What contracts will be affected by Brexit?

Contracts affected by Brexit must fulfil two criteria: (1) the contractual term will run beyond the date of the UK´s departure, expected end of March 2019, and (2) the nature of the contract means that it crosses the UK-EU border in some way. The latter arrangement can take many forms, for example if a supplier is situated in Germany and the buyer in the UK, or an English company could offer its products to English customers only, but do so in reliance on EU regimes and laws.

A particular example which is common in licence and agency agreements is reference to the ‘EU territory’. Will this continue to refer to the UK after Brexit?

Interpretation

In contracts, everything which isn´t clear, will be a question of interpretation. The English courts have started to take a much stricter approach to interpretation than in continental Europe. In Arnold v Britton, the Supreme Court underlined the importance of the language of the contract, and warned that the fact that the contractual arrangement, if interpreted according to its language, has worked out badly, does not justify departing from the natural language of the contract. In Marks & Spencer Plc v BNP Paribas Securities Service Trust Company the court held that a court should only intervene where a term has been considered so obvious that it went without saying.

Therefore any doubt caused by Brexit could lead to disadvantages, which quite often both parties didn´t want. Businesses shouldn´t rely on a Material Adverse Change Clause, i.e. that the Brexit is such a material change/ force majeure that leads to an automatic termination of a contract.

Contractual issues caused by Brexit

There are four major issues for commercial contracts caused by Brexit: EU references, financial hardship, impossibility and enforcement of agreements.

One difficulty can arise from the reference to EU territory or EU law, like the scope of right or restriction, such as in a trade mark licence or restriction on transferring personal data. After Brexit, the UK will not be part of the EU anymore. Therefore, to make sure the territory of the UK will be included, contractual provisions should have a full list of countries including the UK and future EU members. With data protection we will have to see whether the UK will uphold the EU data protection standard, otherwise the UK won´t be a “safe harbour” and the same problems will arise as with the USA. Then, UK organisations should guarantee their compliance with EU data protection laws. Issues can also arise for new goods entering the EU, if they need to comply with certain EU standards. This should be borne in mind already. The same applies by reference to EU legislation. We do not know yet what EU law will be converted into UK domestic law, or if the UK will take over new legislation.

Financial hardship can be triggered by the movement of exchange rates like we saw in June 2016, tariffs and VAT issues. There could be additional costs and delays for customs checks imposed after the UK leaves the customs union, and restrictions on the free movement of people could lead to labour shortages or increasing labour costs. These should be considered in new contracts, although old contracts cannot be changed.

This will be different if Brexit makes performance of the contract impossible, in which case frustration will apply. This will be very rare, possible examples could be seen in the financial sector with the EU passporting. This could fall under force majeure. However, the courts are very reluctant to accept force majeure, as demonstrated in Czanikow Ltd v Centrala Handlu Zaranicznego Roimpex.

Therefore, organisations should consider a special termination clause in the event of Brexit and certain hardships.

Within the EU, under the Brussels Regulation, in general all judgments are enforceable in any member state. However, when the UK leaves the EU, it is doubtful that the Brussels Regulation will be enforceable in the UK. Therefore, there is a risk that UK judgments won´t be easily enforceable in the EU and vice versa after Brexit. However, the UK is member of the New York Convention 1958 on Arbitration, so arbitration will be enforceable. Consequently, organisations should use arbitration clauses and agree on the applicable law and jurisdiction, because the Rome I and II treaties which regulate these questions within the EU, will most likely not be (directly) applicable after Brexit.

Old contracts – new contracts

One further differentiation is the question of (1) existing contracts, where business have to live with the contractual text or re-negotiate a new agreement and (2) future proofing contracts, where businesses are in a position to deal with these new challenges now.

For existing contracts, organisations should consider how Brexit could affect their business, identify key contracts governing those arrangements, and look for loopholes or consider whether to try to negotiate or amend those contracts. However, be careful. Brexit is an unknown quantity for everyone, therefore try to find common ground. With future contracts, you should expressly state the commercial impact of Brexit, i.e. change to tariffs, exchange rates, customs procedures, whether reference to the EU shall include the UK and the position of EU law. You should use arbitration clauses for enforcement in the EU/ UK, and consider whether to include an express right of termination for certain issues prompted by Brexit.

Whilst we do not yet know what kind of Brexit – soft or hard – will happen, we do at least know that change is coming, so it’s time to take this into account, change contracts where necessary and begin dialogues with your business partners. Nothing is as damaging for business as uncertainty.

About Urs Breitsprecher

Urs Breitsprecher is an expert in Company Law, M&A and Tax . Urs is a member of IR Global, the world’s fastest growing global professional service firm network.

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Already as asset managers prepare for MiFID II — the revised Markets in Financial Instruments Directive, to give its full title — they find themselves with a number of difficult decisions to make about budgets, technology and even their very futures.

The legislation itself has several key objectives, from creating a coherent regulatory system across the EU to increasing transparency and boosting protection for investors. It will also come at a significant cost to asset managers, and with further extensions to the deadline for when MiFID II comes into force highly unlikely, the industry is running out of time to get its ducks in a row.

