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Big Tech’s Expansion Into Financial Services: The FCA Kicks Off Debate On Potential Implications
BigTech firms – Google, Apple, Meta and Amazon – are gradually entering the financial sector and becoming essential service providers. The giants use platform-based technology to facilitate payments and have more recently expanded into other areas, such as lending, asset management, and insurance services.
On October 25th, the Financial Conduct Authority (FCA) published a discussion paper examining potential regulation avenues for BigTech companies. Today, the FCA is hosting an expert panel that will focus on harnessing the benefits of BigTechs’ entry into the financial sector while minimising the harm to consumers and competition. Currently, no regulatory changes are being proposed, and the FCA’s paper aims only to stimulate discussion on the topic.
The UK’s City watchdog believes BigTech companies could provide innovations in financial services and drive down costs, but also expressed concerns that they could build dominant positions leading to the “potential exploitation of market power” as well as pose a serious threat to consumer data. These risks and opportunities will be explored further in the sections below.
Competition: risks and opportunities
BigTechs’ entry into the financial services sector opens many opportunities for consumers, including a broader range of services to choose from, ‘one-stop shop’ platforms offering a diverse range of services, and, of course, reduced costs.
However, while BigTech has demonstrated its ability to drive innovation and reduce costs for consumers, it has also shown its potential to disrupt and dominate established markets. It is no surprise that authorities are increasingly interested in establishing safeguards to stop the giants from dominating yet another sector and eliminating competition. Without these, BigTech could leverage its colossal profits to support entry at scale, exploit its entrenched market power to harm healthy competition, and put consumer data at risk. Such actions would erode any potential benefit their entry would make.
The FCA said it was concerned that BigTech companies could become ‘gatekeepers’ to financial services because of advantages ranging from “global scale and large user bases” and “rich data about their users” to the fact that they can set default options on consumer devices, potentially allowing them to push their own products or exclude others. Recent happenings, including Apple’s denial of third-party access to its near-field communications chip or Apple and Google’s restrictions on app developers’ ability to use competing payment providers, demonstrate that these concerns are well-founded.
The FCA needs to examine how BigTech uses consumer data to influence the financial services it will provide. This is because BigTech could draw on the consumer data it amasses from its other business lines to enter another market. By doing so, BigTechs can scale up rapidly in payment, credit, insurance, and investment services. For example, it is highly likely that Amazon – who recently entered the insurance sector – will use the enormous amounts of data on consumer spending habits from its e-commerce platform to curate tailored insurance services. However, this could be considered an unfair advantage.
Data use and protection: risks and opportunities
Although the use of data to offer tailored solutions to consumers could, to some extent, be beneficial, the FCA also needs to ensure BigTech firms do not use the data in their possession in ways that harm consumers. Harm to consumers can take many forms.
First, BigTechs may be able to act as data providers to incumbents, fintech, advertisers and potential entrants in the market.
Second, their anti-competitive use of data can also give rise to ‘digital monopolies’, where BigTechs can engage in price discrimination once their dominant position in data is established. They may use their data to identify the highest rate the borrower would be willing to pay for a loan or the highest premium a client would pay for insurance.
Price discrimination could also have adverse economic and welfare effects and raise serious ethical concerns. Using personal data could lead to excluding high-risk groups from insurance markets. There are also signs that BigTechs’ sophisticated algorithms to process personal data could develop biases towards minorities. With Amazon’s recent entry into insurance, there is a risk the sector could be undermined if data is negatively used in insurance underwriting, therefore impacting access to insurance for specific cohorts of consumers. Since bias can feed into AI or machine learning, the FCA must ensure that the AI that BigTech companies use to enter the market is safe, ethical, and unbiased.
BigTechs’ role in financial services brings efficiency gains and lowers barriers to the provision of financial services, but the same features that bring benefits also have the potential to generate new risks associated with market power.
Should the FCA ever deem BigTechs’ move into the financial services space uncompetitive or as posing data protection threats, it would likely work with the Competitions and Markets Authority and the Information Commissioner’s Office in any investigation. The FCA plans to publish a feedback statement in the first half of 2023, setting out how it will develop its regulatory approach.
Article written by Wanjiru Chigiti
Birmingham: COLPs And COFAs Convene
At the annual COLPs (Compliance Officers for Legal Practice) and COFAs (Compliance Officers for Finance and Administration) conference, the worsening economic climate was the main topic on the agenda. Westminster’s aspiration regarding having a single regulator for legal services was made clear to delegates.
Around 600 compliance officers participated in the SRA (Solicitors Regulation Authority) annual COLPs and COFAs conference on Tuesday, November 8, at Birmingham International Convention Center. This turnout was considered impressive because there was a scheduled virtual rerun of the event the following week.
