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
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?
- 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.
- 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 servicesor 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.
- 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
- 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.
- 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.
- What happens if I do not comply?
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.
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.
- 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.
- 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
“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).
Is MiFID II still fit for purpose in a post-COVID financial landscape?
By Martin Taylor, Deputy CEO and co-founder at Content Guru
January 2nd, 2021 was the third anniversary of the implementation of MiFID II, a legislative framework instituted by the European Union (EU) to regulate financial markets in the bloc and improve protections for investors. This second iteration of the Markets in Financial Instruments Directive includes a range of binding obligations for financial traders, including the need to record and store any/all external communications that could result in a trade, for a minimum of five years.
MiFID II is a complex piece of legislation to put it mildly and compliance requires a great deal of time and effort. Despite this, its ‘real-world’ value currently remains subject to debate. While the EU Regulator recently stated that rules around investment research and analysis had been a success, it has previously conceded aspects of MiFID II targeting marketing data costs have been less so. In a wider sense, industry professionals affected by the new legislation have extremely mixed feelings about its benefits and detriments, both to their work as individuals and to the financial sector as a whole.
However, one thing that is clear is the imposition of financial penalties associated with non-compliance to MiFID II is likely to increase significantly in the near future. Under the original MiFID legislation, many high-profile organisations, including Goldman Sachs International, received fines running into tens of millions of pounds for failing to report transactions in an accurate and timely fashion. Conversely, less than €2 million in fines were handed out under MiFID II in the whole of 2019. Many industry commentators attribute this low figure to a grace period for the new legislation, with the Financial Conduct Authority (FCA) giving firms some wiggle room as they acclimatise to it. But as this period ends, fines and penalties are expected to skyrocket.
Applying pre-COVID legislation in a post-COVID landscape
Of course, to say the financial landscape has changed somewhat in the last twelve months is a bit of an understatement, which makes adherence to MiFID II even harder than it was previously. In particular, the massive shift to home working has rapidly accelerated the adoption of new innovations and technologies aimed at making remote collaboration more effective, but not necessarily MiFID II compliant.
Organisations with well-established processes and methodologies have been forced to rapidly rethink their strategies. In many cases, the speed at which they’ve been able to achieve this has been extremely impressive, but it’s come at the expense of compliance. After all, MiFID II is applicable to any communication that may result in a trade. In a lockdown environment, where finance professionals are collaborating and screen sharing to make decisions, they are still operating under the compliance rules set out and their interactions should be recorded and stored. But how many organisations have actually put processes in place to meet these obligations as part of the ‘new normal’?
As the rollout of multiple COVID vaccines gets underway around the world, there’s growing hope of a return to more traditional working environments in the not-too-distant future. But with the popularity of home working leading to many organisations saying it’ll become a permanent fixture, where does that leave MiFID II compliance?
A complex compliance challenge
For compliance officers looking to shore up their organisation’s post-COVID remote work environment against MiFID II breaches, there are numerous concerns. For example, how can they ensure every pertinent conversation across numerous digital platforms, being used by hundreds of traders, is correctly managed and recorded? The issue can be broken down into two main categories. The first is the management of tools and services in question, and the second is management of the data being shared across them.
Technical complexity requires a proactive, technology-led response. Disjointed, reactive compliance is becoming increasingly unfeasible, given the depth and breadth of tools now being used. For instance, if trading professionals use Microsoft Teams, but their client prefers Skype, how can compliance officers ensure that each and every recording is properly maintained, regardless of which platform is used each time? The answer may lie in unified solutions, which provide a central platform to take advantage of these best-of-breed technologies and provides resources such as search-and-replay, e-discovery and end-to-end trade reconstruction across a diverse technical ecosystem. Unified solutions may allow firms to develop cost effective, enterprise-wide compliance and data management policies that are fit for purpose in the post-COVID landscape.
Effective data management and analytics will play pivotal role
One thing becoming increasingly clear is that the ability to manage and analyse datasets in their entirety, rather than relying on random manual sampling, will play a pivotal role in eliminating dangerous reporting gaps. Today’s analytics solutions and advanced speech-to-text technologies have already proven invaluable over the last ten months of restrictions and will continue to set the benchmark going forward. Tools such as universal search not only give compliance officers the visibility they need to do their jobs properly, they also help maintain effective standards across all relevant stakeholders.
However, such solutions have requirements of their own, particularly when it comes to robust data and storage. Firms must ensure that their systems utilise compliant data storage, that has sufficient capacity to retain all types of electronic communications data, including uncompressed stereo voice recordings, for at least five years after they are recorded, as stipulated by MiFID II.
