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A promising start with more to follow: The Prime Minister’s Ten Point Plan and next steps for business
A promising start with more to follow: The Prime Minister’s Ten Point Plan and next steps for business

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Sustainable returns? Trends to look out for in ESG in 2021


Evaluating investments on the basis of environmental, social and corporate governance (ESG) principles has been one of the most visible trends in the investment industry over the last few years. A far cry from the familiar, straightforward screening of traditional “sin stocks”, investors are increasingly demanding a much deeper read of a company’s ESG procedures – from staff welfare and internal governance to supply-chain risk and climate action – in order to assess the sustainability of their returns.

Across the world, the proportion of investors applying ESG principles to at least a quarter of their portfolios has risen sharply from 48% in 2017 to 75% in 2019. The Covid-19 pandemic has brought questions of sustainability to the fore, and looks set to reinforce the trend towards greater awareness and uptake of ESG principles. An estimated 200 new funds in the United States with an ESG investment mandate are expected to launch over the next three years, more than doubling the activity from the previous three years. ESG-mandated assets could grow almost three times as fast as their non-ESG counterparts in the coming years, so that they make up half of all professionally-managed investments by 2025.

This growing trend represents a clear opportunity for investors, yet the consensus of a number of studies and surveys is that the significant variety of approaches to ESG incorporation by investment management firms, regulators, and investors means that its full potential is not being realised. Below, we assess some of the key issues which investors will want to bear in mind when formulating their strategies.

Changing regulatory environments

Over 170 ESG-related regulatory measures have been proposed globally since 2018. This marked increase (it is more than the number of proposals from 2012 to 2018 combined) is a measure of the pace of change in this area and the level of regulatory focus upon it.

The traditional approach in the US, for instance, has been the SEC’s principles-based approach to company disclosure, which applies equally to ESG-disclosures as non-ESG. There, are, however, increasing calls for a more prescriptive approach for ESG, along more “European” lines.

In the EU, sustainability risk has been integrated into MiFID II, AIFMD and the UCITS framework. The changes will dictate how market participants and financial advisors must integrate ESG risks and opportunities in their processes as part of their duty to act in the best interest of clients. It is small wonder, therefore, that 97% of European institutional investors now say that they interested in ESG investments.

The UK is expected to retain an approach similar to that of the EU after Brexit. In December 2020, for instance, the FCA set out proposals to promote better disclosures on climate risk from premium-listed companies and will publish a consultation paper in early 2021 with a view to widening the scope of these measures. The Government is due to consult on measures in the Taskforce on Climate-related Financial Disclosures framework, which would oblige large listed and private companies to disclose the risks to their businesses from climate change. Influential investors have also urged the Government to consult on the idea of introducing mandatory “say on climate” votes for shareholders at AGMs, somewhat akin to “say on pay” votes.

Whilst different regulators have taken different approaches, the overall trend is for more stringent ESG disclosure requirements, with ESG more firmly integrated into the investment advisory and decision-making process. International frameworks, including that drawn up by the Sustainability Accounting Standards Board (SASB) are gaining influence in developing consistency in ESG reporting across companies. Indeed, many companies have already identified the value placed on ESG transparency by investors, and are using these frameworks for reporting and disclosure which goes beyond the requirements set by regulators.

The role of technology

As the amount of ESG data available to investors has increased, so too has demand for analysing it. Spending on ESG content and indices rose by almost 50% between 2018 and 2020, indicating the scale of growth in the field.

The trend has been for investment management firms increasingly to develop their own capacity for gathering and processing data, but emerging technologies including Artificial Intelligence are likely to hold the key to extracting material ESG insights as the volume of data increases. AI engines can, for instance, be used to sift through unstructured data – which may not have formed part of a company’s formal disclosure – with a view to uncovering further material information. Such tools are potentially very powerful, but investors and investment managers would do well to keep an eye on the potential for regulation in this area, given the creation of the Centre for Data Ethics and Innovation in the UK and the EU’s forthcoming legislative proposals on AI.

Emerging technologies also have a large role to play in addressing environmental questions – and are thus a significant contributor to the “E” in “ESG”. Here, again, AI is an important field – with promising applications from energy monitoring and control systems to automation in agricultural production. Alongside it sit emerging technologies in energy generation, including carbon capture, small modular reactors and nuclear fusion.

The impact of Covid-19 on ESG trends

The ongoing coronavirus pandemic has had a profound effect across the economy, with Governments playing much more interventionist roles in economic affairs than they might have envisaged pre-pandemic. The UK Government has spent almost £300bn on coronavirus measures, and the EU has agreed its €750bn Recovery Fund. Recovery plans unveiled to date – whether the UK’s Ten Point Plan or the EU’s Green Deal – have set clear ESG priorities and could, therefore, represent significant opportunities in sectors including clean energy, building technology and electric vehicles. In addition, an increase in demand for hygiene and diagnostic technologies may be a boost to the life sciences sector.

The logistical challenges which the pandemic has presented to many firms may bring about a renewed focus on supply-chain risk. Faced with a sudden shock, the vulnerabilities of many widely-dispersed supply chains were exposed, and this may galvanise efforts by companies to “reshore” some elements of production. To achieve this will likely require greater spending on advanced technologies including AI and robotics if moving production necessitates a move away from low-cost manufacturing elsewhere.

Perhaps the most obvious post-pandemic trend is the move towards remote working and digital commerce. For many, these have become embedded into daily life and will doubtless have long-standing social implications well into the future.

The opportunity for investors

The trend towards ESG investing is here to stay. It is an area of intense regulatory focus and the pandemic has heightened interest further still.

This growth represents a substantial opportunity for investors who can fully integrate ESG principles into their investment process. Such integration is likely to go beyond a mechanical exercise in completing an ESG “checklist”. Rather, it is likely to be a robust, thorough due-diligence process, illuminating past sustainability risks and providing a real picture of how target companies conduct their operations. Using the ever-increasing amounts of available data, and the evermore sophisticated technologies available to harness them, investors can gain deeper insights into their target and portfolio companies than ever before, and have the opportunity to generate genuinely sustainable returns.

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The final countdown: Brexit explained in five minutes

How did we get here?

Negotiations have been ongoing since the Brexit referendum in 2016. The UK was initially scheduled to leave the EU on 29 March 2019, two years after it triggered Article 50, but a series of extensions led to the UK’s eventual exit from the EU on 31 January 2020. The UK then entered a transition period during which EU rules continue to apply in the UK and the UK remains part of the EU’s single market and customs union. The transition period will end on 31 December 2020.

The negotiations currently taking place are seeking to agree the UK-EU trading relationship after the transition period ends. These negotiations are between the European Commission (the executive body of the EU) and the UK Government. The UK negotiating team is led by David Frost and the EU team by Michel Barnier. Interventions have also come from Boris Johnson and the President of the European Commission, Ursula von der Leyen, usually at times where political impetus is required.

Where are we now?

The UK and the EU have both said that the vast majority of the components needed for a free trade deal have been agreed. Two main issues are outstanding: fishing rights and the so-called level playing-field provisions.

Fishing rights have become a totemic issue. The UK government views fisheries as a key part of “taking back control” of British territory and regulation. The UK is thus fighting hard on the issue, despite fishing being worth only around than 0.1% of UK GDP. Indeed, in terms of Gross Value Added, the entire UK fishing industry is comparable to the single Harrods store, yet fishing rights now appear to be the single largest obstacle preventing a trade deal.

In seeking level playing-field provisions, the EU wishes to ensure that the UK either maintains equivalence with EU regulations, or faces tariffs, to prevent it from gaining what the EU sees as an unfair competitive advantage. The issue has proven intractable because both sides can argue that their position is reasonable, given the precedent of previous free trade agreements. An agreement on this point is particularly important for investors and businesses in the UK because, without one, tariffs and other regulatory barriers could impede the untaxed flow of goods between the UK and the EU, and vice-versa. In recent days, both sides have hinted that some progress has been made, but the precise nature of this progress is very far from clear.

Compounding these issues is a sense from both sides that they must not be seen to be giving too much ground, as this would set an unhelpful precedent for any future trade negotiations with other countries.

What happens next?

Face-to-face negotiations are continuing. With two weeks to go before the end of the transition period on 31 December, any agreement will require an accelerated approval. This kind of shortened timetable is not impossible, but it is highly unusual. It is likely to mean any deal agreed lacks the depth or complexity that will be necessary to cover the future UK-EU relationship in full for the long term.

In the UK, the ratification process is comparatively simple. A debate in Parliament is likely to take place (though this is not a formal requirement) and the government has set out plans to recall MPs from their Christmas holidays if necessary, to ensure a vote can be take place before time runs out. Normally, a treaty can be ratified only after 21 sitting days have passed since it was first presented to parliament, but the government has the power to push ratification through in a single day.

Given the sizeable Conservative majority of 80 in the Commons, we can assume with a high level of confidence that any deal put before Parliament at this stage would be passed.

The EU system of ratification will take longer. Once a deal has been agreed, the European Commission (which has negotiated it) will recommend that the European Council approve the deal and set out its opinion on whether the final deal is a ‘mixed agreement’ or not. The European Council is the EU’s supreme political authority made up of the heads of state or government of the EU member states, along with the President of the European Council and the President of the European Commission. A mixed agreement is a trade agreement that also deals with regulatory issues or one that covers the oversight powers of each side. The UK-EU deal will not be a mixed agreement, meaning that as long as the Council approves the deal, it can pass without any separate approval procedures in individual member states.

After the Council approves the deal, it will be sent to the European Parliament. Like the UK Parliament, it cannot change or amend the deal, but it can veto it. However, any deal approved by the Commission and the Council is almost certain to be approved by the European Parliament.

