By Michael Feldwick, Head of UK & Ireland, Tinubu Square
When the Bank of England’s Prudential Regulation Authority (PRA), whose job it is to supervise and regulate financial services firms, announces a new consultation paper, it doesn’t usually make headline news. But in the case of the ‘Credit Risk Mitigation’ paper, which was introduced in February of this year, interested parties might find it challenging to see any ripples on the pond at all.
So, it is all the more important to give proper consideration to the impact that this consultation paper might have. To give it its full title, the Credit Risk Mitigation: Eligibility of guarantees as unfunded credit protection paper sets out the PRA’s proposed changes to existing regulation. It wants to clarify expectations regarding the eligibility of guarantees as unfunded credit protection. The proposals extend to any contract or other documented obligation that purports to be a guarantee for the purpose of achieving unfunded credit protection under Capital Requirements Regulation(CRR) Part Three, Title II, Chapter 4. 1.3, and is relevant to all firms bound by the CRR.
Credit insurers, surety and finance companies will all be expected to respond, but the lack of media attention, and, frankly, the lack of open discussion in the industry in general, belies the importance of the consultation.
To put this into context, credit risk mitigation (CRM) is a widely used technique to reduce the credit risk associated with an exposure. Firms may, for sound risk management reasons, wish to use CRM techniques to mitigate credit risk irrespective of any particular capital treatment. The CRR allows organisations to recognise some forms of CRM in the calculation of their capital requirements.
CRM can be funded or unfunded. One of the ways unfunded credit protection can be achieved is through a guarantee. This is reached through the obligation of a third party to pay out in the event of non-payment or default of a credit obligor. In order to be eligible as a guarantee for CRM under the CRR, strict eligibility criteria must be met. The PRA has identified that some firms are unclear about what contracts or other documented obligations are eligible to be treated as guarantees for CRM under the CRR.
The consultation paper has come about because the PRA considers that additional clarity is needed to ensure that capital relief from guarantees is obtained only where the risk has been effectively transferred to the guarantor
This is all very well, but the reality is that the system as it stands currently is working. This makes the consultation paper not only a surprise, but according to many of our colleagues in the industry, possibly surplus to requirements.
Banks, insurance companies and the like have checks and balances that provide evidence that guarantees are in place. Some of our own customers use our RMC Finance for just this purpose, and to easily link banks with credit insurers which assures them that they are fully compliant with the terms of the policy.
There are many aspects to the consultation paper that are puzzling. The most obvious is that the insurance industry has evolved to allow claims to be paid in a reasonable time, which could be weeks, sometimes months, but rarely within a few days. The concern is that any changes, and these are outlined in the consultation paper, would drastically shorten this timespan, and the expectation is that insurers might ask for an enhancement in the claim waiting/processing period as a compromise.
Any change could have an impact on capacity and would certainly require insurers to move funds or change their cashflow arrangements to ensure rapid availability for claims. This will then have a knock-on effect on costs and premiums.
Why has the consultation paper been published by the PRA now? As far as we understand it, this consultation is only being targeted at the UK, but with Brexit looming, the UK financial services market is doing everything it can to ensure it can continue to compete as a financial hub. The implementation of more rigid regulation, and certainly more rigid than in the EU, or the US, where deregulation is expanding, is likely to affect domestic and export trade for the UK. There is a concern that capital relief will become harder and more challenging to obtain from guarantees.
Asking around, it is clear that the consultation paper is not a subject of wide discussion. However, amongst those that are aware of it, and its implications, the hope seems to be that it will not make capital relief from guarantees within the UK more challenging than any other developed market.
Of course, regardless of how difficult it is to get guarantees and regardless of any changes that do come about, dedicated trade credit insurance solutions, such as those from Tinubu Square, can play a part in helping to bridge the systems from banks and receivable finance companies with credit insurers and guarantees. They can help to ensure that conditions meet compliance, and that, in the event of a claim, the evidence required to support that claim is available to ensure prompt payment.
Organisations have until the 16th May to respond to the consultation paper. At the moment, the over-riding theme amongst peers in the industry seems to be ‘if it ain’t broke, don’t fix it’. Granted, we may not see legislation being brought into force in the end, but even by going through this period of consultation, the industry should recognise that it can’t be complacent about the legacy systems and manual processes on which it still relies too heavily. If the argument that digitisation delivers competitive advantage isn’t compelling enough, then perhaps the inevitable reach of regulation should be?