Chair Anna Bradley chaired the opening Q&A session. She said that the move to a single regulator for legal services is a ‘live conversation’ at Westminster and in Whitehall, despite the SRA believing that a significant hurdle to overcome is securing legislative time (knowing that bigger and competing priorities currently face the government).
Bradley stated, ‘there is an appetite to try and move more in that direction. This is a live conversation at Westminster and Whitehall’, while chief executive Paul Philip agreed, stating, ‘is it time for a single regulator?’. Possibly, although he added that he does not believe this will happen quickly: ‘Depending on the day’s politics, there is always something more pressing to move to.’
The obvious first choice, assuming more general oversight of a sector – which currently, nine approved regulators supervise – is the SRA (knowing that the others are considerably smaller). The SRA was approached controversially earlier this year by the Chartered Institute of Legal Executives to take charge of the regulating of legal executives from CILEx Regulation.
The legal and societal implications
The regulator asserts that it is ‘in the foothills’ of discussions revolving around a potential transfer, which includes talks with the Law Society. Bradley stated to journalists, ‘we can’t see any reason why we couldn’t do this operationally’ and added, ‘but that in a way is a smaller question. The bigger question is does it have a fair wind politically. We are looking at what the regulatory model will look like and are heading toward a discussion with our [the SRA] board in the spring.’
The Q&A session’s chair, BBC journalist Clive Myrie, asked Philip about the deteriorating economic climate for law firms and law firms’ clients. Unsurprisingly, Philip answered that since the 2008/2009 banking crisis, this is the worst backdrop we are facing.
‘At that time we were particularly concerned with misuse of client accounts,’ he added. ‘When things get hard, we need to pay close attention to the client account because there is a natural tendency to try and use it to get by – not stealing, though there are folk who do that unfortunately – but using it to pay bills and putting [the money] back in. That’s a major issue for us.’
When prompted regarding the professional indemnity insurance of the market, Philip asserted that the regulator saw no evidence of ‘market failure’. Even though premiums might still be going up, cover was more likely to be secured by firms last year compared to the year before.
The SRA’s agenda contained another issue: the exposure of disparities in pass rates for the SQE, which the regulator was committed to having investigated. In the first cohorts, Black and Asian candidates were significantly outperformed by White candidates. It can’t be said to be skewed in any respect because the SRA later confirmed that the first cohort was composed of a disproportionate number of candidates who qualified abroad. Therefore, they achieved a lower pass rate than the overall average, and the SRA expects the number of candidates who have undertaken an SQE preparation course to increase.
‘Research on reasons for the disparities will land on the regulator’s desk at about the same time as stronger datasets that will enable the SRA to consider next steps’, Bradley said.
Philip disclosed the SRA’s plan to prepare for the issuance of a warning notice to the profession regarding ‘lawfare’, evidently the abuse of civil society actors and journalists and the oligarchs’ use of the legal system by stating that ‘rich people are trying to protect their reputation inappropriately…to silence people raising legitimate concerns. We are in the middle of that as the regulator of solicitors. We are about to publish a warning to the profession on what we expect.’
Article written by Nadine AbiKanaan
Why Is The Bill Of Rights Bill Causing Widespread Apprehension Among City Firms?
In response to the reintroduction of the BRB, the Law Society of England and Wales met with over thirty City law firms and their stakeholders, who have expressed their concerns about the unintended impact the enactment of this Bill may have on businesses and the UK’s economic competitiveness.
Indeed, the BRB is challenging the current relationship between Parliament and UK Courts in ways that may be interpreted as undermining the legal protections businesses currently enjoy against the State.
Moreover, the undermining of human rights in the UK resulting from this Bill may serve as ammunition for competing jurisdictions that wish to dissuade foreign actors from conducting business within the UK.
Indeed, Law Society vice President Nick Emmerson opines that this legislation will create ‘’legal confusion and uncertainty’’ and that undermining the UK’s adherence to its international agreements will disrupt normal contracting and business practices. This would signal to international actors that markets are unstable and disincentivize businesses from conducting their affairs in the UK because of higher business risks.
Clients of city law firms include many international law firms looking for market stability, and the BRB’s volatile nature signals quite the opposite. Emmerson also warns about “regulatory overreach by local governments and regulators” ensuing from this Bill, which will only further the uncertainty and complexity that City law firms’ major clients are concerned about.
The legal uncertainty and the removal of legal safeguards for businesses which the BRB will likely result in are therefore estimated to undermine the UK’s attractiveness as a place to conduct business. This is bad news for City law firms, who see the potential retraction of their clients from conducting their affairs in the UK as an impediment to their businesses.
It follows that the BRB adds to the current uncertainty ensuing from the Retained EU Law (Revocation and Reform) Bill, which causes concern among the legal sector in terms of maintaining their clientele and economic competitiveness. Currently, the Bill is at its second reading stage in the House of Commons. Only time will tell how the BRB will impact City law firms’ activities.
Article written by Mahault Dignet
The Sale and Leaseback Transaction – An Appropriate Solution?
