A new way of working
20 Jan 2021
While COVID-19 highlighted the inefficient work processes in the corporate actions space, industry experts suggest it has been a catalyst for a new, improved way of working
Image: spainter_vfx/stock.adobe.com
The financial services industry traditionally processed corporate actions on existing back-office systems which were separated by region, line of business or asset class, and those systems were not integrated with one another and often operated on a batch cycle without any real-time capabilities.
More recently, modern solutions have become available allowing institutions to deploy technology to help navigate the complexities of corporate actions but manual workflows are still commonplace.
The one common cause of problems across corporate actions has always been the lack of defined processes, manual workflows and paperwork combined with fragile, complicated infrastructures leading to operational inefficiencies and increased risk, according to Mike Wood, general manager, asset servicing at Broadridge.
With the volatility last year, when the pandemic started, the movement to remote working had a knock-on effect on corporate actions and only intensified the importance of modern technological solutions in this space.
For corporate actions, a company can issue dividends in either cash or stock which are usually paid out during specific periods, usually quarterly or annually. This tends to mark a share of the company profits that are being paid to owners of the stock.
Lockdowns and remote working caused some issuers to defer their annual general meeting (AGM) and approval of cash dividends — or even cancel their dividend for 2020, which means the implications of this will stick well into this year.
Amid the challenges, however, industry participants pulled together and collaborated sharing creative solutions to solve some of the problems and issues around corporate actions. This has been a catalyst for changing the way corporate actions are viewed and the approach to them.
The immediate implications of COVID-19
During the pandemic meridian in late March to April, unprecedentedly high uncertainty drove a dramatic decline in the prices of almost all asset classes.
Sova Capital’s head of capital markets origination, Alina Sychova, says for them, this resulted in a surge of requests from corporate clients regarding opportunities in liability management or shares buybacks.
“Of these, only a handful were prepared and capable of making the rapid decisions necessary to launch bonds or shares buybacks, and unprepared clients missed the window as assets prices started to recover in summer,” says Sychova.
COVID-19 also resulted in extraordinary government relief, which Sychova suggests, flooded the global economy with exercise liquidity, an enormously effective catalyst for the primary markets.
In response to investors keeping a close eye on new equity placement, issuers believe that the market has unlimited potential to absorb liquidity, resulting in corporates considering alternatives to traditional sales.
The pandemic also meant that people shifted from working in an office to working at home.
BBH was able to move 95 per cent of its corporate actions workforce to a work-from-home model as a result of high levels of automation that were within its processes.
“We did identify the need to adjust certain workflows to ensure we continued to maintain our risk and control environment,” says Cara D’Addario, vice president, corporate actions at Brown Brothers Harriman (BBH).
Meanwhile, KDPW CEO Maciej Trybuchowski, says there were “no major issues” for corporate actions due to the COVID-19 pandemic on the Polish capital market.
Trybuchowski identifies the most common issue was that general meetings had to be cancelled in view of legal restrictions imposed on public meetings.
“We have offered assistance in that regard to issuers with our solution which was implemented before the pandemic, in the autumn of 2019. The e-voting application supports companies whose shares are registered in KDPW in holding and voting at general meetings remotely,” he explains.
2021 uncertainty
COVID-19 is still affecting businesses and there is a large degree of uncertainty as to when participants can return to a more balanced corporate action world.
Last year, some issuers had to defer their annual general meeting and approval of cash dividends — or even cancel their dividend for 2020.
In Poland, for example, the dividends paid by public companies in 2019 stood at more than PLN 24 billion (£4.7 billion or $6.4 billion).
According to Janus Henderson, the provider of the Global Dividend Index, approximately 35 per cent of dividends were not paid out in 2020 as distributions were deferred until 2021.
That sharp decrease is due to the fact that a large part of dividends are paid by banks as well as defensive stocks such as utilities.
“While state aid in corona times has reached unprecedented volumes, the banking industry and defensive stocks may be unable to freely share their profits with shareholders,” comments KDPW’s Trybuchowski.
Meanwhile, the European Central Bank and local regulators in Europe do not encourage banks to pay dividends.
In Europe, there has been a mighty push by the heads of member state organisations acting on behalf of shareholders to improve the processing of AGMs.
David Baxter, managing director at T-Scape, suggests that this, along with shareholder information disclosure, are the two aspects of the European Commission’s (EC) Shareholder Rights Directive (SRD) II, which came into effect September 2020, that the market is still struggling to deal with.
The EC rejected financial intermediaries’ attempts in April 2020 to have the directive postponed. Those same intermediaries also requested the EC to waiver any penalties for non-compliance with the directive until September 2021.
Baxter suggests that it wasn’t “an unreasonable request” given the argument that SRD II wasn’t so much a regulation but more of a market infrastructure project.
“In which case, full adherence could not be achieved until all market participants affected were on board. With such a push to get those improvements in place, the timing of COVID-19 with respect to SRD II couldn’t have been worse,” says Baxter.