The ability to comply with legislation such as MiFID II remains a key priority for every business within its scope. However, adhering to pre-COVID legislation in a post-COVID landscape is a lot easier said than done for many. Whether the creation of MiFID III will ultimately be required remains to be seen. Until then, it’s clear that successful compliance will rely on the effective implementation of technology-led solutions capable of overcoming the new barriers created by such a fundamental shift in work practices over the last 12 months.
FSS and India Post Payments Bank AePS Partnership Advances Financial Inclusion in India
New Delhi, January 12th,2020: FSS (Financial Software and Systems), a leading global payment processor and provider of integrated payment products, today announced partnering with India Post Payments Bank (IPPB) to promote financial inclusion among underserved and unbanked segments. As part of the collaboration, IPPB will use FSS’ Aadhaar Enabled Payment System (AePS) to deliver interoperable and affordable doorstep banking services to customers across India.
FSS’ AePS solution combines the low-cost structure of a branchless business model, digital distribution, and micro-targeting that lowers acquisition costs and improves reach. This strategic partnership offers significant opportunities to bring millions of unbanked customers into the financial mainstream. Currently, there are nearly 410 million Jan Dhan accounts in India. A primary reason for low usage of banking and payment services is the challenge of accessibility in rural areas and the cost of maintaining active accounts — including transaction and transport— outweigh the benefits. In rural and peri-urban areas, the average time to reach a banking access point potentially ranges between 1.5 and 5 hours, compared with the average of 30 minutes in urban areas.
Leveraging its vast network of over 136,000 post offices, and 300,000 postal workers, IPPB has been setup with the vision to build the most accessible, affordable, and trusted bank for the common man in India to deliver banking at the customer’s doorstep. With the launch of AePS services, IPPB now has the ability to serve all customer segments, including nearly 410 million Jan Dhan account holders, giving a fresh impetus to the inclusion of customers facing accessibility challenges in the traditional banking ecosystem.
Speaking on the tie-up, Mr.Krishnan Srinivasan, Global Chief Revenue Officer, FSS said, “We are proud to be IPPB’s technology partner in this monumental nation-building exercise. The collaboration is evidence of FSS’ deep payments technology expertise and commitment to bringing viable, market-leading innovations that promote financial deepening. FSS’ AePS solution combined with IPPB’s expansive last mile distribution reach empowers citizens of the country with a range of digital payment products and advance India’s vision towards less-cash economy.”
“Through the vast reach of Department of Posts network along with the advent of the interoperable payment systems to drive adoption, IPPB is uniquely positioned to offer a range of products and services to fulfil the financial needs of the unbanked and the underbanked at the last mile. Having launched AePS services, the Bank has become the single largest platform in the country for providing interoperable banking services to customers of any bank. The strategic partnership with FSS provides us with an opportunity to expand the portfolio of financial services and improve customer experience whilst maintaining operational efficiency, thus building a digitally inclusive society,” said Mr. J. Venkatramu, MD & CEO, India Post Payments Bank.
The infrastructure created by IPPB addresses the accessibility challenges faced by customers in the traditional banking ecosystem. It fulfils the Government’s objective of having an interoperable banking access point within 5 KM of any household and creating alternate accessibility for customers of any bank.
The operation of FSS’ AePS solution is based on agents performing transactions on behalf of customers using a tablet, micro-ATM or a POS device. The system is device agnostic and can accept transactions originating from any terminal. Customers of any bank can access their Aadhaar-linked bank account by simply using their fingerprint for cash withdrawal, balance enquiry and transfer of funds into an operating IPPB account, right at their doorstep. FSS’ AePS exposes APIs to third parties to develop an expansive services ecosystem and extend a broad suite of financial products and tools including micro-insurance, micro-savings, micro-finance, mutual fund investments, enabling the bank to further services adoption among low and moderate-income consumers.
FSS (Financial Software and Systems) is a leader in payments technology and transaction processing. FSS offers an integrated portfolio of software products, hosted payment services and software solutions built over 29+ years of experience. FSS, end-to-end payments products suite, powers retail delivery channels including ATM, POS, Internet and Mobile as well as critical back-end functions including cards management, reconciliation, settlement, merchant management and device monitoring. Headquartered in India, FSS services leading global banks, financial institutions, processors, central regulators and governments across North America, UK/Europe, Middle East, Africa and APAC. For more information visit www.fsstech.com.
About India Post Payments Bank
India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Hon’ble Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked & underbanked and reach the last mile leveraging a network comprising 155,000 post offices (135,000 in rural areas) and 300,000 postal employees.
