In June the Bank of England voted to raise interest rates from 4.5% to 5% in a move that puts more pressure on businesses.
For planners working with corporate clients, the rate rise’s squeeze on business is likely to have a negative impact on the eagerness to execute corporate investment plans. Existing loan repayments increase and the opportunity to take on more debt to expand becomes significantly less attractive.
So rising rates are bad for business, nothing new there. But are there any opportunities for businesses to take advantage of the rising rates?
We’ve been working with several businesses that are doing just that.
Introducing Electronic Money Institutions (EMIs)
EMIs are businesses that operate online payment services or issue online money. This may be payment providers, such as Stripe, Debit and Credit Card Providers, or Currency Exchanges. All of which fall under strict FCA rules and guidelines when it comes to safeguarding client money.
This is a significantly growing area. The number of e-money accounts alone now stands at 76 million at the end of 2022, up 108% in two years, outnumbering UK current account estimates according to a recent Dsputiv survey.
The capital held in e-money accounts is also growing fast, totalling £16.3 billion year end, up 191% in two years. There are now over 250 EMIs registered with the FCA and over 1,000 payment institutions. The change in consumer behaviours away from traditional banking following the rise in open banking and blockchain technology are huge drivers behind this.
EMIs must conform to the FCA safeguarding requirements stated under chapter 10 in the Approach to Supervision as well as Article 14 of the Capital Requirements Regulations as stated in the European Electronic Money Directive. This refers to the need for segregated accounts and funds from day-to-day operation of the EMI which protects consumer capital.
EMIs have options in how they adhere to these regulations. The most popular routes are either to use an insurance policy to cover the obligation of liquidity on client funds, or to establish a segregated bank account with a trusted custodian or Investment Manager.
The decision to opt for a cash account or an investment account is a complex one and there are benefits and drawbacks of each strategy, as with any client decision to hold cash or seek exposure to global markets. Current interest rates are making it attractive to hold cash, but this is diminished by inflation which means even with high interest, cash accounts are losing purchasing power over time for businesses.
What is the planning angle?
Well, under FCA regulation, EMIs must be able to provide liquidity or their segregated client holdings, however any interest earned on that capital is for the EMI to keep and therefore choosing the right strategy here can transform a compliance cost into a cash generator for the business. This is a very powerful conversation to be having with these sorts of clients or professional connections from whom introductions can be made.
If higher interest rates are squeezing businesses on their debt, then conversations around ensuring their cash holdings are working best to offset this is going to be a very popular one. Exposure to 15-year high bond yields in the US and UK means business can both comply with FCA regulations and generate cash flow for the company to at least offset the cost of safeguarding.
This is not going to be a solution for all EMIs and, of course, there is risk involved in pursuing an investment solution. Bond yields change, as do interest rates, and some may prefer the stability that cash accounts provide. However, the fall out of SVB and its impact on SMEs, which was felt particularly strongly in the fintech space, is not to be ignored. Working with specialist Investment Managers, backed by a custodial partner, like Nucleus, presents a solution that can set advisers apart in the conversations they’re having with professional connections and EMI clients directly.
Please get in touch if this is something you wish to explore: O-IM provides a specialist Safeguarding account in partnership with Nucleus. If this is an existing area for you and you wish to explore this further, or a new planning angle you need support on when speaking to professional connections, then please do.
