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WILL YOU PASS THE RED FACE TEST?

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James Gill

Naming and shaming of late payersdue to arrive in April 2017  in respect of goods and services other than financial services

By James Gill, Lewis Silkin LLP 

James Gill

James Gill

From 6 April this year, it is expected that all large UK companies (and limited liability partnerships) will come under a new regime which requires them to publish, on a Government website, detailed reports on their supplier payment policies and practices. The proposed Regulations are designed to create public transparency of large businesses’ payment policies and practices, primarily for the benefit of small and medium-sized suppliers.

Late payment of invoices is considered by the Government to be a widespread issue, with a particular impact on small businesses. In 2008, a voluntary Prompt Payment Code was introduced, to which there are now some 1,800 signatories, and which serves as a kite mark for treating suppliers fairly. However, due to the practices of some corporates, the Government has decided that Regulations imposing some mandatory rules are required. When the Regulations were first proposed, the then Minister for Business and Enterprise stated that “We are determined to make Britain a place where late payment is unacceptable and 30-day terms are the norm – with a clear 60-day maximum.” In their revised form, the Regulations don’t go as far as mandating specific payment terms, but they will create transparency which is likely to have the effect of reducing payment terms for some suppliers.

So what do finance professionals and finance teams need to do to adapt to this change?

  1. Who is covered by the new Regulations?

  The Regulations apply to a company that meets two or more of the following “turnover”, “balance sheet” and “average number of employee” thresholds on both of its previous two balance sheet dates:

  • its annual turnover exceeds £36 million
  • its balance sheet total exceeds £18 million
  • it has more than 250 employees on average

Both quoted and unquoted companies are caught. The obligations apply at an individual entity level, although a parent company must only report if it qualifies as large itself under the separate thresholds applicable to parent companies.

The Regulations do not apply to a new company in its first financial year as it will not know whether it will exceed the qualifying size thresholds. A company in its second financial year will be caught if it met two or more of those thresholds on the balance sheet date in the previous year.

The same criteria also apply to LLPs.

  1. What types of contracts are covered?

The Regulations apply to all contracts for the supply of goods (including IP and other intangibles) and/or services.  However, you can breathe one sigh of relief as they do not cover a) financial services[1]or b) contracts without a significant connection to the UK.However, the Regulations may apply to the purchase of other goods and/or services, such as technology, catering, cleaning, security, etc.

  1. When do they apply?

The Regulations are currently in draft form but are expected to apply from 6 April 2017. This means that a business whose next financial year starts on or after this date will be caught this year.

A business whose next financial year starts between now (February 2017) and 5 April 2017 will not need to address the Regulations until its next financial year starts in 2018 

  1. What information needs to be report?

Information that must be provided includes (among other things):

Details on payment terms

  • ‘standard payment terms’, expressed in days
  • details of any variation to those terms, including in relation to any prior notification or consultation with suppliers

Details on payment practices

  • ‘average’ number of days taken to pay (which means the ‘arithmetic mean’, which should help to avoid a distorted picture)
  • percentage of payments paid:

– within 30 days

– between 31 and 60 days

– over 60 days

  • percentage of payments not paid within the contractual payment period (one to watch!)
  • whether the company has deducted money from a contract as a charge for a supplier to remain on its supplier list (another one to consider carefully)
  • the company’s dispute resolution process for contractual payments
  • whether the company offers e-invoicing (including invoice tracking) and supply chain finance
  • whether the company is signed up to a voluntary payment code and, if so, which one (consider PR benefits here versus the cost of complying with the code)

There is no requirement to report on interest paid on late payments

Online reporting portal

Details of the Government’s online portal where the reports will need to be published have not yet been provided. It is expected that access will be given to the platform in April.

  1. How often and when do we need to report?

Banks, finance houses and all other large corporates will need to publish a report twice yearly within 30 days after the end of each reporting period. The reporting periods are linked to the company’s financial year and are generally the first and second six months of each financial year. This means we may not see the first report until the Autumn.

It is also important for financial teams to note that 30 days really doesn’t give much time to prepare the report in respect of the previous reporting period, so preparation and planning will be key so as not to overburden staff or be late.

  1. What happens if I do not comply? 

Offences

Breach of the reporting requirement is a criminal offence for the company and its directors. There is a (limited) ‘reasonable steps’ defence for directors.

It is also an offence for a person (knowingly or recklessly) to publish a report, or make a statement (for such purpose), that is misleading, false or deceptive in a material element.

Reputational fallout?

The Regulations are designed to generate transparency, public scrutiny and a change in behaviour for some businesses. A key question for every Board and management team is to ask itself “Will we pass the red face test?” Once the online portal is up and running, you can expect canny suppliers to compare any payment terms that you offer them against the published figures that you have agreed with other suppliers. See the Government Response.

  1. What should be done now?

It is important to ascertain how easily you can obtain this information, check if the information is accurate and see how processes and systems might be improved to make the task easier for future reporting.

Payment practices need to be reviewed and appropriate remedial steps implemented if disparities in terms offered (or observed in practice) prove embarrassing or otherwise impact a business.

A voluntary payment code is also another option open to businesses and the pros and cons of signing up to one should be weighed up by the Finance, Procurement and Legal teams

Close attention should also be paid to the Government guidance (released at the end of January), with an eye to the final form of the Regulations and any reporting portals that the Government might make available.

