7th European Financial Congress, 5–7 June 2017
EFC 2017 day 1 - GDP growth cannot be maintained without investment
The 7th European Financial Congress began on June 5th in Sopot, the annual meeting of representatives of the European finance sector, the world of politics, and economic experts. The main theme of this year's EFC, "Capital, Taxes and International Solidarity in the 21st Century", reflects the key dilemmas facing the global economy in the tenth year after the outbreak of the world financial and economic crisis which undermined many of the dominant paradigms of economic policy at the turn of the 21st century.
"A year ago, nobody thought Brexit would happen, that Donald Trump would win the US presidential elections, that Marine Le Pen would be close to winning in France, or that we'd be witnessing almost the suicide of the West," said Honorary Chairman of the EFC Program Board Joschka Fischer as he opened the session. "This is an alarm bell for Europe, which has to integrate further to solve its problems connected with development and unemployment." He added that the decisions taken could result in a Europe of many speeds. "The question is, which group of states will Poland belong to."
The Congress began with a debate as part of the Poland Capital Summit series, during which there was a discussion of the role of foreign capital in the creation of a sustainable economy, and the factors affecting Poland's investment attractiveness. The prevailing opinions in the discussion were that even though the Polish economy is currently expanding well, mainly as a result of increasing domestic consumption, in the longer term investment will be of great importance. Its share of GDP has been falling in recent years. Another challenge is the aging society and the effects of this change on the country's labor market, and the deteriorating structure of public expenditure at a time when fiscal policy should be improved by exploiting the economic situation resulting from low oil prices, for example. In the longer term, however, the greatest challenge is that in just a few years the flow of EU funds to Poland will be significantly smaller than over the last decade or so, and the effects of programs co-financed by the EU budget form a major part of the increase in Poland's GDP. There is also a need for a strategy to define and create a new driving force for the Polish economy. An assessment of the role of foreign capital has shown, however, that it is enormously significant in Polish companies' advance in the global value chain. Poland, like other countries in the Central Eastern Europe region, currently requires high quality foreign capital adapted to our economy's development needs. The most important task is to constantly increase the added value generated by companies.
Further debates organized as part of the EFC itself concerned tax solidarity, and the role of monetary policy in a sustainable economy.
Participants in the first of these stressed that tax avoidance by large corporations is a problem that every country in the world has to deal with. Without mutual solidarity, there is no chance to win against the powerful interests of those who escape to tax havens. Those invited to discuss monetary policy, meanwhile, considered that it was difficult to assess Europe's economic state, which was an obstacle to central banks' monetary policy. The European Central Bank stimulus package is working, but the labor market is fragile and economic growth is still at a low level. In this situation, it is very difficult for central banks to implement a monetary policy.
All those taking part in the debate stressed that the key to avoiding another crisis is to ensure the stability of the banking sector. This is also tremendously important in the social context.
EFC 2017 day 2 - Polish Banking with Newest Technologies
Talks about the future of the banking sector in Poland dominated during the second day of the European Financial Congress in Sopot. The industry is facing a number of challenges stemming not only from the policy of the central banks but also from the dynamic development of new technologies.
The debates held on June 6th as part of the 7th edition of the European Financial Congress were attended by the CEOs of the largest banks in Poland as well as many experts in banking, innovations and security in the world of finance.
The representatives of the banking sector were not afraid to deal with topics that are difficult for the banking sector. New regulations, low interest rates or growing capital requirements towards financial institutions, to name just a few.
During the session under the theme “Map of Challenges Facing the Banking Sector”, the bank CEOs focused, among other things, on the consequences of interest rate hikes which are expected in Poland. Referring to the mortgage loans, Zbigniew Jagiełło, the President of PKO BP, stated that an increase in interest rates (and by extension in lending costs) would be a big social challenge.
Meanwhile, Cezary Stypułkowski, the CEO of mBank pointed to the continuous uncertainty relating to the CHF loans and solutions that may be proposed to the borrowers.
The guests also spent much time on Tuesday discussing the likely changes in Polish banking over the next few years when new technologies would become even more important than they are now. The experts emphasized that Poland was shown as an example in the world which proved that innovations in the financial sector may be implemented fast and the clients were willing to accept them. The extraordinarily fast growth of contactless payments was cited as an example of that attitude.
“Polish banking is known as being modern and affordable. It is a competitive market, and all technologies here are visibly more advanced than in the other countries of Central and Eastern Europe”, underlined Małgorzata O’Shaughnessy, the Managing Director for CEE in Visa during a discussion on innovations in banking.