After this approval, the Council must then confirm the agreement. As soon as this has been published in the Official Journal of the European Union (OJEU), the ratification process for a non-mixed agreement is complete.

How ready is the UK for the transition period to end?

The government has faced criticism for its post-Brexit preparations. The Business, Energy and Industrial Strategy (BEIS) Committee held evidence sessions on business preparedness for Brexit in early December 2020. Following the sessions, committee Chair Darren Jones MP warned that expected border disruption would lead to issues for imports and exports, with the food and manufacturing sectors particularly likely to be affected.

The treatment of the border between the Republic of Ireland and Northern Ireland is politically and economically complex, but a future arrangement has been agreed. Checks will not take place at the Irish border. Instead a new “regulatory” border between Northern Ireland and Great Britain (England, Scotland and Wales) will be introduced. Northern Ireland will continue to follow many of the EU’s rules, meaning that lorries can continue to drive across the NI/RoI border without having to be inspected, but some checks on goods moving between Great Britain and Northern Ireland will be required.

Some sectors face disruption regardless of whether a deal is reached or not. Most issues affecting the services sector, such as market access, are unlikely to be included in a trade deal. Most large firms have already sought to offset this risk by moving headquarters or establishing operations within EU. UK financial services currently benefit from the ability to ‘passport’ into the EU’s single market, which allows them to sell funds, debt, advice or insurance to clients across the EU unimpeded, as if they were domestic, rather than foreign, businesses. This ability ends when the transition period ends. Disruption caused by the end of passporting will be limited if the EU formally states that the UK has regulatory equivalence with the EU. This would allow British firms to serve EU clients if Brussels deemed British regulations to be closely aligned with its own. This system is more limited than passporting and can be revoked by the EU with 30 days’ notice. The process for approving an equivalence agreement is separate from the trade negotiations and is unilaterally decided by the EU.

The movement of data across borders is also key to the trade in services. Whether EU-UK transfers will be allowed is subject to the EU declaring that UK data regulations are equivalent to EU regulations. This decision is separate to the agreement of a trade deal and has not yet been made.

An agreement has also not yet been reached on whether to continue mutual recognition of professional qualifications (MRPQ). An agreement could make it easier for UK service providers to continue operating in the EU (and vice versa) and remove the expense of securing new qualifications or recruiting appropriately qualified staff. If a deal is not agreed the UK and EU member states could decide to unilaterally recognise each other’s professional qualifications or provide streamlined routes to re-qualification.

Can the transition period be extended?

There is no legal basis for extending the transition period, as the deadline for doing so passed on 1 July 2020. It is technically possible that, if both sides agreed, an extension of no more than a few weeks could be arranged through international law, though this is highly impractical. It is, therefore, a very unlikely outcome.

What could a deal look like?

Both sides have sounded more confident that a deal can be struck in recent days. Ursula von der Leyen, President of the European Commission, told MEPs on Wednesday 16th December that “there is a path to an agreement now”, albeit a narrow one, with Boris Johnson echoing this sentiment in meetings with MPs. A deal primarily affects the goods and manufacturing sectors. The key part of any deal will be the tariffs and quotas system. Both sides are aiming to continue the current tariff- and quota-free trading relationship, and this is the most likely outcome if a deal is agreed. The UK and the EU are looking to negotiate an agreement that would include measures to simplify customs procedures as far as possible.

A deal would still involve some level of customs checks at borders. However, these could be much simpler than in a no-deal scenario. Full regulatory controls on medicines, chemicals and industrial goods are likely to apply, as in a no-deal scenario. A mutual recognition agreement could be included in the trade deal to partially offset this regulatory burden, but compliance costs are likely to increase regardless.

What would the impact of a no-deal Brexit be?

The UK would begin trading with the EU on World Trade Organisation (WTO) terms, meaning that ‘most favoured nation’ tariffs for all good and services will be in place, replacing the current tariff-free arrangement. This is also referred to by the government as an “Australia-style deal”.

For most goods, the tariffs charged by the EU are not significant, but some sectors are at risk of considerable disruption. Agricultural goods and food face regulatory hurdles and additional tariffs as does the automotive sector, where car imports face an EU tariff of 10%. All goods would face greatly enhanced border checks, increased compliance costs and increased time for goods to reach their destination. The absence of mutual recognition agreements would mean that businesses would potentially have to certify their goods on both sides of the UK–EU border. This would lead to significant costs in particular for the chemical and pharmaceutical industries. Amid the Covid-19 pandemic and rising unemployment, the political implications of disrupting food and medicine supplies into the UK could be severe for the government. A Cabinet Office “reasonable worst-case scenario” document published over the summer set out a strategy for coping with the event of a no-deal Brexit during the Covid-19 pandemic, which includes the possibility of significant disruption throughout the UK. This is a scenario which the government will be extremely keen to avoid. Disruptions or shortages of food, medicine or other essential supplies during the pandemic would severely harm the government’s reputation domestically and abroad, as well as compounding the economic damage which the pandemic has already done.

A no-deal situation is by no means permanent. A deal could be struck with the EU at a later date and the UK hopes that the signing of new trade deals with other major economies in the future will offset the immediate Brexit impact and provide new opportunities for British businesses. The UK has signed 29 agreements covering 58 countries or territories that will roll over the trading relationship the UK had while it was an EU member. Additionally, a new trade deal has been signed with Japan. These deals are intended to mitigate the impact on non-EU trade and the UK government will look to sign new trade deals with major economies as soon as possible.

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Roundtable: DD in the post-Covid era

This roundtable was originally published by Real Deals and features WA’s Head of Investor Services, Lizzie Wills. Please find the original here.

The Covid-19 pandemic has certainly changed the way we work, and this is no different for private equity managers and their DD providers. While technology has hugely assisted remote working, what hurdles are in the way of managers’ DD of potential targets? What can and cannot be done remotely and how has PE firms’ approach to DD changed in the post-Covid world? A group of industry experts discuss.


Lizzie Wills director & head of investor services, WA Communications

James Prebble co-founder & director, Palladium Digital Group

Matt Farnsworth technical director, sustainable business, ESG & transaction advisory, RPS Group

Chris Goodall founder, CG Consultancy

Paddy Woods Ballard partner, Fairgrove Partners

Andrew Ferguson partner, Baird Capital Partners

Bernard Dale managing partner, Connection Capital

Moderator Talya Misiri, editor, Real Deals

In a recent Real Deals roundtable, experts from across the industry discussed the evolution of due diligence, the shift in manager focus on DD pre-deal in a post-Covid era and what will be the new normal DD agenda.

How has the pandemic changed how DD is carried out? What can and can’t be done on a desktop? Which types of diligence can only be done properly in person? Andrew from your perspective, what has continued at Baird and what challenges have you faced?

Andrew Ferguson: We’ve made five investments this year, three of which were top-to-toe completed in lockdown, in a virtual environment. And I would say, in many respects, that the diligence process is pretty similar to what it was pre-Covid. The industry has adapted very quickly using the technology tools available to it. Virtual data rooms and various video conferencing facilities. I think we’ve had to evolve fairly quickly to become highly effective in a remote environment.

Pre-Covid, the industry had evolved a very sophisticated approach to diligence, linking to the key business activities, risks and mitigants and market drivers of the target company and I don’t think that will change. The DD process and considerations have remained largely unchanged in our experience.

The key challenge for PE has been how you build a relationship with a team and how you understand them in this virtual format that we’re now having to operate in. But, on a more positive note, the ability to access video conferencing platforms has facilitated, in our experience, more face time.

Bernard Dale: I think on new deals, what we’re finding is that the expectation that change is coming in the Capital Gains Tax regime, combined with the reduced ability to have face to face meetings with the advisor community, is really compressing the timetable at the early stage of an investment. That’s all doable, but you get left with a load of unanswered questions and not the bond of relationship with the management team that you want to have at exclusivity. So, we’re finding now that with some transactions, we’re really not as advanced in relationship or company knowledge as we would have been a year ago.

We said at the beginning that we were never going to make an investment without meeting the management team. I think we’ve become more comfortable with online meetings as time has gone by, though it is still a prerequisite for us.

The interesting thing about the DD is I don’t think it has changed, but what has changed is the way it is done. Typically, if you were undertaking a financial or commercial DD exercise, you would have a huge day-long meeting with the management team, go away with a pile of paperwork and then as you compile the work, you would pick up the phone to follow-on. Now, some managers are having fixed daily meetings with management and it has created a more efficient process for all involved as a more exploratory approach is being formed to suit the access constraints, with the process becoming a little more collaborative.

Post-Covid, how will the DD process change? What types/ areas of DD are managers putting the most emphasis on and how has this changed? Has the uncertain landscape meant that DD is taken even more seriously?

Paddy Woods Ballard: In terms of what people are interested in in this post-Covid world is firstly, how Covid has impacted the productivity of firms and firms’ ways of working? Secondly, we’ve also spent a lot of time looking into firms’ customers and their endsector exposure. If businesses have exposure to hospitality or retail or travel, for example, you really need to understand how those end-sectors may evolve.

We’re also doing more modelling work. Thinking through if different scenarios take place, how the business will evolve. We’ve also spent more time working with businesses that haven’t had a management plan together and off-market deals.

In terms of the process, the move to communicating on Teams and Zoom, etc. has been very effective and I reiterate the point on the quantity of management calls and meetings that we’re having has helped the process in a number of ways. The bit we do miss out on, however, is assessing the culture of a business, it’s harder to do this virtually.

Lizzie Wills: Understandably, investors have been turning to us over the course of the pandemic to get clarity on what the government is doing in terms of business support schemes, and its likely fiscal response in the short and longer term. We’ve been supporting investors to think a bit further down the line than they may have done previously about what the Government’s response will look like, and what the implications for the UK’s economic performance might be. Clearly this will impact existing portfolio businesses, and the sectors investors are looking to make acquisitions in.

