UK: Financial Services And Markets Group Bulletin

Last Updated: 23 July 2009
Article by Natasha Lee

HOW WILL THE TURNER REVIEW AFFECT YOUR BUSINESS?

On 18 March 2009, Lord Turner published his review, alongside the accompanying Financial Services Authority (FSA) discussion paper, of the regulation of banks and bank-like institutions in response to the financial crisis which has besieged the global economy. In truth, the review was less radical than had been feared as the majority of its recommendations had already been made public.

We address some of the high-level issues raised by the Turner Review including the potential wider impact on regulated firms which do not fall under the banking umbrella.

Capital adequacy

As expected, Lord Turner recommends that the quantity and quality of capital maintained by banks should be increased. However, given the current financial pressures experienced by the banking sector, the recommendation will not be implemented in the short-term.

The main aim of this proposal is for banks to hold counter-cyclical capital in order to avoid the peaks and troughs experienced in recent years. Taking a steer from the existing regime operating in the Spanish banking market, banks will be required to maintain counter-cyclical capital buffers which increase in the good times to be used in the bad times.

To help implement this system, Lord Turner proposes transparency within the banks' published financial statements, whereby such a buffer is separately accounted for and disclosed, favouring a capital reserve over a smoothing provision. Whichever accounting method is favoured, the International Accounting Standards Board will need to agree to this.

The most challenging aspect of implementing a counter-cyclical capital buffer will be judging the level of the buffer depending on the state of the economy at any given time. Each bank's judgement will undoubtedly be subtly different, potentially resulting in significant variances in the level of buffers. Lord Turner recognises this, and proposes that the banks make their assessments transparent in order for any outliers to be identified and corrected. He also acknowledges that such a proposal will need international buy-in for it to be effective, otherwise the majority of banking activities will merely converge to lesser regulated jurisdictions.

As a supplementary measure, he has proposed that firms monitor their gross leverage ratio, set against a predetermined benchmark, in order to identify and help prevent excessive balance sheet growth.

The days of Value at Risk (VaR) models appear to be numbered. An increase in capital requirements against banks' trading books and assessing the validity of VaR models, as they appear not to have stood the test of time, have been proposed. Firms that use such models should now be seriously considering viable alternatives.

Liquidity

Lord Turner considers liquidity to carry equal weighting with capital adequacy. The majority of the proposals have already been considered through the FSA's consultation paper (08/22) and we previously discussed this in the May edition of this newsletter.

The key point from the FSA's perspective is that such proposals can be implemented nationally, unlike those proposed for capital adequacy, and implementation is scheduled to commence from quarter four of this calendar year. BIPRU firms would be well-advised to ensure these requirements have already been addressed.

Lord Turner also invites consideration of a 'core funding ratio' as either a rule or as an indicator of potential concerns. In essence, this will drive firms to adopt stable forms of funding.

Credit rating agencies

Credit rating agencies (CRA) have not survived Lord Turner's wrath. He believes the credit rating based system played an important part in the origins of the financial crisis, in particular due to its lack of rigour in assessing the risks of securitised and structured credit and the potential conflict of interests it has with its commercial objectives.

To counteract these issues, the Turner Review proposes that CRAs are regulated going forward, but acknowledges the need for change in legislation in order to achieve this. However, Lord Turner expects this to be achieved by quarter two of 2010.

Remuneration

Clearly an emotive topic, particularly bearing in mind the constant press coverage, Lord Turner acknowledges the conflict of interests certain remuneration structures encouraged in respect of profit versus risk. However, despite this, he clearly states that areas such as capital and liquidity were the key drivers behind the financial crisis.

Proposed changes in remuneration are discussed in the FSA's consultation paper (CP 09/10) and principally surround the need to break the link between bonuses and short-term profit making.

FSA supervisory approach

Ever since the publication of the Turner Review, the FSA has been at pains to make it clear that its approach will now be a more intrusive one – firms are already experiencing this through an increase in ARROW visits and notification of Skilled Person Reports (s166). Going forward, this will also involve the FSA placing a greater emphasis on understanding firms' balance sheets and related accounting judgments.

Firm risk management and governance

Continuing the theme of an intrusive approach, the FSA believes a significant improvement in risk management and governance is required by banks, including the quality of senior management. The FSA will now play an active role in assessing the technical competence of senior management, which will include interviews with the FSA before any recruitment decision can be confirmed. In addition to this, the FSA requires improved skill level and time commitment of non-executive directors. These issues are expected to be addressed in detail by the Walker Review, with final results due to be published in the last quarter of 2009.

Cross-border banks

The review highlights the need to impose more local/national regulation on individual cross-border firms affecting domestic markets. This would involve branch entities of banks not currently regulated where they reside. The FSA is clearly reacting to the consequences suffered through the Icelandic bank failures and requests the European framework is revised accordingly.

Impact on other sectors

The underlying FSA discussion paper highlights the wide impact the proposed changes made by Lord Turner have on other regulated firms.

  • Intrusive supervision – this will affect all firms as the change in culture of the FSA will be felt industry wide. Risk management and governance of all firms will be assessed.
  • Quality and quantity of capital – key criteria which matter to all firms. How much this is passed on to non-banking firms will in part depend on their ability to enter into an orderly wind-off, as documented within a firm's Internal Capital Adequacy Assessment Process.
  • Group regulation – the FSA intends to widen its scope of group reporting and this will therefore affect all regulated firms that are part of a group (particularly those that currently do not report to the FSA on a group basis).
  • Macro-prudential approach – the FSA will need to be alert to macroprudential risks arising from other sectors within the financial services industry.
  • CRAs – these are not only used by banks, and therefore the regulation of CRAs will have an indirect impact on the regulatory capital required to be held by firms.
  • European Union passporting – potential changes in passporting arrangements may be applied to other sectors in addition to banks, which will undoubtedly affect a firm's commercial activities.