  1. Closing thoughts

It is easy to see why the Government wishes to help suppliers who may not be paid quickly enough. However, it will be interesting to see the extent to which the Regulations change behaviour in practice by the banking and financial services community and how they adapt. Inevitably, some suppliers will be paid more quickly than in the past. However, some large banks and others in the finance sector may choose to take the reputational risk. Others may also find ways of adjusting their purchasing behaviour in a manner that attracts less public scrutiny but which offsets the cost of having to pay sooner. One simple way of achieving that, of course, is to negotiate down pricing.

James Gill, Partner Head of Commercial & Technologyat Lewis Silkin LLP

[1]“Financial services” is defined in s3 Small Business, Enterprise and Employment Act 2015 as service of a financial nature, including (butnot limited to)—

(a) insurance-related services consisting of—

(i) direct life assurance;

(ii) direct insurance other than life assurance;

(iii) reinsurance and retrocession;

(iv) insurance intermediation, such as brokerage and agency;

(v) services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services;

(b) banking and other financial services consisting of—

(i) accepting deposits and other repayable funds;

(ii) lending (including consumer credit, mortgage credit, factoring and financing of commercial transactions);

(iii) financial leasing;

(iv) payment and money transmission services (including credit, charge and debit cards, travellers’ cheques and bankers’ drafts);

(v) providing guarantees or commitments;

(vi) financial trading (as defined in subsection (2));

(vii) participating in issues of any kind of securities (including underwriting and placement as an agent, whether publicly or privately) and providing services related to such issues;

(viii) money brokering;

(ix) asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial, depository and trust services;

(x) settlement and clearing services for financial assets (including securities, derivative products and other negotiable instruments);

(xi) providing or transferring financial information, and financial data processing or related software (but only by suppliers of other financial services);

(xii) providing advisory and other auxiliary financial services in respect of any activity listed in sub-paragraphs (i) to (xi) (including credit reference and analysis, investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy).

Finance

The Psychology Behind a Strong Security Culture in the Financial Sector

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The Psychology Behind a Strong Security Culture in the Financial Sector 1

By Javvad Malik, Security Awareness Advocate at KnowBe4

Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.

Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.

With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.

Defining Security Culture: The Seven Dimensions

In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:

  • Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
  • Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
  • Cognition: The understanding, knowledge and awareness of security threats and issues.
  • Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
  • Compliance: Written security policies and the extent that employees adhere to them.
  • Norms: Unwritten rules of conduct in an organisation.
  • Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.

All of these dimensions are inextricably interlinked; should one falter so too would the others.

The Bearing of Banks and Financial Institutions

Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.

Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.

Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.

Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.

Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?

Towards Achieving Excellence

There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.

By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.

Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.

Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.

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Finance

Has lockdown marked the end of cash as we know it?

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Has lockdown marked the end of cash as we know it? 2

By James Booth, VP of Payment Partnerships EMEA, PPRO

Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.

Has cashless gone viral?

Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.

Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.

More choice than ever before

Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them[1].

As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z[2].

Does social distancing mean financial exclusion?

As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.

There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.

Supporting the transition away from cash

Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.

Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies

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UnionPay increases online acceptance across Europe and worldwide with Online Travel Agencies 3
  • UnionPay International today announces that two of Europe’s leading travel companies, Logitravel and Destinia, have started accepting UnionPay.
  • This acceptance will enable users of the groups’ travel websites to make purchases using UnionPay payment methods.

The acceptance partnerships between the OTAs and UnionPay began in July 2020 for customers across 13 European countries and another 90 countries and regions worldwide.  The European countries covered by the agreements include the UK, Germany, France, Italy, Spain, Portugal, Norway, Denmark, Sweden, Austria, Switzerland, Hungary and Ireland.  The brands covered by these acceptances include Logitravel.com and Destinia.com which together deliver more than 8.5 million worldwide travel bookings each year covering flights, hotels, holidays, car hire and other experiences.

With over 8.4 billion cards issued in 61 countries and regions worldwide, UnionPay has the world’s largest cardholder base and is the preferred payment brand for many Chinese and Asian expatriates and students based in Europe, as well as an increasing number of global customers. These cardholders are also particularly attractive to the two OTAs.  Despite the impact of Covid-19, Logitravel and Destinia expect to see the demand for travel across the European continent as well as that between Europe and Asia return to growth in the coming years. They are now placing significant focus on offering more payment options and smoother payment services to meet this demand.

The partnerships incorporate UnionPay’s ExpressPay and SecurePlus technology, which will ensure seamless transactions for the customers, contained within a single process through the relevant websites.  UnionPay’s technology also provides for the requirement to authenticate transactions under the EU regulation Payment Services Directive 2 (PSD2) ensuring that sites will be compliant as soon as the relevant countries apply the requirements.

Wei Zhihong, UnionPay International’s Market Director, said: “This is a major partnership with two of Europe’s leading online travel companies.  Logitravel and Destinia are brands which have been at the forefront of e-commerce for many years and we are very excited to be working with them to extend their reach to new audiences. This highlights the work that we have carried out in ensuring that our technology provides effective solutions for the biggest e-commerce sites both in Europe and around the world. We look forward to announcing many more similar agreements in the near future.”

Jesús Pons, Chief Financial Officer at Logitravel Group said: “UnionPay has always been on our radar, and since travel has become a crucial part of its development, Logitravel felt it important to develop this important partnership. It really was an obvious decision for Logitravel since both companies share a passion for e-commerce and emphasising the payment experience for their customers.”

Ricardo Fernández, Managing Director at Destinia Group said: “We believe that this is the beginning of a really strong relationship.  Our discussions with UnionPay in reaching this partnership have demonstrated their understanding of the needs of major online merchants and their ability to deliver the highest quality systems.  We look forward to working together on further partnership as we move forward.”

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