From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers
The Association for Corporate Treasurers (ACT), in partnership with Deutsche
Bank, has today announced the release of “The Group Treasurer: An ACT guide to the first 100 days”, which provides valuable insights on the role of the treasury function – serving as an in-depth guide to those moving into senior treasury roles for the first time, as well as a valuable refresher on the latest developments for treasury professionals.
Treasury departments are often staffed by people who move across from other finance disciplines and, for them, navigating their first 100 days – with a host of new, often alien, concepts and the need to quickly get up to speed –can be a challenge.
The Guide serves as a complete compendium of the crucial, need-to-know information – starting with the basics, including the role of treasury, how departments are set up and what you need to know about treasury policy, before moving on to a series of deep dives into the critical features of life in treasury, including all you need to know about cash and liquidity management, the innovative technologies that are driving change, as well whether an in-house bank is right for you. Scattered throughout the Guide are useful insights from treasury professionals across a wide range of industries and geographies – providing best practice advice for gaining maximum benefit from your time in treasury.
“We have looked to create a guide that goes back to basics – and the ACT seemed the perfect partner for this” says Ole Matthiessen, Global Head of Cash Management, Deutsche Bank. “While the ACT can provide treasury professionals with training and qualifications necessary for a successful career, Deutsche Bank, in its role as a trusted advisor, can provide up-to-date insight on the options available for treasurers in the market.”
The Guide is also a reaction to the sweeping changes seen in treasury over the last few years. With new processes and technologies moving centre stage, the Guide seeks to provide treasury professionals with a concise “refresh” of the latest developments – especially for perennial challenges, such as the availability of liquidity.
Release 1 | 2 “I hope readers will find the Guide a useful tool” says Caroline Stockmann, Chief Executive, ACT. “And remember: the ACT is here to support you, whether you are a member or not, as our Mission is to embed the highest standards of professionalism and integrity in the treasury world, and act as its leading advocate.”
Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds
Tangerine Bank Ranks Highest in Overall Credit Card Customer Satisfaction for Second Consecutive Year
With 73% of credit card customers in Canada saying COVID-19 has negatively affected them financially and 24% who say they are unable to make monthly credit card payments, overall satisfaction with their primary credit card issuer remains relatively flat year over year at 764 (on a 1,000-point scale), according to the J.D. Power 2020 Canada Credit Card Satisfaction Study,SM released today.
“While credit card issuers in Canada are faring somewhat better than their U.S. counterparts in averting the negative effects of COVID-19 on customer satisfaction, they are not out of the woods,” says John Cabell, director of banking and payments intelligence at J.D. Power. “Credit card companies are falling behind in key areas related to the customer experience, especially in factors linked to financial sensitivity and customer support channels, which are crucial during the pandemic.”
According to the study, despite a one-point increase in overall satisfaction from 2019, credit card issuers have experienced a year-over-year decline in key performance indicators (KPIs) related to interactions with credit card customers, such as showing concern for customer needs; appreciating customer business; problem-free experiences; card activation; and reward redemption. As a result, satisfaction is down 12 points in assisted online experience and down 11 points for call centres.
More than half (55%) of cardholders acknowledge COVID-19 has changed their card usage habits, mainly by spending less. Understanding customers’ needs and addressing their changing priorities can help card issuers to mitigate future decline in satisfaction and elevate loyalty. The study shows that offering free or discounted services in response to COVID-19 are the actions driving a more positive impression of the issuer (39% and 35%, respectively), followed by gestures such as employee support (33%); waiving fees (32%); and community support (32%).
“The pandemic presents an opportunity for issuers to align their card services and benefits with customers’ evolving needs,” Cabell said. “Issuers can increase the perceived value of the card and strengthen loyalty. Offering discounted airline tickets or free airport lounge access is probably not as lucrative these days for cardholders as, for example, it would be to extend the duration of annual fees.”
Following are additional key findings of the 2020 study:
- Satisfaction declines with household income: With 29% of cardholders earning less during the pandemic, many are looking for relief from their credit card company and are more critical of card issuers. In fact, credit card satisfaction among customers whose household income has declined due to the pandemic is lower than among those whose income remained unchanged. The largest gaps in satisfaction are in rewards (-12 points); benefits and services (-11); communication (-8); and customer interaction (-8).
- Call centre woes: The pandemic has put a greater strain on call centres, which has negatively affected satisfaction. Caller wait times jumped to more than 12 minutes during the pandemic compared with less than 8 minutes prior to the pandemic. Also, caller satisfaction with the level of courtesy exhibited by call centre representatives declined significantly, which calls out the need for card issuers to restore best practices among their reps and identify better ways to manage customer support.