It has been difficult as things have been moving so quickly, but the value that we have been able to add, in addition to gathering and synthesizing the masses of information coming out of Westminster, has been in helping firms to take a step back and look at the longer-term implications of the Covid-19 pandemic on government decision making. Helping investors scenario plan in a thoughtful way and making sure they understand all of the different political dynamics affecting their investment decisions has been where we’ve been most invaluable.

As a result, I think political DD is going to become even more important over the next few years and particularly in the next few months as we start to unpick what the pandemic has meant for the economy and specifically for the investment environment in the UK.

James, on the digital DD side, how have the types of questions managers are asking DD providers changed? What exactly are they asking?

James Prebble: It really depends on the digital maturity of the business. We’ve seen a lot of ecommerce deals over the last 4-5 months, most of which have been done completely remotely, and the emphasis is on either the benefit or downturn in revenues due to Covid. So, the question that gets asked the most on this is “the benefits that I’m getting in reduced cost of customer acquisition, or the traffic bumps that I’m getting, the spikes that I’m seeing in sales, are they here to stay, is this the new norm or is this something that I have to factor in as a short term boost?”

We haven’t had enough time to see whether or not that curve has flattened out or whether that improvement is here to stay. So that’s been very difficult for investors to get their head around.

Conversely, the other thing we’ve been asked to look at a lot is almost like a mini-diligence post transaction. We’ve had investment managers ask us to look at assets and see whether it can trade through this period, whether it is as digitally mature as thought, can it scale its digital operation as it’s gone Conversely, the other thing we’ve been asked to look at a lot is almost like a mini-diligence post transaction. We’ve had investment managers ask us to look at an asset and see whether it can trade through this period, whether it is as digitally mature as thought, can it scale its digital operation as it’s gone from being a small part of a business to the entire part of a business. Trying to understand whether their infrastructure can be scaled and if it can support increased competition in a digital space, or jumping on some of the opportunities that have been created from Covid.

Finally, there have been a lot of requests around future scenario planning. Such as: “Should traffic fall to previous levels, what does that mean for my business? Should the advertising space harden up, how much will it cost for me to acquire customers and is that sustainable? How defensible is my position?” This has been a little different to normal where we might look a bit more forward in time. That has been an interesting development.

Have any new areas/ sub-sectors of DD or new considerations in the DD of a business emerged from the anxieties caused by the pandemic?

Matt Farnsworth: What we saw pre-Covid was a general sway towards ESG matters. There was a steadily increasing focus on ESG and the impact that business has on the environment and society as a whole.

What we’ve seen throughout Covid though, are significant impacts on staff welfare, supply chain risk, climate action and internal governance matters. So, to complement the discussion about the governance of a business, not to mention the financial sustainability of a business and its viability, you’ve got to question, is the business model right in the first place? There’s more focus on that. We’re seeing investors wanting to get a much better idea of a company’s ESG procedures, its approach to risk mapping and its footprint.

Also, we’ve seen increased consumer pressures on plastic use, climate change, ocean waste and all of these issues have continued to intensify since the outbreak of Covid. As regulators and consumers drive forward the agenda, we’ll see increased investor focus on ESG going forward.

Chris, perhaps you could give your opinion on which areas of DD have taken a back seat or which sectors you think are proving more challenging for GPs?

Chris Goodall: We’ve had a number of tech DD assignments over the years in the travel sector, so I was surprised that we’ve also been involved with two during this period. The focus has been around assumed bumps in terms of Covid with more in-depth revenue and fiscal analysis. But, parking that to one side, can the target’s tech deal with those flexes in volume and traffic and being able to analyse the underlying technology to ensure that ideally it is cloud-based with some sort of flex in place to be able to cope with the fluctuations.

And Andrew, are there any sectors that are difficult to diligence remotely or are any types of DD taking a back seat at the moment?

Ferguson: Back to my earlier point, I think the issue with diligence is not so much the process, because the industry has adapted very quickly and there is no real drop in quality from providers. The bigger issue for me is the mediumto-long term implications of Covid on the targets that we were looking at.

The basic premise of diligence is that you start with a management’s business plan and the diligence is to test assertions, identify the risks and mitigants. Covid has added a new layer of risk and uncertainty to the process. That uncertainty can take a number of different forms. It might be the operations of a business, and its working patterns, additional costs, etc.

There will be winners and losers from the pandemic and finding out where companies will be by 2022/23 provides an additional challenge for the industry. For people-based businesses, the impact that Covid is having on their culture and workforce is unknown at this time. How we’re going to diligence this is an area of focus.

Prebble: To reverse the question, rather than what areas have taken a back seat, but rather those that have come to the fore. One of the most interesting findings is that in some respects it has been a busy time for us, as it has parachuted all elements of digital to the forefront of conversation. A few years back, we might have heard from an investment manager that “it’s not a particularly digital business, so we don’t need to worry too much about its digital footprint”, but this has changed. Now, the question is more like “we’ve got a financial services business that we’re looking at, professional services businesses, care homes, recruitment companies, etc”, and all of a sudden the question is “what role does digital play and how could digital play a role in this business?”. Subsequently, can a business be looked at from a digital lense.

Goodall: Adding to James’ point, we’ve worked in a distributed way in our business for 10-15 years with people spread out across Europe and this has been the way of working for a long time for us. But, what I’ve seen, certainly in the businesses that PE firms are investing in is that they’re adopting more agile processes. This includes recognised industry standard ways of working with teams, allowing for collaboration between small sets of teams within the organisation, it helps with the communication and companies have adopted new processes to keep teams connected.

Lizzie, from your perspective, how have the types of questions that you’re being asked changed and what exactly are they asking?

Wills: Unsurprisingly, the big questions we’re getting at the moment are what the impact of Covid is going to be on government decision making and in particular on its fiscal priorities. Given the Budget we were expecting at the end of the year has been cancelled, Government has bought itself crucial extra time to decide exactly what its approach to tax and spend is going to be – it’s also meant things like the expected changes to Capital Gains Tax have been pushed back, which has been a relief for a lot of investors, as the Government’s plans for CGT and carried interest have been a topic we’ve received a lot of questions on.

We’re also getting trickle down questions relating to Covid, and how that impacts the political agenda that we were expecting to play out over 2020/21. Irrespective of the government’s immediate policy response to tackling the pandemic, what does it mean for the mechanics of Government decision making? What are the knock-on effects on the Brexit negotiations? How does this affect the domestic policy agenda and what is or isn’t now being prioritised for delivery? How do these macro political agendas affect the sectors that PE is looking to invest in, and how well does the government’s longer term fiscal agenda support the investment environment?

Because the political and economic landscape is shifting at an unprecedented rate, many of the questions we are being asked are much more macro than they have been in the past. We’re still being asked to look at the technical, political and policy aspects impacting a business, but those bigger dynamics and how they interact and impact the macro picture have become that much more important to the investment thesis. And firm conclusions are clearly very difficult to come to in the current landscape. So, it’s about helping investors with detailed scenario planning and analysing what it means for their investment strategy.

And Matt, what types of questions are you getting around ESG? How has managers’ sustainability agenda or ESG considerations changed?

Farnsworth: I think there’s been consistency throughout this period. The questions that were being asked pre-Covid remained throughout. However, now there’s more focus on management procedures and culture and it’s well known that strong governance within a target business can be an excellent indicator of how successful a target will ultimately be.

There’s also been an increase in questioning around health and safety and staff welfare matters. As you’d expect with people being furloughed, there can be mental health issues to consider, as well as the obvious supply chain disruption that has accompanied the pandemic. So, putting these together, firms are examining how these ESG matters are impacting overall business performance.

When doing DD now, what types of Q’s are you asking?

Dale: In terms of DD priorities we’re definitely wanting to ensure a high level of cash headroom, but we are still wanting answers to the impossible question “Will the company hit its forecast?”. My first boss in PE said to me “forecasting is very difficult, especially with the future” and that is even more difficult than normal today, due to Covid! You have to come back to the big picture fundamentals of: How good is this team and fundamentally is this a business that is at a crucial place in its market environment; is it a business that’s product or service has to be used and therefore has some strategic value, or is it a business that is consistent and solid in cash generation without differentiation. These can be impossible questions for DD firms to answer, but we’ll ask them anyhow as the process of thinking about this is very useful in developing the strategic agenda.

Woods Ballard: Building on Bernard’s point, a key question is how is a business differentiated? We usually get the answer to that from customer interviews; to hear it from the customer why they work with this particular business and what makes it really stand out. This goes to the heart of good commercial DD.

What about the timing of DD, are managers beginning DD processes earlier? Are there certain types of DD that are being considered earlier or later in the deal process?

Prebble: I’m sure that all of us would say that diligence has never started early enough! I can only speak from the digital and tech perspective, and I would say there was probably a shift before Covid. I think there has been a maturing of the community at large and the tendency for most managers to lead with a tech-led business or tech-enabled to sharpen the focus.

I think financial, commercial and legal will always be a priority as they are extremely important to the process and to make sure everything is in order there. Certainly, we’ve seen digital coming in earlier, with time frames elongating slightly for us as we’re coming in at around the same time that commercial DD is starting. This is because tech DD can be a complement to commercial DD and can assist on the data front. So that has become a consideration earlier in the process. This is not across all assets, it depends on the vertical, but certainly in education, healthcare and financial services; it’s definitely coming earlier in the process.

Wills: To echo James’ point, I think it’s a sign of the maturity of the market that DD is being done much earlier on. It is certainly something that we’ve seen from the political and regulatory side in the last few years that we’re being brought in almost at the beginning of the process.

