Gaspard Biosse Duplan, Product Head – Sales & Trading at Acin
Algorithmic trading is on the rise within banks as well as other types of financial services firms – one study is forecasting a compound annual growth rate of 22% by 2025. Today, algo trading is no longer a niche activity, and it is being baked into firm-wide strategies to drive efficiencies, lower costs, and gain competitive advantages. However, as the prominence of algo trading increases, the risk profiles of the banks and other financial services firms will change, and in many cases, increase.
Regulators around the world have already recognized this potential for adjustment in firms’ risk profiles. For example, in the UK and Europe there is now a heightened regulatory focus. Under the Markets in Financial Instruments Directive II (MIFID II) – specifically RTS 6 – banks and other financial firms within scope are required to undertake a self-assessment and validation process for their algorithmic trading operations. A core component of this is assessing, validating and auditing the firm’s algorithmic trading controls.
Within the EU, it’s likely that there will be additional regulatory focus on algorithmic trading going forward. There are many similarities between the growth and evolution of algorithmic trading and the OTC derivatives market, before the implementation of increased scrutiny and regulation in that area, such as the EU’s European Market Infrastructure Regulation (EMIR), which came into force in 2012.
Now, US regulators are also increasing their focus on algorithmic trading, taking a lead from the UK approach.
New risk environment
So, what are the issues that regulators are so worried about, and should firms be concerned too? Algorithmic trading can bring significant benefits to firms, but as this form of technology evolves, the risks develop and change too. Regulators want to be sure that firms are keeping on top of these potential challenges.
Perhaps regulators’ biggest concern is the quality of the algorithmic code itself – the classic case for this is Knight Capital, which lost $461 million in 2012 due to a trading error which stemmed from a badly designed piece of code. This loss event destroyed the firm, and so regulators are worried that the impact of a piece of bad algo code could mushroom, causing systemic damage as well. Exacerbating those concerns is the fact that today algorithms are being created in shorter timescales than ever before to take advantage of market dynamics – regulators fear that this quick turnaround could lead to code errors too.
There are other emerging, related technology risks as well. Today, some algorithms are being created through artificial intelligence (AI) and machine learning technology – machines building machines. It’s not the machines that regulators fear though, but rather the humans who build them, and the possibility of human error being compounded through the automated nature of this new technological approach.
Heightening this worry is a talent shortage. There is more demand among financial services firms for people who can write algorithms and AI code than there is supply. Firms could wind up hiring less skilled or experienced people, who are potentially more likely to make the kinds of errors regulators want firms to avoid.
Moreover, the talent shortage also makes it more likely that banks will hire in talent which may not have the right moral outlook – this is a key risk, and it is greatly exacerbated in firms which already have a weak ethical culture. Overall, the culture that firms have in place within their algorithm teams is vitally important for the proper management of the whole range of risks that regulators are focusing on.
All of this is not just a sell-side issue – the buy-side is increasingly using algorithms for investment signalling, as a way of automating aspects of the investment process and reducing reliance on human talent. However, just as on the sell-side, this can lead to additional risk for the same sorts of reasons – which is why the algorithms behind robo-traders are being looked at in the US at the moment.
New risk solution
It’s clear that banks and other financial services firms need to be able to recognize the risks that are evolving out of the rise of algorithmic trading. Firms must be able to identify existing and emerging risks effectively. They must also create, document and maintain the relevant internal controls around algorithmic trading operations as they develop.
We are helping grow a community of banks to implement the right risk and controls frameworks around their algorithmic trading operations.
For example, our analysis of this community found that many banks could benefit from a shared understanding of both risks and controls. By sharing information about risks and controls within this benchmarking community, these firms have made their individual organizations stronger, and also contributed to the overall reduction in systemic risk within the financial services industry. No individual bank could achieve this on its own.
This power of the network defence model also applies to the risks associated with algorithmic trading, and the construction of an inventory (e.g. optimum use of control attributes across community). Overall, banks and other financial services firms are in a much better position to identify emerging risks and implement the right controls in a fast-moving area such as algorithmic trading by working together to share intelligence and insights.
Tax giveaway is a boost for business, but will it drive growth or fuel inflation?