One of the major headaches is that there are few clear instructions within the clauses of the MiFID II regulations. Rather, much of it is based on overarching principles, meaning that a great deal of interpretation of the grey areas is required by asset managers.

MiFID II is going to affect almost every aspect of asset management. There are very few back office processes that will remain unchanged due to the regulations, but the cost of compliance will also have a massive impact on business models and almost inevitably lead to consolidation in the market.

The way trades and transactions are reported will change, playing into one of MiFID II’s overarching themes — transparency. All communications with clients need to be monitored and recorded, and there needs to be evidence that communications have not only been received but actually opened as well. Asset managers will also need to be able to prove that they have their client’s best interests at heart, not just in the provision of real-time trade and transaction data, but that ‘best execution’ efforts have been met as well.

The kind of technologies required to meet these needs will come at a considerable cost. While digital transformation has been an industry buzz-phrase for some time now, any investment in technology must be carefully planned and thought out. While some asset management firms will be asking the question ‘build or buy?’, the former option will only be realistic to Tier 1 organisations.

For the vast majority of the market, there’s a great deal of due diligence to be done when assessing the third-party solutions that they will have to buy in.

Software vendors are likely to suffer a capacity crunch in the coming months as they struggle to cope with demand for their products, which brings a new set of problems. A third-party partner could end up costing asset managers in the form of fines for non-compliance if their software isn’t working properly.

In what is already a challenging market, MiFID II couldn’t have come at a worse time for many businesses. The regulations are a significant burden for them and with margins wafer-thin, organisations such as active asset managers, hedge funds, and high-frequency traders could be especially at risk.

While we’ve seen some large mergers in the past couple of years — Aberdeen and Standard Life, Janus and Henderson — MiFID II could be the trigger for a wave of M&A, and even in some cases liquidation. Consolidation seems inevitable as a lot of firms with a narrow focus look to diversify and streamline their operations. Size and scale matter, but it will be the organisations that have solved the digital transformation puzzle that will be best set to survive in a post-MiFID II world.

Mash Patel is CEO of Kurtosys

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A new study by Dun & Bradstreet shows compliance professionals anticipate a more complex and uncertain future, which will increase data governance challenges and cause difficulties in the customer journey.

This quantitative research was carried out in November 2016 by independent research company Censuswide. Responses were gathered from 100 compliance, legal and operations professionals within UK banks and financial institutions.

The research found that almost half (49%) believe that it will become harder for their organisation to comply with financial regulation over the next 12 months. Reflecting this, two-fifths (40%) of compliance professionals also expect customer onboarding times to increase over the next five years.

42% of respondents say it currently takes them three to four working days to onboard a new customer, with 12% saying it takes up to six working days. Three-quarters (75%) of respondents believe that CDD (Customer Due Diligence)-related delays have a negative effect on the customer experience, with increased regulation resulting in significant business impact such as taking on less business and a third (32%) of respondents saying they have had to build larger teams to manage the process.

About half of respondents (45%) say that monitoring the compliance status of customers on an ongoing basis is “fairly” or “very” difficult. Moreover, over a quarter (28%) say that increased time – between 3 and 4 working days – to identify and compile a report on a client that posed a regulatory risk could strain sales and compliance teams, with the potential for revenue loss.

“By valuing the positive impact of a healthy compliance function on the rest of the business, banks and financial institutions can create CDD processes that will meet current and future demands,” said Thomas Cosgrove, Strategy Leader, Global Compliance Solutions, Dun & Bradstreet. “Through intelligent compliance practices, teams can not only manage risk effectively, but actually improve the onboarding process, thus enhancing the customer experience and creating a competitive advantage over rival firms. An effective compliance team not only protects the bank from risks (financial, regulatory, reputational), but also serves as a showcase of the institution’s commitment to responsible business and its ability to protect the interests of customers.”

Compliance professionals believe that using technology is the way to respond to the changing regulatory landscape, with 50% saying they will need to invest in solutions within the next five years. Currently, few organisations are proactively enhancing their level of sophistication around CDD, as only 7% have taken steps to centrally manage and automate procedures. Compliance professionals recognise the advantages that automation would bring to the onboarding process, in particular, including faster times to revenue (60%) and improved customer experience (56%).

“In an age where the regulatory landscape is becoming more challenging and evasion techniques are growing in sophistication, businesses should look to arm their compliance teams with the best tools available,” continued Cosgrove. “Intelligent application of robust data can automate parts of the compliance process, enabling knowledge workers to focus on exceptional cases, improving onboarding speeds and focusing scarce resources on higher value activities. The latest technology is important, but systems are only as powerful as the information that flows into them. Ultimately, teams must ensure the quality and timeliness of the data they use is as robust as possible.”

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Suparna Goswami Bhattacharya

October 17, 2014: When someone mentions “CFO”, the first thing to hit the mind is – a guy managing finance in a company.

However, with time, the role of the CFO has evolved. Today if you mention about the ‘managing finance’ bit to any CFO worth his salt, he will probably laugh out loud.