Something else we’ve seen in the last 2-3 months as the M&A market has got back on its feet is the need for short, sharp top-up pieces of work to follow on from larger pieces of DD that we did in Q1 of this year. We’ve been then asked to do a couple of weeks’ work to help investors to understand whether there have been any fundamental policy or regulatory shifts as a result of Covid, and whether the conclusions drawn in January and February this year have changed as a result.

And is Brexit being considered? Has this taken a back seat?

Dale: The really scary point for me is if Covid wasn’t around, how much attention would we be paying to Brexit? At the moment, I’m not even thinking about Brexit, I’m thinking about Covid, which is quite a concerning position given its imminence and potential impact. Now, clearly, when you’re looking at an asset that is directly affected [by Brexit] then you would do something about it, but overall it probably is something we haven’t put enough thought into as an industry.

Wills: It’s interesting as Covid has completely overshadowed everything including Brexit. If you think about how it was being considered in February in comparison to the rest of the year, it’s as if Brexit has completely been put on the back burner. Then, it got to the end of August/ early September and suddenly people began to ask about Brexit. That’s been true right across private equity.

The introduction of the Sustainable Finance Taxonomy and Disclosure Regulation will affect a number of financial market participants over the next few years. How are firms responding to this in the marketplace? Has this also been overshadowed?

Farnsworth: We’ve seen an uptick in interest in our sustainable finance services, with investors continuing to make sense of what it means for their existing due diligence procedures and ESG risk management processes.

The Taxonomy Regulation doesn’t fully kick in for over a year. But other aspects such as the Disclosure Regulation will impact financial market participants sooner, from March next year.

Some are picking up the pace on that and certainly on the due diligence front, active funds are looking at longer term ESG performance monitoring and how changes can be introduced to more effectively engage during stewardship.

Outside of financial markets, a fair few aspects of ESG management will be affected, we believe. We’re seeing forward thinking corporates and industries starting to integrate ESG in a more formal way. This has been largely driven by pressure from banks and investors, which has led business management teams and their CEOs to rethink how they structure and approach corporate sustainability within their organisations.

Will a GP ever ignore a supplier’s recommendations and what does that mean for future relationships?

Woods Ballard: Sometimes recommendations you make as part of a DD might not be time critical or there might be elements to the recommendation that are outside of a GP’s control, so they won’t necessarily act on the recommendations there and then. For example, if you say this bolton would work really well with the target asset, that could be a longerterm recommendation, so obviously that may not happen immediately.

Also, areas where there may be conflicts are on sell side DD. Occasionally if management’s plans are too aggressive and we analyse them and talk to customers and cannot justify these plans, these may have to be reassessed. That’s possibly an area where you may have a difference in opinion between the CDD provider and client.

In this market, is it possible or more likely for different streams of DD to arrive at conflicting conclusions? How should managers assess this?

Goodall: Generally, we’ve always had some points that are raised where there is almost a debate around those. There are some key red flag items that you’d expect to be addressed, and there’s normally not any discussion around those. There’s probably some vagueness around the lower prioritised recommendations in the 100 day plan, where we try to work closely with the deal team to give some background around why those recommendations were there in the first place. But, 9 times out of 10, most of the recommendations in the 100 day plan are acted on, so we don’t generally see that as a blatant disregard for what we say, but it can happen. As long as it’s accurate information, I think that’s the important factor.

As our current environment is evolving at pace, what if the wrong conclusions are drawn? Should precursors or additional agreements be made to remove liabilities for incorrect diligence, predictions or assumptions?

Wills: Given the nature of the work that we do, we always provide our reports on a non-reliance basis. And that has always been completely accepted by the firm that is commissioning our work.

I think there is an understanding that when you are interpreting and analysing human behaviour, decisions and choices in a very fast moving environment, there is no way you’re ever going to be able to guarantee what things are going to look like in 5 years’ time. You need to help businesses get comfortable with the level of uncertainty, rather than trying to provide a concrete forecast.

Prebble: Similarly, everything we provide is on a non-reliance basis. We don’t have a crystal ball and we can’t see the future. We can only draw conclusions on the data that’s available. When we’re dealing with analytics and data points, you can get a little bit more comfortable on the data, but subsequently, when you’re looking at market sizing or competitor dynamics or broader customer behaviour, you’re dealing with sample sets and you’re modelling from that.

Pre-Covid, post-Covid and many years before, I think everyone has been quite comfortable that PE firms are paying experts who know these environments to draw their conclusions and only on what’s presented to them and what’s available. There’s no absolute certainty and I think everyone is in agreement with that. And, as such, the PE firm makes the final call.

Ferguson: As the GP on the call, I would love for the DD providers to underwrite the future and underwrite my return to make life a lot easier. The worst thing that a diligence report can do is not form a conclusion, and anything that takes away the ability for a provider to make a conclusion from the work they’ve done detracts from the usefulness of that report.

At the end of the day, investment is a risk business, it’s based on judgement and the buck stops with the GP. So I think even in these risky times, the process remains the same and diligence providers are doing the right thing in forming their view. What the GP does with the diligence output is up to them.

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Governments can find multinational digital companies taxing, can the OECD find a solution?

On 12th October 2020 the Organisation for Economic Co-operation and Development (OECD) released the details of a revolutionary global corporate tax plan designed to prevent tax avoidance by multinational enterprises (MNEs). It is the fruit of a collaboration between 135 countries under the direction of the OECD, an organisation representing 37 developed economies. It could transform how businesses pay tax and create a more level playing field for MNEs’ competitors.

Globalisation and the internet have radically changed taxation

As nations have grown economically closer, and digital transformation and ease of trade erodes the need for physical headquarters in each territory of operation, it has become easier than ever for companies to avoid tax. They can do so by shifting profits to low tax jurisdictions where they are legally headquartered. The OECD wants to boost governments’ ability to collect taxes from MNEs by changing global tax rules so that companies are no longer simply taxed depending on where they are based.

The OECD wants a global tax regime for corporations

The proposed rules fall under two separate “pillars”, both of which would only apply to businesses with revenues over €750mn. Pillar 1 is designed to prevent companies from paying very little tax in country A, even if they make vast revenues there, by moving profits to country B where they are headquartered. This is an accusation which has been levelled at companies from Amazon to Starbucks in the UK. Under the proposals, rather than profits only being taxed in country B, a portion of MNEs’ profits would be taxed in country A based on how much of their revenue they make there. This pillar would apply to companies providing “automated digital services” and to “consumer facing businesses”, the latter being everything from food retailers to consumer electronics businesses.

Pillar 2 is designed to stop MNEs being taxed at very low rates overall by effectively applying a global minimum tax rate. If a company pays very low corporate taxes because it is registered in a tax haven, jurisdictions where its subsidiaries are based would be permitted to collect taxes up to the global minimum.

The proposed rules may struggle to achieve political agreement

The group of 135 nations collaborating on this plan described the proposals as a “solid basis” for future rules, which is international organisation jargon for “we haven’t actually agreed anything yet”. Many issues remain outstanding, including what the global minimum should be and what proportion of profits should be shared out globally based on revenue location. Perhaps even more importantly the US has proposed that the Pillar 1 requirements should be optional, something which the UK and France are against. With Joe Biden now confirmed as the president-elect, global politics could be about to see a fundamental change. However, agreeing such a comprehensive change to global tax rules is unlikely to be easy, especially as many digital companies such as Amazon and Facebook are based in the US.

If they are implemented, they will have a big effect on MNEs and their competitors

What would the implications be for business if the politicians can reach agreement? For MNEs this is likely to mean additional regulatory burdens, as well as possibly an additional tax bill. However, the lack of tax paid by digital service companies has spurred numerous European countries, including the UK, to institute or propose digital services taxes on the revenues of online businesses. Compared to these unilateral taxes, both the OECD and companies including Facebook argue that a global tax would provide certainty and stability. It would also prevent trade wars resulting from unilateral action, which could cost more than 1% of global GDP according to the OECD and which would largely affect MNEs.

For competitors to MNEs, such as department stores like John Lewis who compete with multinational online retailers on everything from electronics to clothing, a global tax minimum would be a breakthrough. It would reduce the advantage MNEs get from minimising their tax burden, creating a more level playing field and a fairer and better functioning market.

Implementing what is effectively one of the first global taxes is unlikely to be straightforward but these changes would benefit most businesses, as well as, crucially, the public purse. As we reach the stage of political negotiations and these rules get closer to reality, MNEs and their competitors should be prepared to show they are listening to the concerns driving the rules and develop strategies to work with individual governments, including in the UK, on the implementation of the rules.

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What the delayed Budget means for investors

Last week the Chancellor Rishi Sunak announced that the Budget, due to take place in either late November or early December, was being postponed due to the economic uncertainty caused by the increase in cases of Covid-19. While no new date has been set for the Budget, it is now likely to be held by the end of March 2021. Crucially for the investment community, this means another six months before business taxes, including Capital Gains Tax (CGT), potentially go up.

The postponement of the Budget is useful for Rishi Sunak, giving him more time to assess the state of the economy, before setting out his plan to repair the public finances, but it is just as useful for investors. The extra four months allows them to take advantage of the current tax regime when planning their short-term investment and exit strategies.

The Chancellor has made an important political decision. Debt repayment is – for the time being at least –  manageable, and aggressive tax rises will damage whatever economic recovery is underway. He’ll be disinclined to introduce sweeping tax increases across the board to address the deficit while this remains the case. However, he needs to give some red meat to the more fiscally conservative parts of the party, and that means Sunak may make a calculated decision to introduce targeted tax increases to begin the process of putting the country’s finances on a more sustainable footing.

