developments will provide more conclusive answers on the success of MiFID II.”

UK firms have almost £700bn of hidden cash

British businesses currently have £680bn tied up in working capital, according to a Lloyds Bank Commercial Banking study of 5,400 companies. The bank’s Working Capital Index found that firms’ annual revenues have increased, on average – with the result that the amount of cash stuck in inventory or unpaid invoices has increased by 6% in the past year. The trend is driven by a combination of business growth and falling efficiency in managing customer payments and stock.

Lloyds Bank head of Global Transaction Banking Ed Thurman said: “Revenue growth is good news for British business, but to improve efficiency is going to take investment – and that requires cash flow. Small firms in particular are taking even longer to free up cash from inventory and unpaid invoices. The longer that money remains unavailable, the less firms can invest in growth, new machinery or pay down debts.”

He added: “Companies that manage their working capital well can generate healthy cash flow and will be best placed to invest in their businesses and take advantage of new trading opportunities. Those who don’t may find it difficult to deal with a potential rise in interest rates later this year – or to take on the opportunities and challenges created by Brexit.”

Do green bonds need their own regulated ratings system?

Stakeholders in the green bonds market are debating whether it requires its own, dedicated ratings framework, a recent FT article shows. Published on 14 May, the piece notes that the current crop of entities responsible for rating green bonds, including accounting firms and established credit-rating agencies – but increasingly also environmental consultancies and research groups – do not have to abide by any, specific set of rules while making their assessments.

Bank of America Merrill Lynch global head of green bonds Suzanne Buchta told the publication: “Some investors are relying more and more on second-party opinions. Therefore, it would make sense for there to be some regulation around who can write such opinions in the same way that there is regulation of the agencies that write credit opinions.”

Sean Kidney – head of green finance advocacy group the Climate Bonds Initiative – pointed out ethical flaws in the current system, saying: “Because the [assessment] fees are paid by the issuer of the bond, you have the same potential conflict of interest [with third-party verifiers] as we had with the credit-rating agencies before the financial crisis.” However, Christa Clapp – research head at research house Cicero – said that academic bodies such as her own can be trusted to be impartial as they do not have financial interests at stake.

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