Category Archives: United Kingdom

UK Budget 2017: 5 Key Points for Financial Services Firms

The UK Chancellor of the Exchequer, Philip Hammond, delivered the latest UK Budget on 8 March 2017.  It was billed as “the final Spring Budget” because budgets are set to be delivered in the Autumn going forward.  On the face of it, there was not much ground-breaking policy in this budget, certainly not much directly aimed at the financial services industry.

I examine some key points from the budget that will probably be of interest to financial services firms – especially banks, large corporates and the people that work for them.

1 – The Macro Picture: UK open for business as the second fastest growing G7 economy

There was an upbeat yet cautious outline of the UK economy in the budget.  On the one hand, the UK’s GDP growth forecast was upgraded from 1.4% to 2% for 2017 and the Chancellor said that the UK had grown faster than every other G7 economy apart from Germany in 2016.  However, the road ahead (basically the Brexit uncertainty) meant that GDP growth was forecast lower at 1.6%, 1.7%, 1.9% in subsequent years, returning back to 2% in 2021-22.

As an incentive for businesses in the UK, the Chancellor said that the UK corporation tax rate would, as planned, be cut to 19% from April 2017 and to 17% from April 2020.  He pointed out that the UK’s corporation tax rate is the lowest in the G20.  Clearly, businesses considering moving because of Brexit would need to take this tax competitiveness into account.

2 – National Insurance increase for the self-employed: Will employers who use them be next?

National Insurance Contributions (NICs) for the self-employed will go up from 9% to 10% in April 2018 and then to 11% in 2019 on earnings between £8,060 and £43,000.  Earnings above £43,000 will continue to be taxed at 2% while those below £8,060 will not be taxed.  Employees currently mostly pay 12% NICs.

The Chancellor sees this as a fairer balancing in the labour market given that self-employed people make up a larger proportion of the workforce than ever before and are now entitled to certain benefits like the state pension.  Self-employed people could of course argue that compared to employees, they get fewer benefits (e.g. no sick pay or holidays) and so paying a lower level of NICs was fair.

The NICs rise is a clear breach of the spirit if not also the wording of Conservative Party Manifesto pledge of raising no new taxes in this Parliament.  It may also signal a direction of travel: if the Chancellor is prepared to raise higher NICs from the self-employed in the name of fairness, will there be a future tax raid on the companies that use such self-employed labour?  The likes of Uber, Deliveroo and other “gig economy” players may seem the most obvious future targets but plenty of banks and other corporates use self-employed contractors too – everywhere from IT to legal.

3 – Tax-free dividend allowance reduced: Crackdown on investors and service companies?

From April 2018, the total amount of dividends that individual company shareholders can receive tax-free from their company will fall from £5,000 to £2,000 per year.

According to the Chancellor, half of the people who have benefited most from this tax break are company directors with a shareholding in their business (they can effectively pay themselves £5,000 above any salary they may also get from their company) and the other half are investors who hold £50,000-plus of investments outside their usual ISA allowance (set to rise to £20,000 from April 2017).

Again, this cut was meant to address unfairness in the economy.  Generally, there seemed to be signals that using a service company only to get a tax break (UK corporation tax can be much lower than income tax) is something that may soon be the subject of further tax reform.

4 – Shares in Lloyds Banking Group and RBS & UK Debt Markets

The budget gives an update on the sale by the UK government of shares it acquired during the crisis.  In relation to Lloyds, it is following a divestment plan laid out in October 2016, is on track to sell all its shares by 2017-18 and fully recover the £20.3 billion taxpayer funds used.  In relation to RBS, there were “legacy issues”, which have so far prevented any opportunities for disposal.  The budget also provided an update in relation to UK Asset Resolution Limited (UKAR) – the company set up to hold the mortgage assets of Bradford & Bingley and Northern Rock – whose balance sheet had reduced from £115.8 billion in 2010 to £36.9 billion in 2016.