“We see that in SAP as a technological partner of leading financial institutions. The consumers get an enormous number of convenient mobile and digital tools. However, with the rapid growth of digital data, financial institutions must resort to more and more advanced software and data analytics. Many processes, such as stock exchange transactions, are being automated. Our experience over the last few years shows that the technology security and stability in the financial sector are important for the entire global economy. Poland may actively and successfully join all the processes, thanks to the e-banking solutions which are recognized all over the world”, said Kinga Piecuch, the CEO of SAP Polska.
It is important, though, that banks do not lag behind. Hence, the entire sector is very much involved in supporting start-ups from the financial sector. During the discussions the bank representatives emphasized that it was imperative that all banks work together on issues relating to new technologies. Only in that way will they be able to create projects that will improve the competitive advantage of financial institutions in Poland.
There were also voices that fintechs that look for innovations in the world of finance should take a much broader perspective than the domestic market. There are still few start-ups in Poland that would be ready to fight on foreign markets.
The attendees of the debate under the theme “The Internationalization of Business and the Impact of Political Changes on European Business” also discussed how to support Polish businesses abroad. They pointed out that limiting trade barriers and support from Polish diplomates were becoming of particular importance now that the expansion on foreign market was getting more and more difficult.
The attendees of the debates on Tuesday were also able to tackle issues relating to women’s presence in business. During the discussion on “Women’s Participation in Management Is a Way to Higher Efficiency Rather Than Fairness”, experts dealt with the barriers preventing women from holding managerial positions more often.
EFC 2017 day 3 and Recommendations
One of the most important topics discussed during the third and final day of the 7th European Financial Congress was the creation of a proper relationship between banks and their clients, or actually the need to restore clients’ confidence in banks. Participants also discussed the support that small- and mid-sized companies may receive from the state institutions. The SMEs make up for as much as 80 per cent of the Polish economy. There were also recurring discussions on the reinforcement of the Polish companies’ position in the global value chain (GVC). However, the most important event of the EFC was the presentation of final recommendations developed before and during the Congress by dozens of experts representing the world of finance, science and business.
The participants of the debate on the banks’ relationship with their clients pointed out that financial institutions faced the need to improve their relations with the consumers. Negligence in that area is already defined as a separate category of risk. That problem was visible on the Polish market in recent years, mainly because clients were offered financial products, including mortgage loans in foreign currencies, that were unsuitable for them.
Banks do notice that issue and the majority of them (67 per cent) are trying to improve the quality of training courses for employees to remedy the situation; more careful monitoring of risk relating to customer relationships was also mentioned, among other things. At the age of social media, it is simply not worth taking any measures that the clients may consider inappropriate. Hence, the trend to get rid of any “asterisks” or “fine print” in advertising. The fact remains though that the more complex the product, the more responsibility for the financial sector. “There is no place for breach of ethics”, said Marek Niechciał from the Polish Office of Competition and Consumer Protection (OCCP).
The most heated discussion concerned the borderline between the liability of the bank and the liability of the clients. The representatives of the banking sector argued that regulations must not completely release clients from any liability for their financial decisions. Wojciech Pantkowski from Pekao SA. claimed that the “bank should not overstep the mark and make the decision for the client. Instead, the bank should provide the client with all information and address their doubts. However, once the client has taken a decision, the liability for its consequences should rest with the client.”
Small- and mid-sized companies are an important area of the economy that requires good cooperation not only with the banking sector but also with the state institutions. The SMEs need funds to growth and this is where the state steps in. However, entrepreneurs do not always know which institutions they should approach and what they should ask for.
The Polish Development Fund (or, PFR) is an important government institution that focuses directly on providing support for the SME sector; the PFR launched a project called PFR Ventures. The new entity is planning to support companies at all stages of their growth. It will operate as a “fund of funds” and invest in promising projects. Young scientists who are looking for opportunities to monetize their ideas may try their chances at the National Centre for Research and Development (NCBiR). The institution offers a number of programs addressed to start-ups, including not only project financing opportunities but also subject-related support. Polish Information and Foreign Investment Agency (PAIiH) and the Export Credit Insurance Corporation Joint Stock Company (KUKE) offer support to entrepreneurs who want to expand on foreign markets.
International activity of companies is extremely important because it improves the position of Polish companies in the global value chain (GVC). Poland records high growth in the share of value added in the economy and in the exports. Between 1995 and 2014, the share of value added absorbed abroad went up by as much as 18.1 per cent for our country. Nevertheless, we are about to reach the point where the optimistic ratios may slow down due to the fact that the simple methods of building value added are ending.
Ever since the crisis of 2009, as much as 80% of economic growth in Poland was related to GVC. Thus, it is even more worrying that a large part of our competitive advantage relies on low costs, including low labor costs, that will certainly keep growing in the coming years. However, it is not the only dark cloud overshadowing the ratios concerning the activity of Polish companies in GVC. There are more, including: the ageing technical staff and lack of successors which results from the liquidation of technical schools, high energy costs (from the perspective of energy-intensive industries, energy in Poland is twice as high as in Germany) or lack of visa policy that would promote the import of people with specific degrees to Poland.
