Bank Of England Prepares For Payment Revolution

To help modernise and steer the central bank toward a new digital economy, the Bank of England Governor Mark Carney unveiled new initiatives on Thursday. At his annual Mansion House speech, Carney announced its intention to open its vaults to technology companies for the first time. The move would allow these tech companies to bank with the central bank and thereby keeping emerging payments systems on a level playing field with established commercial banks, threatening existing banks who currently have exclusive access to BoE payments operations. Through this exclusivity, these banks act as an intermediary to other payment providers and make money from it.

The governor emphasised that this would help to ensure similar activities which are regulated consistently by permitting all payment providers to store funds overnight in interest-bearing accounts with the BOE (Bank of England). This would mean holding the competitors to the same risks and standards by allowing access to the same resources and support private innovation and empower competition. Mr Carney insisted that only companies that met strict standards would gain access to the BoE's banking services and the policy is in line with Mr Carney's open mind but no open door approach to Facebook and its proposed digital currency, Libra. Relieving Facebook of banking charges and the risk that its commercial banking partners could go bust, the sterling funds underpinning the new token would be offered a safe interest-bearing account.

Historically, only commercial banks were able to hold interest-bearing deposits, or reserves, at the bank, which is guaranteed to be safe as it is backed by the central bank's ability to create money. Mr Carney said that access to the bank's core infrastructure should change to offer services to others as well, which would help in increasing competition in payments systems. The bank hopes that by giving access to ultra-safe and cheap banking services to new payment providers, it can reduce reliance on major banks and support financial stability by ensuring that even if big banks go bust, payment systems to continue to operate.

Mr Carney also noted that this would help in improving the transmission of monetary policy, and users would benefit from the reduced costs and increased certainty. More comprehensive access can improve inclusion and services, benefiting the UK households and businesses. The governor also said that this access could empower a host of innovation that could overhaul how markets operate. Billions of pounds in capital and liquidity would be unlocked that could be put to more productive uses by reducing counterparty risks in the system and driving efficiency and resilience in operational processes.

He added that the potential transformation in retail payments is even more fundamental and praised Libra for its ability to lower the costs of domestic and cross border payments. Two days ago, Facebook formally unveiled its plans for a digital currency, known as Libra, which Governor Mark Carney said would be systemically important if it achieves its ambitions. It has been launched by a cooperative of technology companies, which hopes the new currency would upend the delivery of financial services around the world. While policymakers and regulators around the world have welcomed its stated aims of making payments across borders cheaper and more efficient, several regulatory problems associated with it have prompted a cautious response from them.

The governor said that Libra must also be a pro-competitive, open platform that new users can join on equal terms and would have to address issues ranging from operational resilience to data protection to anti-money laundering. The implications of the new currency for monetary and financial stability would need to be considered carefully by regulatory authorities. He added that the creation of Libra underscores the imperative of transforming payments and future payments revolution would help in meeting the demands of the new economy.

Hargreaves Refuses to Waive off Charges on Woodford’s Fund

Hargreaves Lansdown PLC (HRGV) is a British-based company which operates the UK's largest direct to investor investment service. The company was founded in 1981 with headquarters in Bristol, United Kingdom. Hargreaves Lansdown administers over £86 billion of investments for more than 1 million active clients through various investments accounts. The company provides execution only, advisory and third-party arrangement services with the aim to empower people to save and invest with confidence.

Neil Woodford's Equity Income fund, which was included both in Hargreaves Lansdown's best buy list and via its in-house funds, blocked investors from withdrawing money on 3rd June. This dragged Hargreaves into controversy as the company had invested a huge amount of money in the fund and had advised its clients to the same. Now, the fund supermarket Hargreaves Lansdown is refusing to waive even part of the management and platform fees it charges on its in-house funds exposed to the fund, as investors exposed to Woodford Equity Income demand that the company do not charge them for the two layers of fees.

Representing about £1.6 billion in assets, a quarter of Hargreaves customers are, either directly or indirectly via its in-house funds, are exposed to Woodford Equity Income, with some £560m of its in-house funds invested in Woodford Equity Income. Since the fund was launched in 2014, Hargreaves has earned £41.1m in platform fees from funds, and in the last financial year, the company earned £67.2m in revenue from management fees charged on in-house funds alone, as it also earned extra management fees on assets invested in the fund via its in-house funds. The group charges a 0.45 per cent platform charge on assets invested in its Multi-Manager funds and 0.75 per cent in management fees on assets invested, which the company has refused to waive off.

The company has already scrapped its exposure to Woodford Income Focus and is consulting on decreasing exposure to Woodford Equity Income from its in-house funds. By using cash balances in the fund portfolios and selling down other funds, the company is redeeming customers wanting to sell out and is still trading in its in-house funds. Adrian Lowcock, head of personal investing at broker Willis Owen said that if a part of a portfolio is not trading then the fees should be reduced or waived as if the fund is being actively managed, then only fees must be charged.

New data published by the broker this week reveal that between April and May Hargreaves exposure to Mr Woodford in its multi-manager funds declined by more than £50m, but the company had been asking its clients to stick with Mr Woodford, praising the troubled fund manager for his skills to deliver excellent long term performance. Investors are also furious after they came to know that chief executive Chris Hill had been aware of increasingly serious liquidity problems at Mr Woodford's fund as early as November 2017, but failed to take any action, possible because of the fat margins it had been earning from investing and recommending which is now the beleaguered fund.

Share Price Commentary

Daily Chart as at June-24-19, before the market closed (Source: Thomson Reuters)

 On 24 June 2019, before the market closed, HRGV shares were trading at GBX 1,885, down by 0.95 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,447.33/GBX 1,622.00. The company’s stock beta was 1.17, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £9billion, with a dividend yield of 1.70 per cent.