Conclusion

Though not wholly unexpected, the Turner Review and underlying discussion paper make some thought-provoking suggestions, some of which may have a long lead time before seeing the light of day, given the international cooperation required. However, notwithstanding this, firms should already be starting to address recommendations made where this is practical. Ultimately, fundamental changes to the regulation of the financial services industry, and consequently its business activities, will be made and sufficient time needs to be afforded to firms in order to move with these changes. Thankfully, this is something the FSA has acknowledged.

Comments were required to be submitted to the FSA by 18 June 2009, and these should be published by the last quarter of 2009. Once published, we will provide our readers with an insight into the next stage of what will be a long running saga.

PLANNING AHEAD SAVES TIME AND MONEY

Reduce the impact of the proposed increases in income tax and NIC.

From 6 April 2010, the income tax rate for individuals earning over £150,000 per annum (p.a.) is currently planned to be 50%; the highest rate for 20 years. Personal allowances will also be restricted for individuals earning more than £100,000p.a. The effective rate of tax for earnings between £100,000 and £112,950 in the year from 6 April 2010 will be 60%.

From 6 April, 2011 all national insurance contribution (NIC) rates are planned to increase by 0.5%. The new rates will be:

  • 13.3% for employers' NIC
  • 11.5% for employees' NIC up to the earnings limit
  • 8.5% for Class 4 NIC for self employed persons
  • 1.5% additional rate for all earned and self employed income.

New rules are also proposed to limit tax relief for certain pension contributions against the 50% income tax band.

Minimising the impact

The possibilities available to UK taxpayers to limit the impact of the changes will depend on the status of the taxpayer, i.e. employee or self employed, for example, a partner in a partnership or a member of a limited liability partnership (LLP).

Pensions remain tax-efficient saving mechanisms for most taxpayers and businesses, up to certain limits. Salary sacrifice schemes can still reduce NIC.

Alternatively, approved or unapproved share or share option schemes can result in employees receiving amounts taxed as capital gains, at 10% or 18%, rather than income, with a potential tax deduction for the employer. Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP) are popular approved share schemes and can be tax efficient for employer and employee. The limits on the value that can be granted are £120,000 for EMI and £30,000 for CSOP. It is worth considering whether these are relevant for your company.

Unapproved share schemes are flexible, not being subject to HM Revenue & Customs (HMRC) imposed conditions. If structured correctly, they can offer significant tax benefits. Smith & Williamson has developed several share scheme ideas, offering tax benefits to both employee and employer, while also being an incentive scheme for the employee. We have implemented these for a number of clients, helping save tax and NIC.

Using employee benefit trusts can also offer tax and NIC benefits.

For partnerships and LLPs, we have developed an incentive scheme for employees which mirrors a company share scheme and also offers tax advantages.

Otherwise, partnerships and LLPs could reduce the impact of the increasing taxes by:

  • changing their accounting date
  • using rules involving partner cessation and commencement
  • introducing new partners (including companies), or retiring partners
  • using a service company.

These measures would need to be introduced carefully to ensure unintended consequences are avoided.

Businesses should not forget routine tax planning, for example, ensuring that profits are taxed in the correct period and tax deductions are maximised for expenses/ provisions and capital allowance claims.

Tax planning can reduce the impact of the proposed increases in income tax and NIC and businesses should take action as soon as possible to ensure they do not lose the opportunity to reduce their tax burden.

VAT PROBLEMS WITH SUPPLIES OF STAFF

Avoid self-inflicted VAT costs through mishandling supplies of staff.

Most financial sector businesses are partly exempt and recover only part, or none, of the VAT on their costs. Such businesses are often careful to pay no more VAT than necessary, but many incur self-inflicted VAT costs by mishandling supplies of staff. This is because, while salaries are VAT-free, a supply of staff (or directors) from one business to another is generally subject to VAT.

Temporary staff

Since 1 April 2009, businesses which hire temporary staff from an agency have been paying more VAT than before. Previously, the agencies were able, by concession, to restrict the VAT charge to their own fee and not the salary element. The removal of the concession was widely publicised, but in the recession businesses have been employing fewer temps and the full impact has probably not yet been felt.

The concession also benefited outsourcing businesses, which typically take over part of their client's workforce and supply their services back to the client. With VAT chargeable on the full amount, achieving savings by outsourcing may now be more difficult.

Corporate groups

Businesses which have service companies, or share personnel between companies (often for tax, national insurance or transfer pricing reasons) can end up paying VAT on the full salary costs of the people concerned. The problem can be exacerbated if charges are applied retrospectively (e.g. at the year-end), when it may be too late to consider alternatives.

The same issue can arise if staff costs are spread around the group by means of a management charge – not forgetting that management charges paid to an overseas parent company can also attract VAT as a 'reverse charge'. It may seem odd, but yes, you could end up with a UK VAT bill on recharged US salaries.

Possible solutions

Sometimes the VAT costs can be removed by simply forming a VAT group, but remember that not all companies are eligible to be grouped – and HMRC will not allow grouping to be backdated. Alternatively, you could consider 'paymaster' or joint employment arrangements.

It is also worth looking in more detail at what, exactly, is being supplied. A charge calculated by reference to salaries is not necessarily a supply of staff: it could be a supply of whatever the staff do, which in the financial sector could well be exempt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.