Enormous funds held by the UNO or the World Bank are another opportunity for foreign expansion of Polish companies that has not yet been taken advantage of. That money is spent on the development of poorly-developed areas of the world; there are, for example, large projects on the development of mobile banking in Africa, however, Polish companies hardly ever participate in tender proceedings organized by those organizations. Polish companies need to be more active in that area.
The 7th EFC ended with a series of recommendations concerning fundamental issues for the future development of the country and for the functioning of the financial sector.
The European Financial Congress raised again the subject concerning policy towards economic migrants. It was not without a reason. The importance of immigrants on the Polish labor market is growing fast: alone in the last two years their number increased by 100%; the number of statements on intention to hire a foreigner in Poland issued between 2007 and 2016 went up from 21,000 to more than 1.3 million. One of the main demands in that recommendation is to transform seasonal immigration to permanent one (for 5 years) in the case of people who have worked in Poland for the last 2 years and who paid all social security contributions and taxes for at least 6 months.
By contrast, the recommendation concerning the public administration intervention was based, among other things, on the demand for respecting certain norms, whereby the transfer of funds from the budget to the household and to the privet sector (via growth of public deficit to no more than 3%) would be increased during a crisis; however, during economic revival it would be mandatory to establish reserves (by reducing the deficit).
As regards cybersecurity, which is perceived as one of the main challenges faced by the global financial sector, the EFC recommended an intensive awareness campaign addressed to clients, the development and implementation of new communication forms that would enable widespread communication on threats relating to cyberattacks and the development of inter-sectoral education- and information campaigns.
Digitalization of insurance is another area covered by the recommendations of the 2017 EFC. Insurance digitalization is blocked by regulations that limit the ability to enter into agreements only by the remote electronic means of communication. Consequently, the EFC demands that such restrictions should be eliminated from Polish law which should help the Polish insurance market develop at a faster pace.
One of the most important topics discussed during this year’s EFC was tax solidarity which is aimed at limiting aggressive tax optimization so widely used by many corporations. The recommendations adopted in that respect include, among other things, the legal duty to publish data on headcount, revenues, profits, assets, taxes paid by countries of operations by all companies that report sales in excess of PLN 1 billion and that operate in at least 2 countries.
Polish banks are worried about the future due to the likely upward trend of interest rates, among other things (which will affect not only Poland); bearing in mind that most loans are granted at a variable interest rate, such an increase may lead to social problems due to a rapid increase in the costs of servicing housing loans. Hence the recommendation to develop lending rules based on fixed interest rates that would apply to mortgage loans, and also to develop legal- and financial instruments so that the interest rate risk may be taken over from clients on a systemic basis and that the fixed interest rate risk may be hedged against in the banking system. The EFC also recommends establishing a pool mortgage bank to enable repurchase of mortgage loans from other universal banks and refinancing through the issue of pledge bonds.
In a few years, Poland will face a considerable reduction in the EU funds. “With the expected reduction in the availability of EU funds after 2020 and due to minor own funds of provincial governments, it is necessary to build a strong financial base within regions; such a financial base will help cooperate effectively with private capital when pursuing the regional development policy”, reads the recommendation concerning the Regional Development Funds. The Regional Development Funds which are being created may become the Polish version of Juncker’s micro plans, provided the money that return to them from the implementation of earlier projects funded by the EU as part of the Regional Operational Programs (ROP) will stay with them, as demanded by EFC, among other things.
The final recommendation issued by the EFC relates to the involvement of the Polish capital market in the implementation of the Responsible Development Strategy (RDS) adopted by the government. The main demand in that area is to give high priority to the “Capital Development Program” under RDS so that the entire integrated package may be launched as of 1 January 2018, and to ensure that it is as effective in motivating private capital as possible.
The EFC Academy is one accompanying events organized within the framework of the EFC. The EFC Academy is addressed to young and active people, students and graduates who want to join the debates held during the Congress. The participants of the EFC Academy also agreed on recommendations which they presented upon the end of the Congress. They believe that it is very important for Poles to develop a habit of saving. That is why they demand that classes on basics of finance management be taught at kindergarten and primary school; there should be a mandatory course on that topic in all university faculties as well. The youngest participants of the EFC also recommended that banks should promote ways of automated savings, such as automated transfers of round up amounts from card transactions or transfers to a dedicated interest-bearing savings account.
As announced by Professor Leszek Pawłowicz, EFC Coordinator, the next edition of the Congress will be held between 18 and 20 June 2018 in Sopot.