IPPB’s reach and its operating model is built on the key pillars of India Stack – enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers’ doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages.
IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true – Every customer is important; every transaction is significant and every deposit is valuable.
Be Future-Ready: The Case for Payments as a Service (Paas)
By Barry Tarrant, Director, Product Solutions, Fiserv
Over the years, financial institutions have faced a myriad of changes in regulations, technology and customer expectations. Banks are now having to deal with the competing demands of maintenance and compliance on the one hand, and the need to innovate and deliver value-added services on the other. The balance of effort is increasingly consumed by the former with the share of investment in innovation and value generation being squeezed.
COVID-19 has changed customer behaviour, which will accelerate the need for more digital innovation, adding further to the demand on technology resources that are already stretched to the limit. While future investment plans may remain uncertain, banks need to consider several factors for their technology strategy, such as efficiency, where to invest and how to reduce capital expenditure.
It is apparent that the traditional approach to implementing and updating technology is no longer sustainable in the long-term.
The true cost of outdated technology
Maintaining technology has always been a challenge. What makes it more important now than ever is that innovation expectations have become far greater and exist on multiple simultaneous fronts. Today, there is more demand for product innovation, alongside the need to deliver consistently across multiple channels. On top of this, banks are facing structural changes, such as the convergence of payments.
Faced with this combination of imperatives, many banks are finding that continuing to maintain their payments technology in-house is no longer the most viable option.
Banks that persist with existing in-house infrastructures are in many cases spending large sums just to keep up, with little left for innovation. This can put them at a distinct disadvantage in today’s digital environment, where challenger banks and fintechs are fully embracing tools like the cloud to optimise operations while delivering truly transformational customer experiences.
Maintaining technology can be quite costly, and leveraging shared payment innovation can result in notable cost savings. Additionally, there are savings to be had in the areas of capital costs, opportunity costs, regulatory or payment scheme compliance costs, and the inevitable one-off costs from technology or infrastructure upgrades.
And as the options available for customers to initiate payments across card and non-card payment rails increase, this will drive a convergence of the technology that supports the processing of those payments, further increasing the demand for change.
In this environment, migrating to an alternative technology strategy, such as PaaS, can be a strategic and cost-effective decision.
One solution to mitigate the risks and costs associated with maintaining technology is to outsource payments activity to a PaaS provider. The most obvious advantage here is cost reduction. However, there are many other positive and significant financial benefits that can be realised in terms of reduced capital expenses and the associated effects on balance sheet and free cash flow. This is particularly important in the current environment as capital investment comes under even more scrutiny.
Running a robust platform is a PaaS provider’s primary business, whereas for a bank it is just one of the many areas in which it has to invest. A PaaS provider is compelled to continually reinvest to ensure their technology never stands still long enough to become outdated, while also recruiting high-calibre personnel to support and advance it.
Geographical scale can also add value and increase opportunities for innovation. A PaaS provider with clients around the world sees and delivers innovation globally, which can be redeployed elsewhere rapidly and at a lower cost than custom development. Also, a global processing network can serve as a worldwide payments intelligence network, detecting trends, such as new payment types, consumer payment behaviour and cyberthreats.
One further consideration is how payments have become increasingly commoditised in recent years. As traditional revenue streams from payments have declined, it makes even less financial sense to retain payment processing in-house. By adopting PaaS and benefiting from the associated cost savings, retained payment margins can be maximised, simultaneously freeing up resources that can be diverted to innovation and value-added activities, such as enhancing customer experience and building the franchise.
Debunking the myths
Despite the compelling business case for banks to adopt PaaS, some remain reluctant to do so because of various myths. One example is the belief that outsourcing data is inherently risky. The reality is, in fact, the opposite. PaaS providers have the scale, resources and procedures to address and invest in key priorities – for example, cybersecurity. Keeping things in-house can actually create greater data security risk if resource constraints are an issue.
Budgetary considerations aside, experience and specialist tools are also major points of difference here. A typical bank IT manager might experience two or three major transition projects in their entire career. In contrast, teams at a PaaS provider collectively will have experience successfully delivering many major transformation projects, and will have also developed a whole range of specialised implementation adapters and toolkits that are continually enhanced and expanded.
Be more agile and tactical
When technology becomes outdated it can easily go from an asset to a liability. While COVID-19 has emphasised this reality for some, truly appreciating it requires a comprehensive assessment of existing technology and its long-term impact on business. Outsourcing through PaaS has a wealth of benefits that can radically transform this situation. Financial institutions can become more agile and tactical so they can continue to innovate and provide services that customers demand while differentiating themselves from the competition.
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