David Green: Scanning the regulatory horizon
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It’s time to relax but, says David Green, thoughts will inevitably drift to the regulation coming in the not too distant future including MiFID II, ringfencing in banks and new accounting standards.
As we enter summer holiday season, it’s time to reflect on the challenges ahead. Don’t get me wrong, I hope to spend most of my week in Majorca worrying about which restaurant to try next, rather than anything work-related. But there are plenty of regulatory changes coming over the horizon and so my thoughts, and maybe yours, are likely to slip back to treasury management from time to time.
MiFID
MiFID II is probably top of the list. The Financial Conduct Authority seems quite unworried that it has effectively locked nearly one in five local authorities out of professional financial markets from January.
Treasury risk management at a small authority is going to be a lot harder if you’ll struggle to maintain a £10m portfolio, or demonstrate your expertise in new investment areas.
Treasury bills, covered bonds, repo and money market funds could all be off the New Year menu. You might even have to look for some new financial services providers if firms decline to deal with retail clients. For larger authorities, there is just the burden of extra paperwork to evidence that you are knowledgeable in your field and can still be treated as a professional.
Banks
Ringfencing is the separation of “utility” banking from “casino” banking, one of several measures by regulators to reduce the impact of future bank failures on consumers and taxpayers. The big UK banks are likely to each split in two next spring or summer. On the banking side, this could mean a change of sort code and account number and the rigmarole that entails.
On the investment front, you can now make a 12-month deposit and not know which legal entity is responsible for repaying you. How do you assess the creditworthiness of a bank that doesn’t exist yet? The lack of clear information from some banks on what they will look like next year is worrying.
Accounting
IFRS 9 will present another headache for some treasury departments. Although accounts will not be prepared under the new standard until April 2019, some of the changes are likely to impact on the revenue account and may need addressing in the forthcoming 2018/19 budget round.
Chief amongst these is the new requirement for forward-looking impairment provisions on loans made, requiring losses to be taken to revenue just in case the counterparty defaults, rather than only accounting for losses once they happen. Long-term loans to local charities and companies are likely to need larger provisions than short-term treasury deposits.
Also, more investments will be caught by rules requiring changes in value caused by market fluctuations to be taken to revenue. Structured loans and deposits are most likely to be caught by this new rule; gains and losses on most pooled funds can still be taken to reserves if the authority elects to do so.
MMFs & Interest rates
There are also a couple of hot topics that won’t be causing me to lose any mid-afternoon sleep on the sunbed. Money market reform is another 2019 start, but the final rules for the new “low volatility net asset value” funds aren’t so different from those for the current “constant net asset value” funds, at least not from the investors’ perspective.
There may be a small drop in yield, especially for those funds that stretch the boundaries of the current rules, but the basic concept of £1 in, £1 out won’t change. That should be a relief for treasury managers.
And short-term borrowers needn’t worry overly about the risk of an interest rate rise. Last year’s sharp fall in the exchange rate will start to trickle out of the year-on-year inflation measure in the Bank of England’s primary target. And UK economic growth is almost certain to stay subdued while uncertainty remains over our future trading relationship with Majorca and the rest of Europe. Even if we do get the odd rate rise, short-term rates will still start with a zero and be far below current long-term rates for some time to come.
So, make full use of our visa-free travel arrangements with Spain while they last, don’t worry about the shocking tourist exchange rates, and I’ll see you nice and tanned at LATIF 2017 in September.
David Green is Strategic Director at Arlingclose Limited.
