Investment planning; The Financial Services Act: what's new?

Contents:

• UK dividend payments: every little helps?
• Insolvency changes for payment and electronic money institutions
• The Financial Services Act: what's new?
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UK dividend payments: every little helps?

(AF4, FA7, LP2, RO2)

Link Asset Services has published its latest quarterly UK dividend monitor, showing what at first is a surprising outturn: total dividend payments were up 7.9% compared with the first (largely pre-pandemic) quarter of 2021. That sounds too good to be true, but, as explained below, it is at least mathematically correct:

• In Q1 2021, total dividends payouts were £1.3bn higher than in 2020 at £18.8bn.

• Whereas special dividends accounted for a near-invisible £0.1bn of payouts in Q1 2020, in Q1 2021 they amounted to £6.1bn – almost a third of total dividend payments. £5bn came from Tesco’s one-off payment following the sale of its Asian business, with large special dividends from some of the big mining companies making up much of the balance.

• Underlying (regular) dividends fell by 26.7%, an improvement on the 39.0% decline in Q4 2020. Link notes that the latest figure was helped by some companies resuming dividends and as a result bringing forward payments into Q1. This acceleration will unwind as we go through 2021, so will be a drag on later quarters.

• Almost half of the £5.8bn cuts in Q1 underlying dividends came from the oil sector – Q1 2020 was the last quarter in which both BP and Shell were paying their old high quarterly dividends before making big cuts (10.5c to 5.25c and 47c to 16c, respectively). By Q3 2021, the BP/Shell comparison will be with the reduced dividend levels. Shell has already raised its dividend to 17.35c.

• After oil, the next biggest impact came a variety of companies, many hit by the pandemic such as Compass (commercial catering) and ABF (owner of Primark).

• Payouts from the Top 100 companies fell 25.7% year-on-year on an underlying basis, beating the more UK-focused Mid 250 which produced a 37.3% drop. It was the fifth quarter the Top 100 outperformed.

• The concentration of dividend payouts in a handful of companies increased in Q1 2020, although again Tesco can take the blame for this. The top five payers (Tesco, Astra Zeneca, BHP Group, British American Tobacco and Vodafone) accounted for 56% of total payments, against 50% last year (when Shell and BP took first and third-largest payment rankings). The next 10 companies accounted for 31%, (cf 34%) meaning that just 15 companies were responsible for 87% of all UK dividends in Q1 2021 (cf 84%).

• Link expects the remainder of 2021 to see a recovery in dividends, helped by a change in the comparator base. Its best-case scenario now has an increase of 5.6% for the year on an underlying basis, with total dividends up by 17.2% (Tesco, again). The worst-case scenario has payouts still rising, but with just a 0.9% increase in underlying dividends and 11.1% in total dividends.

These latest figures and Link’s projections suggest that the worst appears to be over for UK equity income investors. However, a return to pre-pandemic payment levels remains some way off. Link says in the concluding paragraph of its report ‘Despite the greater clarity, 2025 still looks like a realistic moment for UK dividends to finally match their 2019 underlying high point’.

 

 

 

Insolvency changes for payment and electronic money institutions

(AF4, FA7, LP2, RO2)

HMRC has published the outcome of its consultation regarding insolvency changes for payment and electronic money institutions. The consultation sought feedback on proposed insolvency changes for payment institutions and electronic money institutions, including a new special administration regime. 

Whilst increases in the use of card, mobile and electronic wallets to make payments have offered opportunities for UK businesses and consumers, with many making payments faster, cheaper and more securely, they have also presented new challenges and risks. The Government is therefore proposing to introduce a bespoke Special Administration Regime (SAR) that is intended to help protect customers in the event of a payment institution (PI) or electronic money institution (EMI) being put into insolvency.

The proposed SAR is intended to have the following key features:

• an explicit objective on the special administrator to return customer funds as soon as reasonably practicable;
• a bar date* for client claims to be submitted to speed up the distribution process;
• a mechanism to facilitate the transfer of customer funds to a solvent institution;
• a post-administration reconciliation to top-up or drawdown funds to or from the safeguarding process;
• provisions for continuity of supply to minimise disruption;
• rules for treatment of shortfalls in the institutions’ safeguarding accounts;
• rules for allocation of costs; and
• an explicit objective on the special administrator for timely engagement with payment systems and authorities.