Challenges and problem solving
Aside from SRD II, the pandemic shone a bright light on traditional processes that rely on physical documents and signatures.
This encouraged creativity to solve some of the problems and issues around corporate actions.
D’Addario explains that BBH collaborated with its clients to quickly create new electronic workflows for items that were previously done physically, adhering to the same level of risk and control.
For example, BBH was able to file approximately 50 per cent of its reclaim volume via email PDF docs for the 2020 statute of limitations for tax reclaims which typically require physical documents to be filed.
On the topic of how the pandemic encouraged creativity to solve some of the problems and issues around corporate actions, Baxter says: “Only insofar as the overcoming logistical issues and challenges caused by the displacement of operational staff (as a result of the pandemic), were concerned.”
From the perspective of KDPW as a post-trade infrastructure institution, its services have long been driven by regulation and technology.
Trybuchowski says: “Regulations aiming to improve market transparency and safety are very complex and require the retention and processing of huge data volumes. We need state-of-the-art technology to ensure compliance. Most of our services, including corporate actions services, are offered via IT systems which have been designed and developed regardless of the pandemic.”
Opportunities for now and in the future
There are opportunities for increased collaboration across all parts of the corporate actions chain as well as a heightened focus on leveraging technology to achieve automation and scale.
Looking at some of these opportunities and how corporate actions could change in the future, experts anticipate an increased focus on automation across the industry and expect to see greater collaboration with market participants to leverage technology and partnerships with fintech firms to create real-time solutions.
D’Addario says BBH would like to see a greater focus on tax reclaims to see greater standards and automation introduced to the reclaim process.
“This would include a focus on migration from physical signatures to electronic signature requirements and review the medallion stamp process. This industry collaborative approach would benefit the holders by providing more transparency and time to make informed investment decisions,” she explains.
The future of corporate actions lies in further development of electronic communications, which Trybuchowski suggests go well beyond simple transition from paper documents to email and extend to advanced communication systems and applications.
Discussing further opportunities that lie in store for corporate actions, Broadridge’s Wood says: “Fintech providers have been helping the market meet these needs and expand with innovative projects underway to overhaul the way the market drives corporate actions, looking to streamline inefficiencies at market level, something the corporate actions world has been in sore need of for some time.”
Although 2020 has been a tough year for many, Wood highlights the fintech industry is thriving and the realisation that institutions can leverage mutualised services has been more prevalent than ever in 2020.
“Benefits such as automation, operational and cost optimisation will benefit everyone in the market enabling further innovation in 2021. There are truly exciting times ahead in the corporate actions innovation space,” he adds.
More recently, modern solutions have become available allowing institutions to deploy technology to help navigate the complexities of corporate actions but manual workflows are still commonplace.
The one common cause of problems across corporate actions has always been the lack of defined processes, manual workflows and paperwork combined with fragile, complicated infrastructures leading to operational inefficiencies and increased risk, according to Mike Wood, general manager, asset servicing at Broadridge.
With the volatility last year, when the pandemic started, the movement to remote working had a knock-on effect on corporate actions and only intensified the importance of modern technological solutions in this space.
For corporate actions, a company can issue dividends in either cash or stock which are usually paid out during specific periods, usually quarterly or annually. This tends to mark a share of the company profits that are being paid to owners of the stock.
Lockdowns and remote working caused some issuers to defer their annual general meeting (AGM) and approval of cash dividends — or even cancel their dividend for 2020, which means the implications of this will stick well into this year.
Amid the challenges, however, industry participants pulled together and collaborated sharing creative solutions to solve some of the problems and issues around corporate actions. This has been a catalyst for changing the way corporate actions are viewed and the approach to them.
The immediate implications of COVID-19
During the pandemic meridian in late March to April, unprecedentedly high uncertainty drove a dramatic decline in the prices of almost all asset classes.
Sova Capital’s head of capital markets origination, Alina Sychova, says for them, this resulted in a surge of requests from corporate clients regarding opportunities in liability management or shares buybacks.
“Of these, only a handful were prepared and capable of making the rapid decisions necessary to launch bonds or shares buybacks, and unprepared clients missed the window as assets prices started to recover in summer,” says Sychova.
COVID-19 also resulted in extraordinary government relief, which Sychova suggests, flooded the global economy with exercise liquidity, an enormously effective catalyst for the primary markets.
In response to investors keeping a close eye on new equity placement, issuers believe that the market has unlimited potential to absorb liquidity, resulting in corporates considering alternatives to traditional sales.
The pandemic also meant that people shifted from working in an office to working at home.
BBH was able to move 95 per cent of its corporate actions workforce to a work-from-home model as a result of high levels of automation that were within its processes.
“We did identify the need to adjust certain workflows to ensure we continued to maintain our risk and control environment,” says Cara D’Addario, vice president, corporate actions at Brown Brothers Harriman (BBH).