A rise in CGT is a likely candidate. Prima facie, a rise in business taxes flies in the face of traditional Conservative neo-liberalism, but the party has painted itself into something of a corner by promising in its last manifesto not to raise personal taxes (income tax, National Insurance and VAT). The idea of abolishing the triple lock on pensions has also been stamped on by No.10, so the Chancellor’s room for manoeuvre is limited.

Capital Gains Tax

Should the Budget have gone ahead this autumn, investors would have only a very limited time period in which they could have disposed of assets without being subject to a new higher rate of CGT. While the Chancellor’s plans for CGT have not been finalised, there is the possibility rates could be increased in March so as to achieve parity with income tax bands, representing a significant increase in the tax liability for investors. Even if the Chancellor does not opt for parity with income tax bands, the likelihood is that CGT will increase. The delayed Budget has opened a window of opportunity for exits to take place ahead of the planned increase in CGT, providing considerable tax benefits to investors.

Over the longer-term, changes to CGT are also likely to have implications for carried interest payments. Currently taxed at 28%, any increase in CGT will bring tax rates for carried interest closer to income tax bands. While the timing of the Budget makes little difference to this issue, the six months in the run-up to the next Budget will afford investors the time to plan their tax affairs accordingly in line with a new higher rate of taxation.

Buy-to-let market

The increase in CGT will also have an impact on individual sectors. In particular, the prospect of increasing CGT in spring 2021 could motivate a sell-off of buy-to-let assets. While the housing market remains buoyant, house prices increased by 5% in the year to September 2020 according to Nationwide, the same is not true for rents. Hamptons International forecasts rents to fall nationally 1% this year and next, with London set for even greater reductions.

The delay to any increase in CGT will mean property owners can potentially take advantage of a housing market inflated by the Stamp Duty holiday while avoiding more punitive taxes down the line. Investors, however, will have to act quickly, with many property agents reporting that they are operating at full capacity, causing a lengthening of the time it takes to complete transactions.

The postponement of the Budget has given both investors and the government time to think. With the economy having been through one of the most tumultuous periods in living memory, there is little chance of things returning to normal any time soon. But for six months, things are staying as they were (fiscally speaking at least), and investors should use this time wisely.

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The Winter Economy Plan explained

Chancellor Rishi Sunak has this afternoon delivered his Winter Economy Plan to the House of Commons.

In response to the recent rise in Covid-19 cases and the introduction of new restrictions expected to last for the next six months, the Chancellor cancelled the planned autumn Budget and instead made a short statement on the government’s immediate plans to support jobs and the wider economy over the winter. Before the statement was delivered in Parliament, Sunak was pictured outside No. 11 with the heads of the CBI and the TUC, signalling this was a set of measures that had the endorsement of both businesses and workers.

The decision to cancel the Budget, which would have included details of the government’s long-term fiscal recovery plan, was only made over the last few days. Today’s announcement reflects a recognition that the potential impact of a second wave of Covid-19 has made longer-term economic planning difficult and the government needs to take a flexible approach to the economic challenges ahead. The government has today taken the opportunity to act quickly to prevent a sudden increase in unemployment following the end of the furlough scheme in October and instead allow for a more manageable increase in unemployment.

Officially the government is still aiming to publish a multiyear spending review before the end of the year that would set out departmental budgets until 2024. However, a more likely scenario given the economic uncertainty is for the government to publish a one-year settlement to allow departments to plan for 2021/22. It is expected that the next full Budget will take place before the next fiscal year, likely in March 2021.

The main elements of the Chancellor’s Winter Economy Plan are:

The expected value of the package announced is around £5 billion, leaving the government with more firepower to support the economy should Covid-19 restrictions become more severe. Anneliese Dodds, the Shadow Chancellor, said it was “a relief” government had U-turned on the need for more support for workers but criticised the government for not acting soon enough. Paul Johnson, Director of the Institute for Fiscal Studies, has also warned that the limits of the new Job Support Scheme mean that the UK will see a large rise in unemployment over the winter.

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Private equity – How to win friends and talk to government

Benjamin Franklin said: “It takes many good deeds to build a good reputation, and only one bad one to lose it.” There is truth in this for the private equity industry; much of its socially valuable contributions go largely unnoticed while its missteps are widely publicised and serve to tarnish the sector’s reputation. One need look no further than the Financial Times or The Telegraph (two publications not known for their hostility to free enterprise) to see regular criticism of private equity and the way it does business, especially its leveraged approach to buy-outs.

A recent Due Diligence column in the FT is a classic of the genre, setting out the regular critique of private equity in a discussion of the potential sale of The AA: “they buy companies, leverage them up, pay themselves juicy dividends and leave their targets over-indebted and far too vulnerable to the slightest shock, with little room for error.” Despite this somewhat crude account of private equity business practices, it has had cut through into the political sphere – although more so in the US than the UK. But where the US goes, the UK quickly follows.

Political criticism

In the United States, Senator and former presidential hopeful Elizabeth Warren last year set out her Stop Wall Street Looting Act 2019, which squarely took aim at the private equity sector and many of its business practices. Included in the Act were 100% taxes on monitoring and transaction fees and bans on dividends for two years after a transaction, as well as forcing PE funds to share responsibility and liability for a target company’s debt and closing loopholes on carried interest. While the Act was not passed into law, the fact a serious presidential candidate proposed an all-out assault on the private equity industry demonstrates the strength of feeling with US politics.

In the UK, there has been little criticism of private equity from mainstream politicians, but Covid-19 and the increased scrutiny of businesses that will accompany the economic recovery could change this. In February of this year, criticism of private equity came from an unlikely source in the form of Guy Hands, founder of Terra Firma. Speaking at a conference on alternative investments, Hands claimed the industry was too insular and said that rather than caring about improving companies and creating jobs, instead “We tended to only talk about ourselves – the funds we raised and the pay cheques received.”

One might think if private equity has friends like these, who needs enemies? Fortunately for the sector, it does not have any high profile political detractors in the UK, yet, and crucially, private equity does have some friends within government. When it emerged that private equity-backed firms would be excluded from the CBILS and CLBILS schemes because their leveraged financial structures meant they fell foul of EU state aid rules, HM Treasury lobbied hard for exemptions for private equity-backed firms. Despite the Treasury being largely unsuccessful (exemptions were granted for smaller firms), its efforts show there are those in government who understand the value of private equity to the economy.

Managing the problem

To a large extent, private equity’s wider reputation problem is the result of availability bias. People, including politicians and policymakers, have a tendency to think that issues that come easily to mind occur more frequently than they do in reality. Private equity only makes it into the mainstream news following a high-profile business failure (often a distressed asset to begin with), while its successes are buried in trade publications or celebrated at industry awards evenings. As such, when influential people from outside the world of private equity come to form their views, they are much more likely to take a dim view of the sector as these negative stories come to mind much more easily.

Fortunately, private equity still has the opportunity to change this perception. With a significant number of businesses requiring injections of equity, and private equity sitting on a large amount of dry powder, the industry can play a key role in ensuring that many businesses can survive the downturn and become profitable once again. However, there is a risk this type of action could be branded as ‘vulture capitalism’ with private equity firms charged with sweeping up assets when they have no choice but to sell.

To mitigate this risk and demonstrate the value of private equity to the wider economy, private equity needs to make its case to government that it is a force for good. At a fundamental level, this would involve making clear to MPs and those within government what private equity brings to the table and the motivations behind its business model. Beyond this, the industry should explain to decisionmakers the vital contribution private equity has made to economic growth and building British businesses, and that the sector is responsible for the employment of millions of people. As the economic crisis begins to bite, private equity can use its resources and position to recalibrate its reputation. But it will have to do this quickly; a failure to get on the front foot is only likely to result in a solidifying of the sector’s already mixed reputation.



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Distressed hospitality: What investors need to be thinking about

With high street names such as Café Rouge and Byron Burgers entering administration, investors will be weighing up their options and trying to understand whether there are bargains to be had.

High street restaurant chains were competing in a crowded market before the onset of the Covid crisis, and lockdown has tipped a number of firms into the red as they’ve struggled to access government support schemes. Over the long-term, investors will need to consider the extent to which the public’s appetite for high street casual dining will remain, particularly given the prospect of social distancing measures continuing for many months to come.

More immediately, there are three areas where government decision-making will have a significant impact on hospitality assets, which will need to be factored into commercial decision making by investors.

Commercial rents

Commercial rents continue to be a problem for hospitality assets, with lease agreements no longer reflecting the value properties operating under social distancing conditions. Many businesses have taken advantage on the government’s moratorium on commercial evictions and have been able to defer paying their rent, but this will no longer be a possibility from 1 October 2020 when the moratorium ends. From this date, businesses will either have to renegotiate their tenancies with landlords or start paying again if they don’t want to face eviction or winding-up petitions.

Further government interventions on the issue of commercial rents are likely, and it is one of HM Treasury’s top priorities, with Treasury officials especially concerned about wider contagion to the financial sector should the issue of firms not being able to pay their rent not be resolved. Options for the government include a subsidy scheme proposed by the British Property Federation and the British Retail Consortium. The Furloughed Space Grant Scheme would involve government grants to cover fixed property costs, with the level of subsidy determined by the fall in turnover experienced by a business. Action from the government in this area could be a massive boost to potential investors, as commercial rents are a significant burden for hospitality assets. It will need careful balancing by the government, but any reforms could be enough to put high street restaurants back investors’ menus.

Short-term measures

With Rishi Sunak set to make an economic statement tomorrow, measures to support the hospitality sector are likely to feature heavily in his attempt to kick-start the economy.