*The PI and EMI SAR will enable the special administrator to set deadlines for client claims and make interim distributions which cannot be disturbed by future claims (a ‘soft’ bar date). It will enable the special administrator to set a final deadline after which any remaining assets can be moved to the general estate and close the client estate (a ‘hard’ bar date). In both cases, the special administrator will be able to set a bar date by issuing a bar date notice.

The Government received 15 written responses.

In response to concerns that a SAR regime would allow otherwise going concern firms to be unfairly put into administration, HMRC says it has reviewed the drafting and relevant pieces of existing legislation to ensure that this is not the case. This regime will not allow otherwise going concern companies to be placed into administration with insubstantial reasoning. Within the regulations, specified parties can apply to the Court to place a firm into special administration if it would be fair to do so. This gives the Court discretion to decide whether or not the firm ought to be placed into special administration

In response to various other concerns and suggestions raised HMRC will introduce additional steps within the rules to:

• Require IPs to provide a reasonable notice period before a bar date comes into effect. This will allow time for IPs to communicate bar dates to customers and for customers to make claims.
• Clarify the full hierarchy of expenses.
• Require notice of a bar date to be given to all persons whom the administrator believes to have a right to assert a security interest or other entitlement over the relevant funds.
• Require the special administrator to engage closely with payment systems operators during the special administration.

On transfer provisions, the Government was proposing rules that will enable the special administrator to do a swift transfer by removing some of the restrictions that usually occur when transferring customer funds and contracts (for example, obtaining client consent). The Government says it has noted suggestions for inclusion and clarity on set-off and netting provisions and has amended the regulations accordingly. 

The Government says that it consulted with the FCA and the Insolvency Service throughout the drafting of this legislation. This response document was published in the week that the statutory instrument containing FSMA changes and the SAR regulations was laid in Parliament. Further statutory instruments containing the SAR rules will be laid in Parliament later this year.

 

 

 

The Financial Services Act: what's new?

 (AF4, FA7, LP2, RO2)

The Financial Services Bill has received Royal Assent and is now law. The new Act amends many elements of the UK's financial services legislative framework, following the end of the Brexit transition period. 

Measures in the new Act:

• enable the implementation of the remaining Basel III standards and a new prudential regime for investment firms, and gives the Financial Conduct Authority (FCA) the powers it needs to oversee an orderly transition away from the LIBOR benchmark;
• simplify the process to market overseas investment funds in the UK and deliver a Ministerial commitment to provide long-term access between the UK and Gibraltar for financial services firms;
• improve the functioning of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (please see below), and enable the FCA to clarify the scope of the UK PRIIPs regulation and address existing, and potentially future, ambiguities in relation to certain types of investment products;
• increase the penalties for conviction on indictment for insider dealing and financial services offences from seven years to ten years; and
• bring interest-free buy-now-pay-later products into regulation, and improve access to cash by making it easier for retailers of all sizes to offer cashback without a purchase.

The EU PRIIPs Regulation stipulates a number of mandatory features of a Key Information Document (KID) including "appropriate performance scenarios, and the assumptions made to produce them". The methodology relies on past performance to produce the performance scenarios and has been widely criticised for producing misleading results across a wide range of products. The new Act seeks to address this issue in the context of the UK PRIIPs Regulation regime by replacing this provision with a requirement that the KID contains simply "information on performance". The FCA now has the power to make rules specifying the information on performance that is to be provided in a UK KID.

UCITS funds are exempted from the requirements of both the EU PRIIPs Regulation and the UK PRIIPs Regulation until 31 December 2021. Until that date, instead of a KID, UCITS funds must produce a Key Investor Information Document (KIID) as per the requirements of the UCITS Directive. The Act gives HM Treasury the power to extend this exemption under the UK PRIIPs Regulation until no later than 31 December 2026.

We expect that the FCA will shortly be publishing rules on the scope of the UK PRIIPs KID regime and the requisite performance information.