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CROWDFUNDING – Will new rules on Crowdfunding have a significant impact on UK SMEs and start-ups who are reliant on alternative finance?

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Republic Crypto adds two new high-promise Startupsto Crowdfunding Line-up

By David Ridley, solicitor at law firm Womble Bond Dickinson

Background

Ridley David

Ridley David

I first became interested in crowdfunding when I wrote my University dissertation on the legislative framework in the UK and US at that time.  Broadly speaking I was attempting to give a view on whether the legislation was fit for purpose (to surmise, it wasn’t) and could accommodate the growth in demand for crowdfunding. I have followed the growth of Crowdfunding since then, which in 2017 had grown to an estimated £6.2bn in the UK, according to the Cambridge Centre for Alternative Finance.

I have been most pleased by the growth of its use by Small and Medium Sized Enterprises (SMEs) and start-ups seeking external investment.  The UK is heavily reliant on SMEs, who made up 52% of all private sector turnover in 2018 and 60% of all private sector employment.  The number of start-up businesses in the North East (where I and many of my WBD colleagues are based) is growing at one of the fastest rates in the country – there were 45,498 start-up businesses in the North East at the end of the 2017/18 financial year, an increase of 20.8% compared to the previous year.

These companies are more and more often looking at Crowdfunding as a method of solving a perceived lack of external financing (known as the ‘funding gap’) available for such companies. Whilst the factual evidence surrounding the existence of the ‘funding gap’ is not conclusive, the rules on alternative external funding can be hugely important to such businesses, potentially unlocking the investment to get them through those “touch and go” initial years.

Regulatory Framework

In the UK the Financial Conduct Authority (FCA),  regulates two forms of crowdfunding:

  • Loan-based crowdfunding – usually called peer-to-peer (P2P), where investors use lending platforms to lend money directly to consumers or businesses; and
  • Investment-based crowdfunding, where investors can invest directly in businesses by buying investments such as shares or debentures.

The FCA has recently launched various consultations on changes to the FCA Handbook to reflect the developments in the crowdfunding sector.  The Treasury and BEIS have also focused their attention on the sector, undertaking an inquiry in 2018 on the state of SME finance, with particular consideration of crowdfunding. These enquiries have often focused on similar themes, such as:

  • whether there should be more explicit rules around governance arrangements, particularly on areas such as credit risk assessment and risk management;
  • what happens if a crowdfunding or P2P platform fails;
  • whether such platforms should evaluate investors’ knowledge and experience before permitting investments; and
  • evaluating the mandatory information that platforms need to provide to investors.

Importantly, the FCA has, following these various reviews, confirmed its proposals for new rules and guidance coming into force on 9 December 2019.  They are introducing a package of rules and guidance to improve standards, seeking to find an “appropriate balance between advancing policy objectives and enabling future innovation in products and services”.  These rules, whilst targeted at the P2P and Crowdfunding platforms themselves, could have an impact on the extent to which SMEs rely on some form of crowdfunding to raise money, and such companies should be taking notice.

What is changing?

The changes introduced by the new rules extend the application of the marketing restrictions that currently apply to investment-based crowdfunding platforms to loan based crowdfunding.  In particular the FCA is to tighten the nature and extent of the due diligence each platform undertakes in respect of prospective borrowers, in order to better assess their credit risk.  The platforms will need to provide more information to investors of how the loan risk is assessed and to assist them in determining whether they able to properly make such investments.

Further to this, P2P platforms that communicate financial promotions directly to consumers will, from 9 December, only be permitted to direct such promotions to prospective investors that:

  1. are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’;
  2. confirm before a promotion is made that they will receive regulated investment advice or investment management services from an authorised person, or
  3. are certified as ‘restricted investors’, i.e. they will not invest more than 10% of their net investible assets in P2P loans in the 12 months following certification.

What is the potential impact on SMEs?

These changes are clearly targeted at protecting potential investors and this is important if the crowdfunding market is to remain a reputable source of raising finance. Crowdfunding has understandably come under greater scrutiny since the FCA forced P2P investor Lendy into administration, and lessons should of course be learnt from this.  Critics of the new rules have however raised the view that these regulations may put off investors who would otherwise have provided a source of financing to those companies that need it most, and restrict crowdfunding to institutional investors such as mutual funds, pension funds, banks and asset managers.

My view is that the additional hurdle of certification outlined above is not necessarily a significant barrier to prospective investors. The inclusion of the “restricted investor” criteria is an important one, without which the pool of prospective investors would become much smaller and crowdfunding would become far less accessible to new investors – certified high-net-worth investors and sophisticated investors are concepts generally seen as restrictive and it can often be difficult to find persons who are willing to certify as such.  On the other hand a “restricted investor” simply needs to confirm that they will not invest more than 10% of their assets. The FCA has also stated in its policy statement on the new rules that investors can re-classify as sophisticated investors (thereby removing the 10% investment limit) when they have made two or more P2P/Crowdfunding investments over two years.

What is more difficult to assess is whether the due diligence each platform undertakes in practice in respect of prospective borrowers, in order to ensure compliance with the new regulations, will result in an increased burden upon prospective borrowers.  A borrower will likely be required to work more closely with the platforms in the run up to their crowdfunding project and this could make crowdfunding less attractive to start-ups and SMEs, if it requires a greater allocation of their (already limited) resources

Finance

From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers

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From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers 1

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.”

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Finance

Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds

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Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds 2

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.

Study Rankings

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.

Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds 3

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Finance

The impact of the Accounts Payable risk landscape

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The impact of the Accounts Payable risk landscape 4

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.[1] On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.[2]

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.

Financial penalties

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.

Restricted cashflow

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.

Audit administration

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.[3]

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.

Wasted time

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.

Reputational damage

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

[1] (The Hackett Group, Key Issues Study 2020)

[2] Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/

[3] https://www.cfo.com/payments/2020/03/metric-of-the-month-detect-and-prevent-duplicate-or-erroneous-payments/

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