By Leonardo Braune, managing director of Intercorp Group
Ever since the Organisation for Economic Cooperation and Development (OECD) Council approved the OECD’s Common Reporting Standard (CRS) in 2014, the international economic community has been gradually moving closer to a smoother and more transparent global exchange of financial account data. It is widely acknowledged that the CRS is long overdue and will be of significant benefit to all parties involved.
What is the CRS?
The CRS calls on all jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions. The automatic exchange of information will promote greater levels of transparency and tax cooperation on an international level, and lead to better levels of financial practice. Given recent high-profile data leaks to the media – as witnessed with the Panama Papers and Paradise Papers – there is growing pressure on the global wealth industry to act now. The automatic exchange of information agreements between international governments and tax authorities is inescapable. It’s now just a question of how to implement the CRS.
Progress made so far
Thanks to the work of the OECD – which should be highly commended for its ongoing efforts –98 countries have already signed up to participate in the CRS. Of these countries, 53 started exchanging information in 2017, with most of the rest committing to start this year. The most recent country to sign up is Panama, which has a chequered ‘tax haven’ history. This recent addition is a promising sign of the commitment to better financial practices on an international scale.
More recently, the OECD published a new set of bilateral exchange relationships established under the CRS Multilateral Competent Authority Agreement (CRS MCAA), which now includes activations by Panama. There are now over 2,700 bilateral relationships for the automatic exchange of offshore relationships that are currently in place under the CRS MCAA.
In theory, the CRS is relatively straight-forward in its overriding mission statement and goals. In reality it is proving more difficult to adhere to on a global level. It has so far been poorly executed, largely because no-one is overseeing the implementation of CRS due to the breadth of countries involved. Essentially, there is a lack of leadership from one overarching body. Whilst the OECD has created the CRS, it cannot be held responsible for overseeing the full roll-out process. This has had a knock-on effect on the success of CRS so far, as outlined below.
Lack of clarity
There has been a lack of clarity due to discrepancies in the standard’s interpretation across different jurisdictions. Due to variations in classification processes across regions, it is hard to accurately interpret these rules and apply regulations in multiple jurisdictions. In some countries, clearer framework is needed. In other countries, guidance is not being issued in a timely enough manner. The general lack of clarity is becoming stifling and beginning to slow down other business processes across the board.
However, the OECD his taking steps to provider clear guidance on CRS. In April 2018, it released the second edition of the CRS Implementation Handbook, which provides practical guidance to assist government officials and financial institutions in the application of CRS. The handbook provides further guidance on the features of the legal frameworks of CRS, compliance, data protection aspects, IT and administrative requirements and a dissection of frequently asked questions within the industry.
Due to the lack of clarification on implementation processes relating to the CRS, financial institutions are naturally responding with knee-jerk reactions by requesting more information than they actually need. It is only natural for financial institutions to react in this manner, as they do not want to be held accountable for possessing misinformation. Any lawyer conducting the necessary due-diligence for a legal case would do just that.
However, the uncertainty of financial institutions on how to proceed with CRSis leading to problems with a deluge of financial data, raising concerns around the misuse and mishandling of sensitive information. Furthermore, it is having knock-on effects across institutions as employees have their work cut out analysing vast amounts of confidential data in a short space of time.
Businesses and clients need to be one step ahead of financial institutions and be fully up-front about financial accounts, past and present. Tax and wealth management consultancies need to develop a more stringent process for onboarding, so that all assets – including overseas investments – are disclosed at the beginning of the process. By taking the necessary steps now, the chances of a genuine mistake being interpreted as a fraudulent declaration will be reduced. Businesses should remain proactive, by pre-empting potential requests for information. This puts businesses in full control of the information exchange process, making adherence to the CRS a smoother transition.
The implementation of CRS would be much improved if regulatory authorities could work together to standardise the different rules. This takes time, however, so in the meantime it is best to take smaller steps. A collaborative effort is needed between advisory firms, banks, and financial institutions.
Leave no stone unturned
At this stage, businesses should ensure they know what information different financial institutions possess. Organisations should go over this information with a fine-tooth comb to make sure that all information is accurate, so that when the information is needed or exchanged, there is absolutely no room for error. Poor accuracy or reckless reporting of financial records can have the same effect as wilful non-compliance. As a result, businesses should conduct all due-diligence now.
We are entering a new era of improved transparency, which is to be welcomed as it will lead to improved cooperation on an international level. Transparency is the new norm; however it is not mutually exclusive with privacy. It is important to delicately balance the two in order to protect clients’ privacy whilst ensuring full compliance and complete transparency with authorities and financial institutions. Businesses should navigate the coming months wisely and seek expert guidance from those who understand the ins and outs of the CRS. The industry should prepare for all eventualities, so it is on the front foot when the time comes to exchange information.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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