With the help of our members, this thought-leadership series focuses on explaining what businesses should expect from the new reality of Brexit – in essence, with “Brexit, What’s Next?”. Today, we present Karen Sloan, Head of Corporate Cash Management Sales for HSBC Continental Europe. She will address: “European Payments and Liquidity Management for Corporates Post-Brexit”. |
What you need to know to navigate the changing landscape
Transactional banking services such as payments and liquidity management have been a focus in Europe over the years, with corporates looking to transform their treasury operations: achieve operational efficiencies, streamline processes, optimize liquidity and manage FX exposures. At the same time, Europe have witnessed significant changes from a market and regulatory perspective such as the introduction of the Euro currency, the capital requirements regulations impacting the deposit taking appetite of banks, new payment instruments and new payment regulations such as the Payment Services Directive (PSD2). New concepts of Open banking, new technologies and new market entrants have also emerged. The United Kingdom (UK) leaving the European Union (EU)* has created additional complexity, which, combined with other concerns around negative interest rates and the Covid-19 pandemic, has created a lot of turbulence for both banks and corporates.
The EU is the third largest economy in the world even with the UK leaving the Bloc on January 1st this year 1. Although a deal has been agreed between the EU and the UK, it does not extend to financial services. This means that going forward most of the banking services provided to EU and EEA clients should be provided by an EU incorporated bank.
The Liquidity Management perspective
Some of the liquidity management solutions that are widely used in Europe by Corporates are the cash pooling solutions which can be grouped into two categories: 1. physical cash concentration or sweeps and 2. notional pooling (balance and interest offset). The impacts from Brexit on these solutions boil down to three main considerations: where the accounts are opened or location of the cash pooling solution; whether there is an EEA entity holding accounts in the structure; and whether the structure is supported by a credit line also booked in the UK.
For example, if a corporate has a notional pooling or cash concentration structure in the UK and some or all bank accounts in that structure are held in the name of an EEA legal entity and in addition the structure is underpinned by a credit facility which extends credit to EEA entities then this may not be a sustainable structure in the long run. Such companies should discuss their existing liquidity arrangements with their banking provider to find out if they need to do anything about it and whether the structure is still sustainable in the long-run.
If you do not have yet a liquidity structure in Europe you should consider all of the above limitations with respect to placing a structure in the UK and discuss these with your liquidity bank.
Brexit has not altered the liquidity management products themselves or the demand for these products; it has simply created another element for consideration in the long run. If in the past treasurers were happy to base their treasury center in the UK and respectively their liquidity overlay structure due to favorable corporate income tax or transfer pricing or withholding tax treatment, now they need to think additionally about the implications for including their EEA legal entities in such structures in the UK – whether it is feasible and sustainable.
Therefore, it is imperative to look for a bank partner who is on top of the market developments and has the breadth and depth of capabilities to meet your local as well as regional and global needs.
The Payments angle
The EU single market concept has been underpinned by countries using Euro as their currency as well as by the implementation of the Single Euro Payments Area (SEPA). SEPA has been a real enabler in Europe for pan European trade. This allows organisations within the EU to make euro payments across the continent, without correspondent bank fees and at low-value ACH pricing.
With regards to making payments in a post Brexit environment, the dust is still settling and it will take time for the landscape to firm up again. It is fair to say though that ways of working have already changed. For example, HSBC now process Euros through an EU legal entity that participates in the European real time gross settlement (RTGS) system. As a result, the processing of Euro wire transfers are not impacted by Brexit and all such payments, initiated from the UK, are being now routed via France.
The major change that will impact these transfers between the UK and EEA are how charges can be applied by all participating banks in the transaction flow. Prior to Brexit charges in respect of payments to and from the UK were applied under PSD2 on the basis that the UK was an EEA country. This basically meant that charges had to be shared between payer and payee and the principal amount was to be protected i.e. no charges could be taken by correspondent banks. Since the UK’s departure from the EU, the UK is now treated as a third (non-EEA) country this is no longer the case and banks will now follow the practice that is applied throughout the rest of the world where correspondent banks can take charges from the principal, other charge options though will be available such as BEN and OUR as well as SHA.
The importance of having a banking partner that can support payments in both the UK and Continental Europe has gained renewed importance. Despite Brexit, the UK has retained SEPA membership which provides some continuity in the way we do business.
In the last couple of years, in addition to regulatory changes, various market trends and events such as the Covid-19 Pandemic, the low and negative interest rate environment, as well as the ever increasing focus on the Environmental, Social and Governance (ESG) agenda have triggered clients to introduce and start implementing various Treasury transformation projects. The same trends and events contributed to the fast evolution and digitisation of existing and new transaction banking solutions.
The treasury landscape continues to evolve, and [HSBC/ the UK banking industry] will continue to support corporates in navigating these changes while simultaneously creating efficiencies. The UK is open for business – we have the right infrastructure and technical capabilities to meet your needs, proven track record of providing cash management services to corporates and we are well connected with the rest of the world. The UK determined to remain a key provider of transaction banking services in Europe and to that end we have implemented treasury hubs that support solutions previously only available from the UK, namely Ireland, Netherlands and France.
- Karen Sloan, Head of Corporate Cash Management Sales for HSBC Continental Europe
Compliments of HSBC – a member of the EACCNY.