To help the UK debt markets, there will be withholding tax exemptions in relation to the interest of debt traded on a Multilateral Trading Facility (MTF).  A consultation in Spring 2017 will be launched about how this policy should be implemented.

5 – Brexit

Brexit was conspicuous by its absence from the substance of the budget.  The Chancellor is clearly keeping his powder dry for the next budget (in Autumn 2017) when the UK will probably have invoked Article 50 of the Lisbon Treaty and talks about exiting the EU will have been underway for some time.  The Chancellor did joke however that the UK’s public sector net borrowing was predicted to fall to 2.6% of GDP this year, meeting the EU target of 3% for the first time in 10 years – but that he was not holding his breath for a congratulatory letter from (EC President) Jean-Claude Juncker.



CRD V: Proposals for bank intermediate EU parent undertakings – retaliation to US measures?

On 23 November 2016, the European Commission (EC) outlined proposals to amend the Capital Requirements Regulation (EU/575/2013) (CRR) and the Capital Requirements Directive (2013/36/EU) (CRD) (and together referred to as CRD IV).  These proposals are likely to form part of the next version of these measures i.e. CRD V.  Links to the proposals are here (CRR) and here (CRD).

One proposed CRD V measure is a requirement for non-EU banking groups (including US groups) operating in the EU to consolidate their subsidiaries under a single “Intermediate Parent Undertaking (IPU)” in the EU, which will need to be separately authorised and capitalised.  I discuss this and similar measures introduced by the US for non-US banking groups operating there.  I also consider the impact of the proposals in relation to Brexit.

EC Proposals

The EC proposals would see a new Article 21b added into CRD to cover IPUs, which would stipulate that:

  1. if a third country group (i.e. a non-EU group) has two or more institutions (i.e. banks or investment firm subsidiaries) in the EU, it must have an EU-based IPU above them;
  2. such an IPU must be separately authorised and be subject to EU capital requirements or be an existing bank or investment firm authorised under CRR;
  3. there must be a single IPU for all subsidiaries that are part of the same group; and
  4. the threshold for this requirement to apply would be if: (a) the total value of assets in the EU (both subsidiaries and branches) of the non-EU group is at least Euro 30 billion; or (b) the third country group is a non-EU G-SII (i.e. global systemically important institution or bank – see list maintained by the FSB).

These proposals would require non-EU banking groups to hold EU bank and broker-dealer (investment firm) subsidiaries through a single EU-based IPU that would be subject to capital, liquidity, leverage and other prudential standards on a consolidated basis.

The IPU requirement may have been added late into the draft CRD V proposals and it seems to have been included without following the usual discussion and impact assessment process for such measures.  It has been suggested that this is a retaliatory action to similar measures introduced by the US (discussed below).  It is possible that EU Member States will decide to alter or even drop this measure before CRD V is adopted into law.

Possible Effect of the EC Proposals on US Banking Groups

Due to strict limitations on transactions between a US Federal Deposit Insurance Corporation (FDIC)-insured bank (and its subsidiaries – the “bank chain”) on the one hand and its bank holding company parent and sister companies (the “non-bank chain”) on the other, the large US bank holding companies operate their US broker-dealer subsidiaries as sister companies of their FDIC-insured banks and often do the same with their non-US broker-dealer subsidiaries.

Such large US bank holding companies operate in the EU through branch offices of their FDIC-insured banks as well as through locally-incorporated bank subsidiaries of those banks and separate (non-bank chain) broker-dealer subsidiaries.

To comply with the EC poposals on IPUs, a US bank holding company would need to transfer its EU bank subsidiaries so that they and the EU broker-dealer subsidiaries become indirect subsidiaries of the parent bank holding company via a single EU IPU. Doing so, could severely limit transactions between the US FDIC-insured bank including its EU branch offices and the EU bank subsidiaries (as well as the other EU subsidiaries) of the US bank holding company.

All this is likely to mean that US banking groups may have to totally rethink their existing holding structures in Europe – they may already be doing so due to Brexit (see below).

