The United Kingdom (U.K.)

Introduction

 

About The UK

The UK is the fifth largest economy in the world, the third largest in Europe and the 13th most complex economies according to the Economic Complexity Index. It is also one of the world's premier financial centres and has a skilled workforce, strong rule of law and complies with international regulatory standards.

For many businesses around the world, the UK is a gateway for trade and investment to the rest of the EU. The UK is an attractive location for regional treasury centres as it offers the world's largest tax treaty networks, with agreements with 140 countries. China is the UK’s seventh largest trading partner and the UK government is committed to creating closer ties with China. It is also the world's western hub for renminbi business.

In addition, the UK has advanced banking facilities, strong regulation, a strong talent pool and advanced IT and telecoms systems, as well as the world's largest foreign exchange market and the deepest international debt market. More than 500 banks have offices in the UK, primarily in London, with many choosing the city for their headquarters.

The onset of the exit of the UK from the EU (Brexit) has introduced a degree of uncertainty into the business and financial environment and will have an impact going forward that has yet to be established. 

 

What solutions are available in UK?

Solution Description
Treasury Centres A centralised treasury is one way to reduce the tax burden, centralise risk management, improve liquidity and enhance yield on cash.
Interest Optimisation Maximise your interest yield from for your balances held with the bank.
Notional Pooling Cash balances in different accounts are notionally offset to derive the net balance, which is then used to calculate interest.
Sweeping/ Zero Balance Account (ZBA) ZBA are checking accounts with zero balances where funds are physically swept to eliminate excess balances and maintain greater control over disbursements.
In-house Banks (IHB) In-house banks provide corporate treasurers with another method of centralising and consolidating their business.
Intercompany loans Similar to bank loans, intercompany loans refer to lending between entities within the same group.

Corporate Treasury in The UK

The UK is one of the world’s premier financial centres. Here, we highlight some of the key benefits relevant to treasury and cash management.

 

Financial Market Development

  • The World Economic Forum ranks the UK 16th in the world for financial market development in The Global Competitiveness Report 2015-2016.
  • It states the UK financial market remains one of world’s best developed, although it is still recovering from the global financial crisis.
  • The UK is one of the three ‘command centres’ of the global economy, has a skilled workforce, a strong rule of law and complies with international regulatory standards.
  • There are no restrictions on capital flows in and out of the UK.

 

Sophistication of Banking Systems

  • The UK is the largest financial exporter in the world and a leading centre of international finance.
  • More than 500 banks have offices in the UK, primarily in London, with many choosing the city for their headquarters.
  • The UK is the largest foreign-exchange market in the world (Bank for International Settlements triennial global survey 2016).
  • London offers access to the deepest pool of international capital in the world. There are more than 15,000 debt securities listed on the London Stock Exchange Main Market and international government bonds from 34 countries in 11 different currencies.

 

Regulatory Bodies

  • The Prudential Regulatory Authority, part of the Bank of England (the central bank), regulates the banking industry in the UK. The Financial Conduct Authority (FCA), which is separate from the Bank of England, ensures financial markets work effectively. The regulatory framework is in line with international standards.

 

Tax

  • The corporate tax rate is 19%, the lowest rate in the G7, falling to 17% in April 2018.
  • UK resident companies are taxed on their worldwide profits. Non-resident companies pay corporate tax on trading profits attributable to a UK permanent establishment, and income tax at 20% on other UK income. Companies may also be liable for diverted profits tax at 25% under certain circumstances.
  • UK companies are exempt from paying corporation tax on most foreign and UK dividends. Withholding tax of 20% may be charged on interest.
  • Gains on capital assets are charged at the normal corporate tax rate.
  • Stamp duty of 0.5% is charged on the purchase price or value of shares.
  • The UK has tax treaties with more than 140 countries and territories.