Meanwhile, KDPW CEO Maciej Trybuchowski, says there were “no major issues” for corporate actions due to the COVID-19 pandemic on the Polish capital market.
Trybuchowski identifies the most common issue was that general meetings had to be cancelled in view of legal restrictions imposed on public meetings.
“We have offered assistance in that regard to issuers with our solution which was implemented before the pandemic, in the autumn of 2019. The e-voting application supports companies whose shares are registered in KDPW in holding and voting at general meetings remotely,” he explains.
2021 uncertainty
COVID-19 is still affecting businesses and there is a large degree of uncertainty as to when participants can return to a more balanced corporate action world.
Last year, some issuers had to defer their annual general meeting and approval of cash dividends — or even cancel their dividend for 2020.
In Poland, for example, the dividends paid by public companies in 2019 stood at more than PLN 24 billion (£4.7 billion or $6.4 billion).
According to Janus Henderson, the provider of the Global Dividend Index, approximately 35 per cent of dividends were not paid out in 2020 as distributions were deferred until 2021.
That sharp decrease is due to the fact that a large part of dividends are paid by banks as well as defensive stocks such as utilities.
“While state aid in corona times has reached unprecedented volumes, the banking industry and defensive stocks may be unable to freely share their profits with shareholders,” comments KDPW’s Trybuchowski.
Meanwhile, the European Central Bank and local regulators in Europe do not encourage banks to pay dividends.
In Europe, there has been a mighty push by the heads of member state organisations acting on behalf of shareholders to improve the processing of AGMs.
David Baxter, managing director at T-Scape, suggests that this, along with shareholder information disclosure, are the two aspects of the European Commission’s (EC) Shareholder Rights Directive (SRD) II, which came into effect September 2020, that the market is still struggling to deal with.
The EC rejected financial intermediaries’ attempts in April 2020 to have the directive postponed. Those same intermediaries also requested the EC to waiver any penalties for non-compliance with the directive until September 2021.
Baxter suggests that it wasn’t “an unreasonable request” given the argument that SRD II wasn’t so much a regulation but more of a market infrastructure project.
“In which case, full adherence could not be achieved until all market participants affected were on board. With such a push to get those improvements in place, the timing of COVID-19 with respect to SRD II couldn’t have been worse,” says Baxter.
Challenges and problem solving
Aside from SRD II, the pandemic shone a bright light on traditional processes that rely on physical documents and signatures.
This encouraged creativity to solve some of the problems and issues around corporate actions.
D’Addario explains that BBH collaborated with its clients to quickly create new electronic workflows for items that were previously done physically, adhering to the same level of risk and control.
For example, BBH was able to file approximately 50 per cent of its reclaim volume via email PDF docs for the 2020 statute of limitations for tax reclaims which typically require physical documents to be filed.
On the topic of how the pandemic encouraged creativity to solve some of the problems and issues around corporate actions, Baxter says: “Only insofar as the overcoming logistical issues and challenges caused by the displacement of operational staff (as a result of the pandemic), were concerned.”
From the perspective of KDPW as a post-trade infrastructure institution, its services have long been driven by regulation and technology.
Trybuchowski says: “Regulations aiming to improve market transparency and safety are very complex and require the retention and processing of huge data volumes. We need state-of-the-art technology to ensure compliance. Most of our services, including corporate actions services, are offered via IT systems which have been designed and developed regardless of the pandemic.”
Opportunities for now and in the future
There are opportunities for increased collaboration across all parts of the corporate actions chain as well as a heightened focus on leveraging technology to achieve automation and scale.
Looking at some of these opportunities and how corporate actions could change in the future, experts anticipate an increased focus on automation across the industry and expect to see greater collaboration with market participants to leverage technology and partnerships with fintech firms to create real-time solutions.
D’Addario says BBH would like to see a greater focus on tax reclaims to see greater standards and automation introduced to the reclaim process.
“This would include a focus on migration from physical signatures to electronic signature requirements and review the medallion stamp process. This industry collaborative approach would benefit the holders by providing more transparency and time to make informed investment decisions,” she explains.
The future of corporate actions lies in further development of electronic communications, which Trybuchowski suggests go well beyond simple transition from paper documents to email and extend to advanced communication systems and applications.
Discussing further opportunities that lie in store for corporate actions, Broadridge’s Wood says: “Fintech providers have been helping the market meet these needs and expand with innovative projects underway to overhaul the way the market drives corporate actions, looking to streamline inefficiencies at market level, something the corporate actions world has been in sore need of for some time.”
Although 2020 has been a tough year for many, Wood highlights the fintech industry is thriving and the realisation that institutions can leverage mutualised services has been more prevalent than ever in 2020.
“Benefits such as automation, operational and cost optimisation will benefit everyone in the market enabling further innovation in 2021. There are truly exciting times ahead in the corporate actions innovation space,” he adds.
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