The government is increasingly concerned with protecting jobs as the furlough scheme is wound down and will be keen to save as many of the 3.2 million jobs in the hospitality sector as possible. Short-term measures could include a reduced rate of VAT for the hospitality sector as a means of stimulating demand, as well as a possible further extension to the business rates holiday for hospitality firms that is set to run until the end of the financial year in 2021.

Interventions of this kind will certainly be welcomed by the sector, and any reduction in operating costs will help stabilise a number of businesses. However, the big question mark for government is whether they are enough to persuade consumers who are concerned about the virus to venture out of their homes and start spending again. It could be that measures such as a VAT cut only end up helping customers who would have spent anyway, making little difference to overall demand and causing the government to miss out on much-needed tax revenue.

Longer-term support

Beyond the Chancellor’s economic statement, the government will carefully monitor the economic performance of hospitality businesses, and further economic support could be forthcoming in the autumn Budget should it be required.

This additional help could be in the form of reduced employer’s National Insurance Contributions or through wage subsidies for younger workers to help in the battle against unemployment. The government has won plaudits for its commitment to the economy since the start of the crisis, and investors may want to gamble that the Chancellor’s cheque book stays open. Going on the government’s actions so far, this might be a sound bet, but investors will have to judge carefully whether purchasing a hospitality asset is only viable if the government continues to offer the industry financial support.

Investors looking to get a taste of the hospitality sector face an unenviable task. Not only will they have to make a long-term prediction about consumer attitudes towards high street casual dining (during a pandemic), but also consider the extent to which the government will continue supporting the sector.

However, investors who take the plunge could get their just deserts. The market will undergo a long overdue natural thinning over the rest of the year and beyond and firms that can embrace new revenue streams such as online ordering and delivery could stake out a sustainable position on the UK’s high streets.



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On the front foot: How the insurance sector can tackle reform and reputation

With all aspects of the insurance market currently facing the twin challenges of reform and reputation, the sector should take advantage of the delays to Financial Conduct Authority (FCA) action to get ahead of future market intervention and launch transformational change.

Pre-covid, change was on the horizon

The FCA launched an investigation into general insurance pricing, focusing on home and motor insurance in October 2018. The investigation was launched following campaigning against practices in the general insurance market, culminating in Citizens Advice making a super-complaint about loyalty pricing to the Competition and Markets Authority (CMA). Concerns about treatment of vulnerable customers, in addition to the transparency of insurance premiums and the ‘loyalty penalty’, where customers face higher charges for remaining with their provider over the long term, were cited by the CMA and FCA prior to the launch of the investigation. The final report was due to be published in Q1 2020 but has been delayed, along with the majority of its open investigations, to “beyond June 2020” due to coronavirus. With the FCA planning significant reforms, insurers should use the extra time to adapt their business models to minimise the impact of the measures when they are eventually introduced.

On 4 October 2019, the FCA published the interim report of its market study into the pricing of home and motor insurance. The report concluded that customers who do not switch insurers regularly pay more for cover, but that many firms have introduced significant barriers to switching, suppressing competition in the sector. Interventionist remedies are likely to be on the way, with the FCA currently considering a ban on auto-renewal of contracts, alongside a requirement to put all customers on the best value plan available to them. Another option currently under discussion is limiting or banning margin optimisation, or only allowing new business discounts where the discount is transparent and fully removed after one year.

Intervention in pricing practices could have significant consequences for the insurance industry. Auto-renew policies in particular, where insurers’ pricing practices mean premiums are raised year on year at the point of renewal, are likely to be targeted. The consequences for the industry are likely to be a decline in renewal rates and margins; a reduction in customer renewal tenures; a decline in new business discounting; and a disruption of the broker market.

For insurers that can pivot to a business model based on driving new business, rather than retaining existing clients through current structures, the transition will bring opportunities to increase market share at the expense of more slow-moving players. However, the impact of coronavirus has also brought fresh challenges to the sector that will have to be addressed.

Covid is likely to compound the need for reform in the insurance sector

The coronavirus pandemic has led to widespread criticism of the insurance sector across multiple specialisms. With the FCA already clear that the sector was not working well for consumers, issues around miscommunication of business interruption insurance and travel insurance coverage will only serve to drive home that perception. While there is no suggestion the insurance sector is running outside the boundaries of current regulatory standards, questions are arising over whether the sector should be more tightly regulated than first thought.

The FCA is currently taking a test case to the Supreme Court to provide legal clarity on business interruption insurance. The FCA previously wrote to insurers in April explaining that it believes most business interruption policies do not provide cover for losses related to the Covid-19 pandemic. Its decision to seek legal clarity is likely driven by the extensive public criticism of insurers during the pandemic, and the number of businesses currently taking their own legal action. While it is likely the FCA’s instincts on the legality of insurers behaviour will be proved right, this is unlikely to exempt the sector from significant reputational damage, particularly as businesses continue to struggle with the economic effects of the pandemic.

The insurance sector should be mindful of the reputational challenges it faces

With legal cases and negative news coverage piling up, insurers are going to need to do more than simply restate the terms of insurance policies if they wish to avoid longstanding reputational damage to the sector. The ongoing debate over the legalities of denying business interruption insurance payouts to businesses is ongoing, however, the growing perception of the sector is increasingly of one that is not focused on consumers.

Insurers are aware of the mounting challenges. Two-thirds of insurers surveyed in May 2020 by FWD Research believe that the industry has damaged its reputation through its coronavirus response. The question now is what the sector can do about it. Coronavirus has exposed a significant expectation gap between insurers and their customers, compounded by a traditionally hands-off approach to customer service and auto-renew policies that require minimal customer engagement.

Preparation is key to minimizing the impact of change

The FCA has made it clear that it is willing to enact transformational reforms on the insurance sector that will dramatically increase transparency and, for some insurers, fundamentally alter the way in which they do business. While the coronavirus pandemic may have delayed the publication of the FCA’s final rulings, insurers should not take this as an indication that the FCA has lost interest and instead begin preparing now for the likely changes that will be enacted.

The negative media coverage during the pandemic is likely to focus political and regulatory attention on the insurance industry once again. Insurers should prepare now for more scrutiny going forward and should consider developing a targeted communications plan to demonstrate that they have listened to the concerns raised over the past few months, and what they will do to help lead change in the industry going forward.



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Connect Four: Choices for fiscal stimulus and what it means for investors

For an unabridged version of this article please visit Real Deals.

With the economy facing its worst crisis in generations and unemployment figures increasing at an alarming rate, the government is preparing a number of measures to help the economy recover. The Chancellor Rishi Sunak will deliver a ‘fiscal event’ in July, which will set out the immediate steps the government is taking to boost the economy. It is expected that a full Budget will follow in the autumn once the government has a better idea of which parts of the economy are in need of further support.

With rumours the government is considering a temporary decrease in VAT, we take a look at four potential measures the government could implement to kick-start the economy and what they would mean for investors:

A temporary VAT cut

Top among the Treasury’s options is a temporary cut to the rate of VAT. The thinking behind this move is that it could encourage a nervous public to start spending in shops, restaurants and pubs. The move would be good for consumers and investors alike, encouraging spending and increasing the revenues of firms hit hardest by the crisis.

The problem with the plan is that it’s expensive and it might not work. If people aren’t spending because they are scared of contracting or spreading the virus, a small adjustment to VAT is unlikely to encourage them to start spending. Also, the Institute of Economic Affairs estimated the government loses £7 billion of revenue for every percentage point it reduces VAT. That is a lot of revenue for the government to give up on a plan that could failwhen concerns about debt and the deficit are mounting.

Bringing forward infrastructure spending

Spending on infrastructure is a good old fashioned way to get the economy moving. Officials in Downing Street are keen to use the delayed National Infrastructure Strategy, worth around £100 billion, as part of an economic stimulus with them hoping to get projects started as soon as possible. This is positive news for infrastructure supply chain investors, as well as for those with assets in the north of England and Midlands where much of the spending is expected to be targeted to shore up support in seats won by the Conservatives in December 2019.

While infrastructure spending can help the economy recover, to do so, it needs to happen soon. However, large projects that will do the most to stimulate the economy are the most difficult to start quickly, often taking years to get off the ground. The government is searching for projects that can be completed in 18 months, but even these smaller projects will struggle with the twin problems that there is a shortage of skills for many of the jobs the projects would create and that the government’s own planning rules are making it difficult to start projects quickly.

Cutting National Insurance Contributions (NICs)

To try to prevent an unemployment crisis, the government is considering a cut to employer’s NICs, or more radically implementing a temporary NIC holiday where employers don’t have to pay NICs on newly hired employees. After employees’ wages, employer’s NICs are the biggest cost to firms, reducing this cost would make it cheaper for firms to hire new employees and keep furloughed workers on the payroll.

A cut to employer’s NIC would be popular with employers and investors alike and has been endorsed by the former Chancellor Sajid Javid. However, if the combination of social distancing requirements and Covid-19 induced changes to consumer behaviour means that millions of jobs don’t exist anymore, a cut to employer’s NICs will do little to stem the tide of unemployment. The UK’s labour market is flexible enough to reallocate workers in these non-sustainable jobs to new roles, but this will not happen quickly. Also, while uncertainty over how long we have to live with the virus remains, businesses will not know which jobs will be viable over the long-term.

Cutting Stamp Duty

An often criticised tax, Stamp Duty has been claimed to create friction in the housing market, preventing growing families move home and stopping older people from downsizing. By cutting Stamp Duty, Rishi Sunak would be able to offer a significant boost to the home moving sector which would in turn increase spending in other areas, as well as create a more flexible labour market.