 

Benefits for Company Treasury Centres and Operations

  • The UK has advanced banking facilities, strong regulation, a strong talent pool, and advanced IT and telecoms systems, as well as the world’s largest foreign-exchange market and the deepest international debt market.
  • The UK’s time zone overlaps with both Asian and North American business hours.
  • It has one of the world’s largest tax treaty networks, with agreements with 140 countries.
  • It currently has a relatively benign tax environment for non-resident companies, which only pay corporate tax on trading profits attributable to a UK permanent establishment.
  • The UK is the second-largest offshore renminbi centre and the RMB centre for Europe.

 

Banking

 

Banking System

  • Four banking groups dominate the UK’s domestic banking sector: HSBC, Barclays, Lloyds Banking Group (which includes Bank of Scotland and Lloyds Bank) and Royal Bank of Scotland (includes NatWest).
  • There are 155 UK-incorporated banks and 45 building societies (financial institutions that offer banking facilities). There are also 156 foreign banks with branches in the UK.
  • The UK has the highest number of foreign banks in the world.
  • As of 2019, the largest banks will be required to separate their investment and retail banking operations.

 

Bank Accounts

  • Resident and non-residents: May hold foreign and domestic currency (GBP) accounts, both domestically and overseas. Domestic currency accounts held overseas are freely convertible.
  • Overdrafts: Available to residents and non-residents.
  • Interest: Offered on current, savings and short-term deposit bank accounts.

 

Legal and Regulatory

  • Bank of England acts autonomously and is a member of the European System of Central Banks.
  • The Financial Conduct Authority is responsible for regulating the banking sector.
  • A company is resident if it is incorporated in the UK or centrally managed and controlled in the UK.
  • In light of the UK voting to leave the European Union (EU) on 23 June 2016, financial regulations will be subject to change when Article 50 is triggered.
  • Anti-money laundering and counter-terrorism financing legislation are in place. The UK is a member of the Financial Action Task Force (FATF), among others.
  • The UK has established a Financial Intelligence Unit (FIU) within the National Crime Agency (NCA), which is a member of the Egmont Group.

 

Payments

Payment Systems

CHAPS

(Clearing House Automated Transfer System)

 

UK's Real Time Gross Settlement system (RTGS)

  • Operated by CHAPS Clearing Company.
  • 23 direct participants
  • Processes high value and urgent GBP-denominated credit transfers (no threshold).
  • Effects final settlement of participants' net balances from other UK clearing houses. 
  • Settlement in real time and across the participant banks' corresponding accounts at Bank of England.

TARGET2

(Trans-European Automated Real-time Gross settlement Express Transfer system)

Europe's RTGS

  • Operated by Eurosystem.
  • Second generation of TARGET.
  • Settled and with finality in real time.
  • No value thresholds.
  • Settles euro-denominated interbank and individual customer payments, as well other institutional payments and high value net settlement systems.

BACS

(Bankers' Automated Clearing Services)

Electronic, low-value multilateral net settlement system

  • Operated by VocaLink.
  • 16 direct participants
  • Processes low value, non-urgent and bulk GBP-denominated credits and debits.
  • Uses BACSTEL-IP secure and direct online connection service which can be tracked by all customers online.

FPS

(Faster Payments Service)

24/7 multilateral net settlement system

  • Operated by Faster Payments Scheme Limited.
  • 14 direct participants
  • Processes one-off GBP-denominated electronic payments (max. GBP 100,000) done online or by telephone, and standing orders.
  • Cleared and settled in approximate real time using VocaLink Real-Time Payments Platform. Standing orders settled same day.
  • Final net settlement done across participants' accounts at Bank of England.

C&CC system, a paper-based clearing system

Paper-based clearing system

  • Operated by the Cheque and Credit Clearing Company.
  • Uses the 2-4-6 principle, which enables customers to receive interest within two days of a cheque being deposited, so funds are available within four days, and certainty of clearance is within six days.
  • Settlement done same day if submitted before 14.00 GMT.
  • Processes GBP and EUR-denominated paper-based instruments (no threshold).
  • Cheques truncated before processing. GBP-denominated payments are settled on three-day cycle.