Chancellor Kwasi Kwarteng has announced a comprehensive wave of tax cuts and other incentives for individuals and businesses, as well as confirming some of the announcements made earlier this week. The measures are part of a new Growth Plan, which is aiming to boost economic growth. However, only time will tell if they will curb inflation and temper recession concerns.
Richard Godmon, tax partner at accountancy firm, Menzies LLP, said:
“With another fiscal statement to follow, this mini-Budget is a defining moment for the new Government and tax cuts are firmly back on the agenda.
“The biggest surprise was the decision to simplify Income Tax by moving to a single higher rate of tax for high earners of 40%, with effect from April next year. This will encourage a spirit of entrepreneurialism by incentivising work and putting money back into the economy. The flip side is that the Government might also be hoping that the move increases the tax take, as it could help to draw people back to the UK who may have previously chosen to live and work elsewhere, while encouraging others to stay put.
“The reduction in dividend tax rates and the abolition of the additional rate of tax from April 2023 means that business owners will need to consider carefully the timing of dividend payments over the next few months.”
Up to 40 new Investment Zones
The Chancellor also outlined plans to create up to 40 new ‘investment zones’ in England, with the potential for more in Wales, Scotland and Northern Ireland. Businesses in these zones will benefit from wide-ranging tax breaks including 100% tax relief on investments in plant and machinery, and no National Insurance Contributions will be payable on the first £50,000 earned by new employees.
Richard Godmon, tax partner at Menzies LLP, said: “The new Investment Zones are reminiscent of the former Enterprise Zones, but they will provide a much more favourable tax environment for businesses and they promise to become a magnet for inward investment. There are currently 38 areas in England on the list for consideration and we look forward to finding out which ones will be selected.”
Incentivising business investment and Corporation Tax rise ‘cancelled’
The limit of the Annual Investment Allowance (AIA) will not revert to £200,000 as planned in April next year, it will now permanently stay at £1 million.
Richard Godmon, tax partner at Menzies LLP, said:
“Capital allowances are highly valued by businesses and they will be pleased that this one in particularly is going to stick at £1 million and that this is no longer being described as a temporary measure, but is to be made permanent.
“The decision to cancel the planned increase in Corporation Tax (due to tax effect next April) will be a relief to many small and medium-sized businesses who have been concerned that this increase would erode profits further and make it even more challenging to remain viable.”
Incentivising entrepreneurial investment
The Chancellor highlighted plans to increase the cap on investments that can be made under the Seed Enterprise Investment Scheme (SEIS) from £150,000 to £250,000. Individuals making investments in start-ups up have had the limit doubled to £200,000, with the 50% income tax relief remining the same. The Government also gave its commitment to continuing to back the Enterprise Investment Scheme (EIS).
“These announcements send a signal to entrepreneurial investors that tax should not be a barrier and the Chancellor wants to expand incentives in this area,” added Richard Godmon, tax partner at Menzies LLP.
Stamp Duty Land Tax
The threshold at which Stamp Duty Land Tax (SDLT) becomes payable on residential property purchases in the UK has been raised to £250,000, double its previous level in a bid to boost the property market. In addition, first-time buyers will not have to pay SDLT on property purchases up to a value of £425,000 (up from £300,000). Both measures will take effect from today.
Richard Godmon, tax partner at Menzies LLP, said:
“The decision to raise the SDLT threshold is designed to build consumer confidence and boost the housing market generally. For property developers it will fuel activity by creating demand, particularly from first-time buyers, and help to free up finance to front-end development projects.”
Richard Godmon, tax partner at Menzies LLP, said:
“The repealing of the 2017 and 2021 IR35 changes will be hugely welcomed as it will remove an administrative burden, risk and cost, enabling businesses to devote resources to furthering their growth strategies.
“It is important to recognise that IR35 has not been abolished and the result of the changes is that the risk and compliance costs are being returned to the individuals and their personal service companies. HMRC will no doubt redirect their focus towards the contractors, which will bring challenges and make enforcement more difficult.”
Anyone Can Become an R&D Tax Expert with the Right Foundations
Ian Cashin is a Customer Success Manager at Fintech company and R&D tax software provider WhisperClaims
For accounting firms, R&D tax credits offer a substantial opportunity to boost revenue and strengthen client relationships. According to Ian Cashin, Customer Success Manager at WhisperClaims, perceived complexities can be overcome with the right approach and support. Indeed, by embracing a few simple practices, any company can become an expert in R&D tax.