Think tanks such as the Centre for Policy Studies and Onward have recently called for reforms to Stamp Duty, with the latter suggesting Stamp Duty should be abolished for all homes worth less than £500,000. Choosing to limit the Stamp Duty cut to homes valued at less than £500,000 would make sure that the benefit of the cut is aimed away from the most well off individuals and would limit losses to the Treasury. Such a cut would benefit investors involved in the housing market, as well as those with assets in the home improvement and retail sectors, given that home moving is a stimulus to demand in these sectors.

There are no easy answers for the Chancellor, but there are certainly changes that could be made to help individual parts of the economy. While some of the options available will be costly, the government is likely to take the risk given the current exceptional circumstances. The unfortunate reality for the government is that the one thing that would allow the economy to grow unhindered is for the virus to be completely contained, but there is little sign of that occurring any time soon.



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Under the microscope: M&A faces new post-Covid world

As most European countries appear to have passed through the peak of the coronavirus pandemic, governments have turned their attention to how to bring the economy back to life. It is becoming clear across all countries affected by the virus that one of the consequences of lockdown will be a wave of businesses entering administration or facing a fundamental restructuring of their operations.

Governments, ranging from populists in Poland and India to fiscal conservatives in Germany, are concerned that the number of businesses looking for new ownership will lead to foreign buyers acquiring assets in bulk. To tackle this, they have turned to protectionist policies to keep prospective buyers out.

Protectionist tendencies were becoming more common before the coronavirus pandemic

The economic policy response to coronavirus is likely to continue to vary significantly across the Eurozone and beyond. However, one emerging trend is the number of countries, including the UK, that are introducing legislation designed to increase scrutiny of M&A transactions on national security grounds. Primarily designed to exclude foreign buyers from purchasing assets of national importance while prices are lowered by the coronavirus pandemic, the wider effects of these laws may make cross border M&A a more complex task for all investors in the future.

The willingness of governments to intervene in M&A has been increasing in recent years. Australia and the United States have been particularly interventionist and have been hawkish on the issue of Chinese investment, both banning Huawei from helping build 5G networks. Although the UK to date has not blocked an M&A transaction on national security grounds, in recent years the Competition and Markets Authority (CMA) and UK government has scrutinised an increasing number of transactions on national security grounds involving various kinds of acquirer, including financial investors. Acquisitions of Cobham, Northern Aerospace and satellite operator Inmarsat have all been investigated by the CMA and the transactions approved. In all instances, the acquirer offered several legally binding assurances to the government before the deal was approved.

The government is taking rapid action to protect strategic industries

Here in the UK, Boris Johnson, Rishi Sunak, Alok Sharma and Dominic Raab are currently developing new legislation that would make it easier for the government to intervene in M&A transactions on national security grounds. In the short term, amendments will be put forward to protect UK assets during the coronavirus pandemic, however, a more detailed plan for a new, more interventionist takeover system is being drawn up and will be presented to Parliament before Summer recess.

Two new proposals already tabled in Parliament will make it tougher for foreign buyers to acquire any assets related to the nation’s healthcare self-sufficiency and, separately, artificial intelligence and other tech. One amendment would drop the £1 million revenue threshold currently in place for screening takeover targets in AI and other areas that pertain to national security. This would allow the government to intervene in the takeover of loss-making start-ups developing medicines or technology of national interest. The other amendment will widen the government definition of sectors critical to national security to include the food and drink sector for the first time.

Crucially, neither of these amendments specify what kinds of investors will be targeted under the new legislation. While concern may rest primarily with state-owned buyers, investors should be mindful that the CMA has instigated action against several US funds in recent years, including in the sale of Cobham and Inmarsat indicating the importance of the asset will take precedence over the nationality of the buyers.

A new long term takeover regime will change how investors should approach UK assets

The new takeover regime being devised would require UK businesses to declare when a foreign company tries to buy more than 25% of its shares, assets or intellectual property. The plans are significantly more stringent than those drawn up under a similar scheme considered by Theresa May’s government, under which companies would have been expected to notify the government of takeovers voluntarily.

Reporting will only be required for businesses where a takeover would pose a risk that it could give a foreign company or hostile state the power to undermine Britain’s national security through disruption, espionage, or by using “inappropriate leverage.” The significance of this legislation will be determined by how this risk is defined. Legislation planned under Theresa May used an incredibly broad definition, which, if replicated, would allow any secretary of state to intervene in any M&A transaction if they were concerned about the security implication.

The sectors most likely to be affected are civil nuclear, communications, defence, energy and transport, however compulsory reporting of transactions would likely have the effect of slowing the pace of deals across all sectors. Investors, whether they deal with sensitive assets or not, are likely to have to get used to greater government interest in their activities, an increased reporting burden, and potentially greater media scrutiny of their activities as the government makes its investigations public.

Change in the EU brings challenges and renewed opportunity

Countries across Europe are also acting. Margrethe Vestager, EU Competition Commissioner and Executive Vice-President of the European Commission, has encouraged EU states to take action to prevent foreign takeovers. Describing the protection of EU businesses from takeovers as a “top priority,” Vestager has effectively encouraged states to act against any takeovers deemed to be a cause for concern.  While this fear relates primarily to Chinese investors amid concerns about intellectual property and national security, the political unwillingness to single out the Chinese for special restrictions could risk creating significant collateral damage. Plans put forward by the Commission would exclude all state owned buyers, potentially eliminating some of the competition for assets created by the increasing activity of Middle Eastern and Asian funds in Europe.

Poland’s populist government is among those planning changes. Legislation is currently being drawn up to allow regulators to block non-EU companies from taking stakes of more than 10% in businesses deemed to be providing critical infrastructure, goods or services for two years. This more stringent block on foreign investment is in part due to the comparative affordability and availability of Polish businesses. 30 years on from the end of communism in Poland, those who have built successful businesses are beginning to reach retirement age, while a drop in the value of the zloty has also pushed prices lower for foreign buyers.

The issue for investors comes back to Brexit. Much of the proposed legislation would impose additional restrictions on all non-EU countries. Proposals, such as those put forward by the Dutch government, would ensure governments could halt companies from buying EU competitors at inflated prices or undercutting them with artificially low selling prices. The Spanish government, meanwhile, is proposing that non-EEA investments larger than 10% in key domestic assets in the “strategic industries” such as infrastructure, technology and media be authorised by the Spanish government. The European Commission would also have the authority to demand greater transparency in foreign companies’ accounts.

These restrictions will soon apply to the UK, with the true impact likely to be determined by the extent to which the UK chooses to diverge from EU law relating to financial services. It may be possible to negotiate the UK’s exclusion from these additional barriers to investment if the UK and EU agree to a close trading relationship for the financial services sector. This would be unlikely to be completed by the time the UK leaves the transition period on 31 December and negotiations around the full financial services future relationship are likely to take years to complete due to their complexity.

Much of the legislation remains in draft phase across the EU and the UK as politicians continue to prioritise the immediate economic and health challenges and much will depend on whether governments can pursue such ambitious regulatory change in the coming months. If these laws do make it onto statute books, investors willing to deal with the additional bureaucratic burden may find greater choice and potentially lower competition for assets in areas of “national interest.” Regardless of sector, as the size of government increases and its post-Covid appetite for intervention grows, investors will need to adapt to greater government engagement in the future.

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Beyond the Future Fund: What it means for VCTs

Nearly two weeks ago, HM Treasury launched the Future Fund, the latest in a series of schemes to support businesses through the economic crisis brought on by Covid-19 and lockdown. Having been overlooked by the Coronavirus Business Interruption Loan Scheme, start-ups are now eligible for government financial assistance via the Future Fund. While this funding will help many pre-profit firms through the immediate disruption, it could also present opportunities for VCTs down the line.

The Future Fund, administered by the British Business Bank (BBB), provides an initial £250 million in funding to UK start-ups. Through the Fund, firms have access to convertible loans of between £125,000 and £5 million as long as government investment is matched by third-party investors. Funding is offered in the form of a convertible loan, with no requirement that companies make regular payments; the convertible loans will convert into equity at the next funding round. Firms must have raised at least £250,000 in third-party equity investment over the last five years to be eligible for future fund investment.

As with almost every government intervention since the start of the Covid-19 pandemic, the Future Fund has been created against a very tight timetable which led to initial criticism of the scheme on the grounds it was not compatible with the existing Enterprise Investment Scheme (EIS). The EIS is a government scheme to help early-stage firms raise money by offering tax reliefs to individual investors that buy shares in a company, but the EIS could only be made compatible with the Future Fund following new legislation. Having been keen to avoid further delays to launching the Future Fund, the government decided to exclude the EIS; this decision led one investor to claim: “If it’s not EIS-able, the scheme just doesn’t work.”

Despite this criticism, there has been significant take-up of the government’s offer of matched funding through the Future Fund, with the BBB receiving requests for £515 million of funding on the day of launch. Funding is being allocated on a first-come-first-served basis, with those firms that have all their application materials in order at the front of the queue to receive a slice of the £250 million on offer. However, the BBB has indicated it is confident the Treasury will increase the size of the Future Fund following the strong initial response from investors, and an announcement setting out additional funding is likely to be made soon.

The popularity of the Future Fund may have dispelled fears prompted by its lack of compatibility with the EIS, but Katherine Griffiths, writing in The Times, points out there are issues with the Future Fund that will only be realised once the crisis has passed. Griffiths argues that the way the Future Fund is set up means that there will inevitably be a battle for control of the business at some point because “the government and its matching investors will decide whether to convert the loan into equity at the end of the term, removing significant freedom from the founders.”