- Cardholders are digitally savvy: Nearly two-thirds (64%) of cardholders solely rely on digital channels to manage their primary credit card activities, and those cardholders are more likely to say it is easy to understand information about their account and do business with their issuer than do cardholders who do not rely solely on digital channels. In fact, one of the bright spots in the study is improvements in customer satisfaction with mobile and online interaction of 8 points and 7 points, respectively, from 2019.
Tangerine Bank ranks highest in overall customer satisfaction with a score of 825, which is 61 points higher than the industry average of 764. American Express (801) ranks second and Canadian Tire (793) ranks third.
The Canada Credit Card Satisfaction Study measures satisfaction of cardholders’ primary credit card issuer. The study measures performance in six factors critical to the customer experience (in alphabetical order): benefits and services; communication; credit card terms; customer interaction; key moments; and rewards. The study includes responses from 6,728 cardholders who used a major credit card in the past three months and was fielded in May-June 2020.
The impact of the Accounts Payable risk landscape
By David Thorley, Director of Customer Development, FISCAL Technologies
The current economic climate has never been so uncertain. Not since the 2008 financial crash has there been a period where organisations are mindful about how the markets will play out and the effect this will have on economies around the globe. As a result, organisations have become increasingly conscious about the way they spend money, but they have also become more aware about how they save money.
The Accounts Payable (AP) department aims to reduce the amount of money lost in an organisation, making sure all payments are completed on time and are done so correctly, but this is unfortunately not always the case. For example, half of large organisations have duplicated or misdirected a payment to suppliers. This roughly accounts for £3 million being directed to the wrong supplier and resulting in a long and lengthy process in getting this money reclaimed. On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.
Therefore, it is clear that in almost every financial department things slip under the radar, but what are some of the risks in the AP department and how can they impact a company?
Lost opportunities reducing income
The capacity for AP resources to work on higher value activities is reduced due to error and query resolution, this can range from anything from chasing up suppliers to looking for a misplaced document. As a result, those within the department are limited to what they can do due to these mundane, repetitive tasks.
Ultimately, lengthy pre or post audit activity reduces the ability of the business to transact, limiting growth and reducing competitiveness, all of which can be avoided if the correct tools are in place.
In some geographies and industries, errors and adverse findings in statutory audits can lead to financial penalties. These penalties can be anywhere from a few thousand pound to tens of millions. Just last year a leading consultancy was fined almost £20m for poor auditing. Payment Policy infringements can reduce an organisation’s ability to bid for certain types of contracts; critical infrastructures for example, which can have a significant impact on the way an organisation operates.
Payment errors and fraud directly affects the bottom line, which can result in a major impact in the financial reporting. Often financial reporting is skewed resulting in liquidity and profits being reduced. In public sector organisations, these lost funds reduce the capital available for frontline services, which can not only impact the quality of service provided but could also affect the reputation.
Increased processing costs
Invoice exceptions prevent supplier invoices being processed automatically. AP staff spend an inordinate amount of time checking, correcting and managing invoice exceptions, which significantly increases processing costs and time. Given the current climate, this time and money could be put to better use, helping a company grow and expand.
Organisations making overpayments – paying duplicate or incorrect invoices – and fraud are a common problem. Together, these account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.
As a result, whenever an audit is conducted, the AP team spends time finding and providing information and documents. The more issues that are found, the more time audits take to identify and recover lost cash.
AP teams will frequently need to check supplier records during their normal transaction processing. Large, unmanaged MSF hold numerous duplicates and no-longer-required records that create more payment errors and hours spent investigating and resolving queries.
Whether a private or non-profit organisation, fraud, errors, compliance breaches or poor financial results all heighten the risk of reputational damage for the organisation generally and the finance director in particular. The reputational damage caused by a high profile incident of fraud can be significant, affecting the business’ credibility and even the share price.
The shockwave from fraud can be more damaging than the financial loss. After a fraud is discovered, considerable time will be taken up investigating every new potential risk of fraud. Whatever the outcome of the investigation, this is an unwelcome distraction for the managers concerned. But, more importantly, the effect on morale and belief in the leadership’s capabilities throughout the organisation – not just the finance team – will be harmed.
Managing these risks
AP assures the protection of cash within an organisation, identifying risks and resolving them. To do this effectively and efficiently it’s imperative AP departments have the correct tools in place to ensure they follow a simple process that allows them to save time and money, helping their organisation both in the short and long term
 (The Hackett Group, Key Issues Study 2020)
 Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/
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