Growing revenue through new business is far more challenging than unlocking revenue from an existing client base. However, a significant number of accounting firms are losing out on value-added opportunities as a result of their lack of confidence or knowledge in R&D tax relief.
Yet, advisors who follow best practice are now in an ideal position to use their extensive client knowledge to mitigate their clients’ risk of and potential exposure to interrogation over fraudulent claims, ahead of HMRC’s introduction of more stringent R&D tax processes in April 2023.
So why are firms reluctant? There is no doubt that the R&D tax credit procedure is different. Compared to other areas of tax regulation, it leaves greater room for interpretation. But it is readily understandable by a qualified accountant – even an unqualified trainee. Understanding what HMRC considers to fall under the scope of research and development is key. Astrophysicists and Formula 1 manufacturers are not the only people who employ science and technology to overcome business challenges. Every day, UK firms of all sizes engage in R&D activities, from civil engineers to food manufacturers, yet far too many have not yet filed claims, losing out on critical cash.
The most important thing to keep in mind is that, as an accountant, you already have a far deeper relationship with your client compared to any other service provider. Once you have raised your level of understanding, you are in the perfect position to optimise this.
Accountants already have a unique understanding of their clients’ operations – insight which, as professional advisors, will help to highlight companies most likely to qualify for an R&D tax rebate. Furthermore, with access to tools like R&D tax claim preparation technology, developed by R&D tax professionals, they are able to significantly speed up the process. This technology enables accountants to easily determine the top targets within their client base, indicating where to focus the efforts of their emerging R&D tax service.
Using this priority list in conjunction with their understanding of the criteria HMRC stipulates, an accountant can leverage their client knowledge and relationship to engage in a conversation regarding daily R&D activities and unlock potential tax relief opportunities.
Moreover, facilitated by a specialist R&D tax claims preparation platform, accountants can be assured of a structured process that prompts the right questions to ask clients during these conversations, and highlights answers that are either in sync with, or fall outside of, the HMRC parameters. For instance, ca restaurant owner adding vegan alternatives to the menu is not on the same level as a food producer starting the development and manufacturing of a fully plant-based product line. The latter will undoubtedly be eligible for R&D tax assistance, but not the former. Accountants should use their position as “professional advisors” in this situation to push back against clients, especially those who may have previously been unwittingly misled.
For the last twenty years, since the introduction of R&D tax rebates in 2001, best practice has been the provision of a detailed report, complementary to the CT600 form, to mitigate the chance of HMRC asking supplementary questions. The technical purpose of the claim as well as the business context must be covered in this report, e.g. the challenges faced; how science and technology were used to overcome these; and the professionals employed who overcame them. Simply put, if the challenges weren’t difficult to solve, it wasn’t R&D.
It’s also critical to keep in mind that R&D claims cannot simply be copied and pasted from year to year. R&D is not necessarily a constant; demand for it changes in line with the evolution of the business’ activity or stage of development. as businesses change and go to the next stage of development.
The accountant’s already solid client relationship and interpersonal abilities come into their own in such situations. Particularly if the appropriate course of action is to suggest that the client should not submit an R&D claim, an accountant must feel comfortable advising the client accordingly. The claim belongs to the client; if it is contested, the client will be the one facing an HMRC investigation. An advisor must be self-assured enough to refuse to input erroneous claims without endangering the client relationship.
Recent years have seen accountancy firms strengthen their position as dependable, trusted business advisors. Discussions regarding a business owner’s long-term objectives, succession and exit plans, as well as pensions and investments, have become commonplace. It should be natural to include R&D tax into these conversations . Asking a customer about their investment in R&D should be a common practice – business as usual – just as it is to inquire about investment in infrastructure or buildings.
The only thing preventing accountants from successfully adding R&D tax to their suite of services is a lack of confidence. Yet, any reservations can be addressed with a straightforward ‘back to basics’ R&D training course, as well as using technology to gain access to a completely new revenue stream with their current clientele. Now that HMRC is openly calling for a much more rigorous, trusted, and evidence-based approach to R&D tax from 2023, accountants hold all the cards they need to gain confidence and give clients the trusted service they desire.
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