 

 

 

Payment Instruments

 

Credit Transfers

  • Are paper-based or automated (through BACs).
  • Used for the majority of payroll, supplier and third-party payments.
  • Part of SEPA initiative for EUR-denominated retail payments (approx. 55 banks in the UK participate). 
  • High-value and urgent GBP-denominated credit transfers cleared and settled through CHAPS in real time.
  • High-value and urgent domestic EUR-denominated credit transfers processed through TARGET2 or the Euro Banking Association’s EURO1 system.
  • Low-value, non-urgent and high-volume GBP-denominated credit transfers processed through BACS (within three days) or the Faster Payments Service (within approximate real time).

 

Direct Debits (autodebits)

  • Used predominantly for low-value regular payments such as utility bills.
  • Preauthorised direct debits processed through BACS on three-day basis.
  • SEPA Direct Debit scheme available.

 

Cheques

  • Cheque payment has been a common form of payment, but it is in decline (from 2015 to 2016 there was a 15% drop in number of cheques used) as high- and low-value transactions are increasingly paid electronically.
  • Cheques are truncated and processed through C&CC system, and settled within three days.

 

Card Payments

  • Becoming increasingly common and dominate cashless payments.
  • Visa and MasterCard are the main credit cards used, with American Express and Diners Club also available. Visa is the main debit card used, and Maestro and Solo cards are used to a lesser extent.
  • Processed via VocaLink same day and credit card payments cleared by the card-issuing companies.
  • There are 70,270 ATMs (www.link.co.uk) and 1.96 million point of sale (POS) terminals (www.statista.com) in the UK, and they are increasing significantly in number each year. Both ATM and POS terminals are Europay, Mastercard and Visa (EMV)-compliant.
  • Oyster cards are issued by Transport for London and can be used on the London Underground and Overground and selected National Rail networks. They are contactless, pre-paid cards that can be used with pay-as-you-go credit or as travel cards.
  • Other multipurpose pre-paid cards include the Cashplus MasterCard, Visa Prepaid and Quidity, a pre-paid Maestro card.

 

Other Payment Systems

  • Bills of exchange are used for trade finance within the UK. They are cleared through the C&CC system.
  • Bank drafts offer a secure form of payment, but are not common and are high cost. They are cleared through the C&CC system.

 

Demographics

Recent Developments

 

Consolidation of Payment System Operators

Retail payment systems in the UK are being streamlined with the New Payment System Operator (NPSO) taking over responsibility for Bacs and Faster Payments. NPSO will also take over operating the Cheque and Credit Clearing Company in the coming months. The move is in line with the aim of Payment Systems Regulator and the Bank of England to help develop the capabilities of the three operators and reduce the associated costs and complexity.

Read more about the development here.

 

Coinbase Obtains UK Licence

The Financial Conduct Authority has granted an e-money licence to cryptocurrency exchange Coinbase. The move enables Coinbase to issue e-money and provide payment services in the UK. It also means client funds will be segregated, so if Coinbase goes out of business any fiat currency being held on behalf of customers will be returned to them. Coinbase’s e-money licence extends beyond the UK to the other 23 countries in the European Union.

Read more about the development here

 

FinTech Financing Soars

Investment in FinTech firms in the UK nearly quadrupled in 2017 to stand at USD3.4billion, according to a report by professional services firm Accenture. The increase was driven by a change in attitude among traditional banks, which have now started to invest in Fintech companies. Globally, financing for FinTechs rose by 18% during the year to USD27.4billion.

Read more about the development here.

 

 

This Market Profile is brought to you by DBS. Get in touch with us for further insights on doing treasury in the UK and take advantage of our innovative solutions to empower your business. Click here to find out more.

 

 

Sources: IMF World Economic Outlook database, October 2016; CIA World Factbook; Trading Economics; PwC

Please note that the information contained in this document, assembled based on information available and accurate as at July 2017, is of a general nature only and is subject to change whether for economic, political, social or other reasons.

 

Last updated on 07 Jun 2018