Once focused on cost containment, accounting and compliance, the position has evolved into that of a true business partner – someone who delivers insights and provides decision-making support.

Today, companies expect CFOs to have the ability to manage volatility, navigate complexity among other things. In fact, a recent Accenture report* — The CFO as Architect of Business Value: Delivering Growth and Managing Complexity — states that the expanded role has resulted in their growing influence, especially as a result of their involvement in growth-related and business transformation activities.

“The role has evolved over time internally because of the increasing importance of financial data and insights and externally as a voice of the company to various stakeholders,” said Christian Campagna, lead managing director, Accenture Finance & Enterprise Strategy Group.

And the biggest drivers of this change in the scope of the role of the CFO are the global financial crisis of 2008, wherein the CFO emerged as a trusted partner to the CEO and other member of the C-Suite.

The role of the CFO at present has clearly expanded. The Accenture study calls it ‘Value Architect’. Here the CFO acts as the guardian of the economic value agenda for the company and provides guidance for key decisions made across the enterprise. “Now the CFO has the responsibility to drive profitability and growth while managing constant volatility, complexity, globalisation and emerging technology. The CFO is arguably one of the most powerful executives after the CEO,” says Campagna.

“This view that the CFO is the owner of cost control, and someone else in the business is the owner of revenue growth, is not the case,” says Margherita Della Valle of Vodafone. “The CFO has a role to play across the whole of the P&L and the balance sheet. It is essential that the CFO convinces the CEO that finance has a role to play on more than just costs.”

Thanks to the expanded role, the CFO now often finds himself in middle of a wide range of internal and external stakeholders, including other members of the C-suite, the rest of the management team, the board of directors, investors, regulators and analysts. Each has their own demands, and the number of stakeholders continues to expand.

Mike McClellan, CFO, North America at Sanofi, believes that bureaucracy should not mushroom in a company in order for things to run smoothly. “The CFO’s role is to really make sure that we’re not allowing processes to become too complex. We’re really trying to keep things effective and efficient, not only from a cost perspective but also from a way of doing business,” remarks McClellan.

Industries embracing change in role of CFOs

Research by various firms shows that the role of CFO is expanding. “The role is expanding but the focus may vary from industry to industry in order to address industry-specific challenges,” says Campagna. For instance, a CFO in financial services must focus more on regulations and cost control while a CFO at a consumer goods company may be more concerned with managing complexity.

In fact, in most industries CFOs are putting a special emphasis on digital. Hugh Morris, finance expert and vice-president of business development banking at GENPACT LLC in his statement earlier, had said that technology continues to change the way business gets done.

“CFOs need an understanding of emerging technology, but also where things are headed. They must remain agile enough to change course as technology changes and be committed to governance as a way of ensuring that the organisation uses the technology as efficiently as possible,” he said

David Rowland, CFO, Accenture believes that technology is central to finance strategy and agenda. “Organisations can’t have optimal efficiency and effectiveness without focusing on enabling technologies. In today’s world, where there’s an abundance of data, it’s particularly important that organisations raise their game in managing, analysing and presenting data in a way that yields the greatest value for the business.”

*The Accenture 2014 High Performance Finance Study was based primarily on an online quantitative survey conducted between January and April 2014 among 617 finance executives.

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12th December 2013

If the explosion of big data were not enough to drive organizations to consider implementing an information governance strategy, the increasing number of regulations that businesses must comply with will certainly bring information governance to the forefront of every executive’s mind. Regulations such as Solvency II, Dodd-Frank, HIPAA, the Gramm-Leach-Billey Act, Basel III as well aschanges to the EU Data Protection regime coming in 2014 make information governance a must for every company, especially multinational firms. It’s simply unreasonable and unwieldy for a business to try to respond to each of these regulations (and their ever-changing requirements) individually. A business must adopt a comprehensive information governance strategy to avoid the serious risks associated with a lack of compliance.

To date, most organisations have relied on manual approaches to information governance, either relying on employees to self-classify information, or employing professional records managers to capture and manage ‘records’. These approaches are prone to error and can potentially leave businesses in breach of compliance and subject to strict penalties and hefty fines, for example, the changes to the EU Data Protection regime may attract fines of up to €1m or 2% of annual global turnover for failures to comply.

Lynn Collier, writing recently in Business Computing World, offers steadied and measured advice for businesses still in the early stages of information governance execution. Most importantly, information governance must be wide-ranging enough to protect a company for all regulations on the books. Information governance is a strategy for every facet of a business, with policies and procedures for data retention, storage, management, and usage championed and put into play by everyone from the C-suite on down. Information governance is most successful when businesses shape these policies and procedures based on a thorough assessment of their own needs and current practices.

Once the information governance strategy becomes ingrained in a company’s DNA, subjectivity disappears, as every employee has clear rules surrounding data. This allows significant benefits to flow to the business, such as more efficient and effective use of data and associated cost reductions. With a recent study finding that 17.3% of companies have paid a financial settlement of at least $50,000 related to compliance issues, the rewards of adopting an information governance strategy far outweigh the risks.

Source: Recommind, Inc

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