US Intermediate Holding Company Rule

Title 12 of the US Code of Federal Regulations (12 CFR Part 252.153) introduced a similar rule in March 2014 requiring  that any foreign banking organisation with US non-branch assets (i.e. subsidiaries) of USD 50 billion or more must establish a US intermediate holding company (US IHC) or designate an existing subsidiary as such.

As you can see, the US IHC rule has a much higher threshold (USD 50 billion) than that of the corresponding EC proposal (Euro 30 billion) and the US threshold only considers assets of subsidiaries, whereas the EC proposal also counts branch assets.

The US IHC rule was viewed as addressing the capital position of large US broker-dealer subsidiaries of non-US banking groups because such subsidiaries were not otherwise subject to US prudential banking regulations including on risk and leverage.  In the EU however, broker-dealer (investment firm) subsidiaries of US banking groups are currently subject to Basel-based prudential requirements.


The EC may or may not have had Brexit in mind when it came up with this proposed IPU measure.  Post-Brexit, depending on any negotiated arrangements, the UK will be outside the EU and thus, on the face of it, UK banking groups will be in the same boat as other non-EU groups with regard to the CRD V proposals and may need to establish IPUs in the EU to hold their EU subsidiaries.  Some UK and non-EU banking groups that are not G-SIIs may review the scope of their activities in the EU in light of these requirements.

Also, from the point of view of US and other non-EU banking groups who currently operate in Europe out of the UK, the need for a separately capitalised holding company in Frankfurt or Luxembourg, for example, could make London a less attractive headquarters for European operations.  Given that most banking groups are currently looking at their structures in light of Brexit, the EC proposals on IPUs will add a further layer of complexity to these considerations.

Next Steps and Conclusion

The EC intends that the CRD V proposals will apply two years after the legislative text is finalised. This would take us well into 2019 at the earliest and therefore, the IPU measure is unlikely to be applicable when the UK leaves the EU – assuming that the UK invokes Article 50 of the Lisbon Treaty in early 2017 and leaves the EU in the two year period provided.

The EC proposal for IPUs will probably be welcomed by European banking groups that have found themselves on an uneven playing field with US rivals.  However, most banking groups are reluctant to hold multiple pools of capital around the world, overseen by different regulators, which they see as less efficient than a centrally managed capital pool regulated by their home bank regulatory authority.

Whether or not the EC proposals on IPUs are adopted into law as they are currently drafted, there does seem to be a growing regulatory trend towards a fragmentation in financial rules, as key jurisdictions like the EU and the US seek to assert control and seem comfortable taking tit-for-tat action even at the risk of duplicating or complicating internationally-settled regulatory measures.



Brexit: PM Theresa May’s 17 January 2017 Speech – 5 Key Points

Exit Single Market: the UK will seek leave the EU Single Market in a “clean” Brexit because being a member of the market means accepting the Four Freedoms including the free movement of people in the EU, something that is seen as a red line following the UK Brexit vote.

Free Trade Deal: whether realistic or not, the UK will seek to negotiate a free trade deal with the EU in the 2 year period of negotiating to leave the EU after triggering Article 50 of the Lisbon Treaty (expected in March 2017 with Brexit in 2019). Transitional measures could be in place for some industries e.g. Financial Services until a trade deal is in place.

Customs Union: since being a member of the EU Customs Union would prevent the UK from entering into other trade deals, the UK will also seek to leave this (unlike e.g. Turkey which is party to the Customs Union although outside the EU).

Parliamentary Vote: whatever negotiated position between the EU and UK is reached will be put to a vote in both Houses of Parliament in Westminster. The question is would a rejection of a Brexit deal by Parliament be seen as frustrating the will of the people?

“No deal better than bad deal”: if the UK gets no deal agreed with the EU, the UK will be free to change its economic model to become a low tax haven outside the EU and presumably suck away business and tax revenue from the EU. This would be a nuclear option.