While this may be suboptimal for founders, it could be a bonus for VCTs. In the event the government does convert loans to equity, it will have little interest in holding the equity stakes for a long period of time, particularly given the coming pressures on the government’s balance sheet. When the government does choose to sell, it will provide investors with the opportunity to take equity in firms that have received a healthy dose of government funding to help them to the position they are in. While investors will have to pay government for the privilege, it is possible the Future Fund may be responsible for a wave of high-growth firms coming to market at the same time, ready for VCTs to use their knowledge and expertise to propel them to further growth.


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Budget 2020 Analysis

This was a Budget of two halves.

The Chancellor started on a sombre note as he gave a detailed statement on the coronavirus and the Government’s response.

To manage temporary disruption to the economy, he pledged that the Government would:

Collectively, the fiscal stimulus package amounts to an eye-watering £32 billion.

MPs behind the dispatch box were visibly surprised by the scale of the intervention, but it did not stop there as the Chancellor moved from ‘providing security today’ to ‘planning for prosperity tomorrow’.

‘Planning for Prosperity’

Added up, the Chancellor’s forward-looking ‘prosperity’ pledges come to an additional £175 billion over five years with money allocated to transport, digital and energy infrastructure; public services; research and development and the wider enterprise environment.

Despite the sombre start, the self-assured delivery and bullish outlook in the face of an unprecedented global event looked like an early pitch for higher office.

The Chancellor said that while the commitments in Budget 2020 have remained within the limits of the existing fiscal rules, the framework would be reviewed – suggesting that a relaxation on borrowing could follow in the autumn in the face of low interest rates.

The Green Book, which sets the criteria by which infrastructure projects are judged, will also be reviewed – tying in with the Government’s commitment to shift investment out of the South East and towards the regions.

More Fiscal Events this Year

The Budget also launched a consultation on the Comprehensive Spending Review (CSR), which will close in July.

The exact timing of the CSR, which will set out detailed spending plans for public services and investment, will be confirmed by the Government once it has a clearer understanding of the coronavirus’ economic impact.

Collectively the Budget amounts to some very big spending commitments but with little detail on exactly when, where and how large chunks of the money will be spent.

What happens next

Four days of debate will now follow as MPs get to grips with the detail of Budget 2020, before the Finance Bill, which enacts the proposals for taxation, is tabled in Parliament.

The Budget will also be scrutinised by the Treasury Select Committee, with expert witnesses providing evidence to committee members.

With a majority of 80, we can expect the debates and Bill to pass without too much drama, but as the ‘omnishambles’ in 2012 showed a second round of scrutiny can throw-up unexpected surprises for the Government.

Looking further ahead, the Chancellor knows that his first Budget will be like no other and further tests sit on the horizon – the CSR later this year which will see an inevitable bun fight ensue as departments square up for longer-term funding allocations, and the Autumn Budget just a few weeks before we’re due to leave the EU for good.



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Money matters

In 2017 there was a huge fiscal gulf between the two main parties.  Labour was the party of tax and spend and the Tories the party of fiscal conservatism.  It was an election of opposites.

Fast forward two-and-a-half years and the scale of spending announcements by BOTH parties is already eye watering by anybody’s measure. Notwithstanding Labour’s unexpected and radical announcement to nationalise Openreach, the Conservatives are opening their own spending floodgates.

Why have the Conservatives seemingly ditched fiscal rectitude, how could this play out over the course of the campaign, and what could it mean for businesses after the dust of the election has settled?

Two factors have compelled the Conservatives to change tac: a decade of austerity and the success of Labour in shifting the battleground on which they must fight.

Jeremy Corbyn lost in 2017, but he made up considerable ground over the course of the campaign by appealing to an electorate fed-up after almost a decade of cuts.  Theresa May had a poll lead of around 20% when the starting whistle for the election was blown. This had narrowed to 2.5% by polling day with the biggest gains made in the final half of the campaign.  Corbyn’s personal poll ratings may be worse than rock bottom at -60 percent, and the wider problems of May’s campaigns are well known, but Labour’s campaigning capability is not underestimated by the Conservatives.

This election was called because of Brexit, but the Conservatives knew that Labour would again look to move the focus back on to the domestic agenda.  Hence the mantra of the Conservative campaign has been ‘Get Brexit Done’, while a steady number of booming funding announcements has been the resounding drumbeat against which it has been sung.

Conservative Campaign Headquarters is hoping that this harmonious combination will be music to the ears of voters fed up of Brexit and austerity and rousing enough to win traditionally Labour seats necessary for a majority.

The challenge is that by taking on Labour on domestic issues, the Conservatives have opened themselves up to an attack line of ‘it’s too little too late’.  Johnson has sought to distance his four-month-old Government from those of May and Cameron, but the sheer scale of funding announcements has exposed other flanks that Labour has sought to capitalise on.

In 2017 Labour made a big deal about its manifesto being costed and the Conservatives failing to do their homework.  It was a punch that didn’t land as hard as it could have because the Conservative manifesto was so light on the draw down from the public purse compared to Labour. This time round Labour is doing the same thing and it could be much more painful as Corbyn and McDonnell will again argue that Johnson does not care about the detail and cannot be trusted to honour commitments.

We are only two weeks into a six-week campaign, and we haven’t even got to the manifestos themselves (Labour’s is expected next week).  For companies planning for the future it will be critical to understand how the details of what has already been pledged fits together into a wider picture of a mandate for government.

The dearth of funding, and arguably policy as a consequence, looks like it is coming to an end.  This will present opportunities and risks for businesses across all areas of the economy, whether they operate in energy or education, transport or telecoms, financial services or food technology.  Those businesses that have early insight into what could come their way, and when, over the course of the next five years from a government of any primary (or secondary) colour will be best placed to engage, adapt and succeed.

For comprehensive analysis on what the manifestos could mean for your business and advice on what to do next, please contact the WA Comms team at

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A taxing question: is globalisation compatible with national sovereignty?

Amid the political turmoil surrounding Brexit, you would be forgiven for missing the recent row about British Crown Dependencies and financial transparency. On 4 March, the House of Commons was due to vote on the Financial Services Bill, a piece of legislation concerning the regulation of financial services in the event of a ‘no deal’ Brexit. However, the government pulled the bill at the last minute because they feared that they would be defeated on an amendment requiring Jersey, Guernsey and the Isle of Man to introduce public registers detailing who owns companies registered there.

The government’s move to delay the bill was not just an attempt to avoid the embarrassment of yet another defeat; it was also done to avert something much more serious – a constitutional crisis. Legislation passed in Westminster does not usually apply to Crown Dependencies, and their consent typically accompanies legislation that does apply. The UK government does have the power to impose legislation on the Crown Dependencies as a last resort, but this power is seldom used and would represent a break with convention. As such, any attempt by Westminster to interfere in the domestic matters of Crown Dependencies without their consent could present the UK with yet another constitutional headache.

Following the release of the Paradise Papers in 2017, in which Jersey and the Isle of Man featured prominently, there has been an increased focus on the Crown Dependencies and the role they play in facilitating tax evasion, tax avoidance and money laundering. The move to force the islands to publish details of anyone owning more than 25 per cent of a company registered there aims to increase transparency. In response, the dependencies argue that they are already committed to transparency and provide ownership details to law enforcement and tax authorities within 24 hours of a request.

However, while stricter rules on financial transparency in the Crown Dependencies may make it more difficult for some to engage in activities that are either illegal or deprive governments of revenue, the debate masks an even greater problem: tax. Guernsey, Jersey and the Isle of Man all have a standard corporation tax of zero per cent, with some higher rates (but not greater than 20 per cent) applicable to firms in certain industries, for example, Jersey charges financial services companies ten per cent corporation tax. The rate of corporation tax in the UK is currently 19 per cent and set to fall to 18 per cent by 2020. The average corporate tax rate in the EU is 22.5 per cent; France has the highest corporation tax at 34.4 per cent and Hungary the lowest with nine per cent.

The advantageous corporate tax rates available in the Crown Dependencies have played a large role in attracting companies to register there; as of December 2018, collectively they were home to 76,000 companies. This amounts to one business for every three residents, whereas the UK has one firm for every 11 residents. In 2017, the EU placed the Crown Dependencies on a ‘grey list’ of jurisdictions that had committed to reform their tax structures to avoid being branded ‘tax havens’. The EU is particularly concerned that firms route profits via the Crown Dependencies to avoid paying taxes in EU member states, weakening the tax base in those countries. In response, the Crown Dependencies have introduced stricter requirements on businesses to prove they are truly resident in either Guernsey, Jersey or the Isle of Man. However, it is unlikely the new regulations will significantly reduce the number of firms registered in Crown Dependencies.

The Crown Dependencies are not the only entities to have drawn the attention of the EU over their corporate tax rates. Ireland has a corporate tax rate of 12.5 per cent, a rate that has encouraged companies such as Apple and Google to base their operations there. In January, the European Commission published a proposal to remove national vetoes of tax matters and to use qualified majority voting instead. The move has been strongly opposed by the Irish government, on the basis that a new voting system will remove Ireland’s ability to set corporation tax rates at the level it wishes.

At heart, the debate about financial transparency and tax comes back to one question: how can national sovereignty be reconciled with a globalised economy? Governments, in competition with each other to attract businesses, have an incentive to lower taxes and loosen regulations. The only way to avoid this potentially damaging race to the bottom is global cooperation, either voluntary or enforced. However, the former may not be possible because of the incentives faced by governments, and the latter would involve countries voluntarily giving up power over tax policy.

The UK is finding out first-hand that determining the ‘optimal’ amount of sovereignty is a tricky business, but it is a question that many more countries will have to grapple with in the near future. Globalisation has made it easier for capital to cross international borders, while public opinion concerning which decisions should be made at the level of the nation-state has remained relatively static. Harmonised tax and regulatory systems may win the economic argument, but as the political landscape confronts a more globalised world, it’s not always the economy, stupid.

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