According to Practical Law, a commercial ‘sale and leaseback’ property transaction or leaseback is a transaction ‘where one party sells property to a buyer, and the buyer immediately leases it back to the seller. It allows the seller to make use of the asset while not having capital tied up in the asset’.
Simply put, the property’s new owner becomes a landlord or a lessor to the previous owner, the latter becoming the lessee or the tenant. Such commercial tenancies are usually for long periods, and the buyer almost always shoulders the most risks within such agreements.
This transaction increases the operational cash flow of the subsequent lessee, often for new investments or settling debts, whilst continuing to use the asset to run their business.
Leasebacks are on the increase, the capability to liquidate fixed assets is a vital survival mechanism on a company’s balance sheet, and usually, for a sale and leaseback transaction to take effect, there must be high-cost, fixed-value assets, for example, land or expensive manufacturing equipment.
For the transaction to occur, as apparent as it may seem, the current owner must agree to sell to the purchaser for an agreed price. Usually, such decisions, owing to the high value of such assets, are taken by the shareholders of a company as listed in the UK and as defined by the Companies Act 2006.
An asset purchase involves several stages, and in general order, non-binding heads of agreement or letters of intent which outline the key commercial terms of the deal, such as its timescale, a non-disclosure agreement to keep the details of the agreement private, and exclusivity agreements to ensure rival bids are kept at bay.
Respective lawyers, accountants, and auditors undertake necessary due diligence to ensure either party is adequately financially protected during and after the transaction should either party decide to proceed. The due diligence identifies the strengths and weaknesses of the deal, of either company and the financial risks involved in proceeding with the transaction.
An Assets Purchase Agreement (APA), which expatiates the finalised terms of the deal, follows the decision to proceed. The APA precedes the tenancy agreement. The rent is usually charged at an open market or index-linked (to inflation) rate and usually for extended periods, therefore defined as long income in the estate market.
The CBRE Long-Income Index tracks the UK’s leaseback transactions.
A leaseback’s advantages in the current economic climate
The current reduced availability in obtaining commercial credit, mainly due to unprecedented inflation and increased commercial defaults, means implementing a leaseback transaction would enable a company to realise an almost immediate cash injection, thereby stimulating business growth by allowing the company to settle debts, increase its debt-equity ratio and thus its liquidity, potentially staving off the unmentionables of insolvency and bankruptcy.
A company may decide to sell off freehold fixed assets owing to the accompanying debilitating financial liabilities; consequently, a leaseback transaction absolves its previous owner of those liabilities. Additionally, mortgage-backed financing does not release the total sum of an asset’s value whilst a leaseback transaction does; up to 100% of the asset’s appraised value, and consequentially, the asset’s full financial potential is realised.
As banking and valuation fees are absent, administration costs are reduced overall, and rent payments are likely cheaper than the property’s previous mortgage repayments. Also, the rent payable under the lease could be deductible as an operational cost, thus a tax advantage to the lessee.
It is for all these reasons leasebacks are increasingly popular with, among others, supermarket chains and medical research organisations.
For instance, in October 2022, Clayton, Dubilier & Rice LLC, the private equity owner of Morrisons, detailed their plans for a leaseback transaction for five of their stores, reportedly worth £150 million, whilst LXi REIT PLC, a closed-end property investment company, and Sainsbury were at the initial stages of a leaseback agreement worth £500 million for 18 of the latter’s stores, although those plans were called off within a few days in September 2022.
In February 2022, Oxford Biomedica, a gene and cell therapy firm, finalised a £60 million leaseback agreement of its Windrush Court facility to Kadans Science Partner, who will grant Oxford Biomedica an occupational lease at a rent value of £3.5 million a year, increasing to £4.7 million after five years.
The rent income generated for the lessor guarantees, for the most part, long-term rental income, and although there are apparent risks, it could lead to more significant than average returns. Further, the lessor possesses an asset that could increase in value, leading to a healthier balance sheet and, in turn, could augment the operational cash flow of that business if and when the time comes to liquidate.
Impact on the legal sector
As more companies are gearing towards this alternate form of finance to ensure, at the very least, survival of the economic downturn, and more long-term property investors are looking to capitalise on the acquisition of cheaper assets and long-term investments, law firms will be looking to capitalise on this increasingly beneficial movement.
An in-depth understanding of the property market’s condition is vital for the successful completion of a leaseback transaction. Such an understanding requires specialised expertise and vast experience. Companies looking to engage in leaseback transactions would no doubt pursue law firms with elite expertise to ensure they appoint the best advisors.
For law firms, this necessity could mean increased reputational clout and additional experience gained in this sector upon finalising such agreements, both of which could lead to securing new clients and, subsequently, more profits.
In the main, leaseback transactions seem an appropriate solution for a capricious commercial property market.
Article written by Aqua Koroma