As negotiations over an exit deal continue, UKEF and fintech companies will need to act quickly to fill market gaps. Finbarr Bermingham reports.
Eighteen months after the Brexit vote, we are still no clearer what the post-separation trading relationship between the EU and the UK will look like.
“We’re seeing a lot of uncertainty. Forgoing access to the single market would not only increase costs through steeper import prices, but also via higher operational costs as existing manufacturing practices may be affected by delays at the border. Uncertainties are also making it harder for UK-based firms to tap the global talent pool,” says Carlos Casanova, an economist at Coface, atrade credit insurer.
Industry insiders say that losing access to the best talent would be a serious headwind for the UK’s trade and export finance industry. Speaking in Brussels in November 2017, the EU’s chief Brexit negotiator Michel Barnier warned that, post-Brexit, UK financial service providers will lose their EU passport. Not only would this exclude UK banks that do not set up a fully-capitalised European subsidiary from a market of 500 million people, it is also likely to rule European banks out of British markets on the basis of reciprocity.
“Passporting rights works both ways. If you lose passporting rights, you get an exodus of talent, that’s my key concern,” says Gabriel Buck, managing director at GKB Ventures and until recently, chair of the British Bankers’ Association Export Finance and Trade Committee.
For UK SMEs, UK banks underwrite the majority of working capital and overdraft facilities. These may be used to fulfil export orders, but in the case of specialist export finance facilities and advice, winning orders with buy-side financing, most of those services come from European and international banks remaining in the UK.
“Whatever anyone likes to say in their publicity campaigns, UK clearing banks are not out there telling clients that export is the ‘be all and end all’ for UK companies. They’re all obsessed with their own scenarios, capital requirements ring-fencing – everyone is going for the low hanging fruit, which is generally domestic,” says Lionel Taylor, managing director at Trade Advisory Network, a consultancy, and former global head of trade at Lloyds.
Indeed, this is not a new problem. Since the financial crisis, it has been a running theme in the UK’s trade finance industry: UK banks such as RBS, Lloyds and Barclays have become more “high street” in their outlook. Employees and trade support networks overseas have been shed, taking their trade books with them.
“There is a lack of knowledge in the wider market. The initial premise is that it’s harder and scarier to export. The need for education is greater than it was before, with all the uncertainty. I don’t believe the relationship managers in UK banks – most of whom have never exported a thing in their life – are well-suited to sell exports to companies, telling them about the opportunities in exporting to, say Vietnam,” Taylor adds.
A recent report by East & Partners outlined the quandary: post-Brexit Britain needs to do more than ever to build new trading relationships with the rest of the world, but is doing so from a poor position, in terms of financial services.
“UK businesses overall, and especially smaller enterprises, are clearly not getting the service they seek from their banks in accessing trade finance and supply chain funding. As Brexit looms ever closer, and the outcomes that result from it take effect, this lack of access can only serve to undermine UK business in its international trade efforts regardless of the UK government’s encouragement and campaigns to promote exports,” the report read.
The underlying problems could be exacerbated in 2019. UK banks have already down-skilled in the structured trade and export finance areas, whereas the European banks that have such skills may leave the market. There is plenty of liquidity in the market, but it will be even more difficult and more expensive for businesses to access it – at a time when they need it most.
“That’s a current problem in the UK market and globally. The average age of structured trade financiers is getting older. In the last 15 years, I haven’t seen a wave of new blood to continue and sustain the industry. If no passporting rights exist and foreign banks leave the export finance market, that creates a problem for the UK,” says Buck.
Not only would this exodus drive up the price of trade finance, it would also create a gap in the market that is likely to be filled by a mixture of government support and new players. In this scenario, UK Export Finance (UKEF – the export credit agency) becomes more important than ever.
Already, UKEF has been making the right noises. In 2016, it doubled its total risk appetite to £5bn and made finance available in 40 pre-approved local currencies. In October 2017, it launched new partnerships with five high street banks to streamline the flow of finance to UK companies. However, once again, these facilities are reliant on non-expert relationship managers to educate their clients.
“At face value, UKEF’s products are totally fit for purpose. The working capital scheme, export guarantee scheme and direct lending scheme, it’s all useful and well-conceived. But the challenge is more that UK SMEs don’t know what UKEF does. Origination is dependent on a relationship manager in a clearing bank spotting the opportunity and understanding how UKEF’s products might fit in. There’s an education and an origination problem,” says John Bugeja, who co-runs Trade Advisory Network.
Is there the opportunity to increase the direct lending scheme and bypass the banks when disbursing it? UKEF failed to respond to questioning along this line, but it would require a huge hiring push and an even bigger marketing drive on its own part.
Technology on the hunt
Also eyeing the opportunity will be digital lending and fintech companies, which are not lumbered with the same KYC and AML regulations as big banks. (A European Commission report on how the EU might harmonise fintech oversight to enable the sector to scale up and compete globally is expected early in 2018.) Digital lenders are armed with capital from secondary markets and have been making headway into trade finance around the world. This trend will likely be accelerated by Brexit.
“I see banks working with fintech, digital platforms, back selling from large corporates into the smaller market. That is where we need to look, no matter what happens post-Brexit,” says Rebecca Harding, CEO of trade finance research firm Equant Analytics.
As it is, though, the UK’s trade finance sector is ill-equipped to deal with the push for new markets that will be required after leaving the EU, especially in a “no-deal” scenario. Brexit cheerleaders promised to return UK trade to the swashbuckling days of mercantilist adventure. What is now clear is that the underlying infrastructure required to support this does not exist. With alarming frequency, the pre-referendum promises are revealed to be hollow and ill-conceived.
Finbarr Bermingham is the Hong Kong-based Asia editor of Global Trade Review, covering all aspects of trade finance markets in Asia Pacific, including developments in fintech. Before this, he worked as trade correspondent at the International Business Times in London.
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