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Awash on the currency

If the Government sticks to its original plan for entry into the European single currency, in less than 30 months UK advisers could be assessing their clients&#39 policies and portfolios in euros and cents.

Yet more pressing industry issues such as Sandler, Pickering and depolarisation mean that many advisers and product providers have ignored the impact that the euro will have on their businesses.

One organisation which has forced itself to look ahead is the ABI, which has been heavily involved in research into what deputy director general Stephen Sklaroff describes as the most “ticklish” and complex issues that will affect financial services.

According to ABI figures, adopting the single currency will cost UK insurers significantly more than their counterparts in other member states. Entry has cost insurers an average of 0.4 per cent of premium income right across the member zones but it is estimated the cost in the UK will be much higher and could hit 3 per cent.

After consulting with its 400 members, the ABI has judged that the cost of updating existing back-office and legacy systems in the UK will be higher than elsewhere in Europe. It believes the process could cost providers four times their average IT budgets for as many years as the currency takes to implement fully.

Sklaroff says: “The decision to go into the euro is not yet signed and sealed so people are unwilling to invest a lot in IT systems before they absolutely have to.”

He thinks the Government must do all it can to make the changeover as trouble-free as possible by learning from the experience of other countries such as Ireland and the Netherlands, which have already been through the process.

The ideal period of time between referendum and implementation is estimated at 24 months but Sklaroff says: “This is a very tight timetable and, even working on a 36-month basis, such a short period would not allow us enough time to implement the necessary changes effectively. Other European countries had a lot longer to get used to the idea.”

The price of the euro will be high for providers, which will have to pay for increased administration, converting policies, providing customers with information on changes, legal and tax issues, invoicing, banking, cash handling and information systems.

In contrast, the IMA believes that, as its members already operate in multiple currencies, the switch to euros will make life easier, as will simplification of cross-border transactions and tax regimes.

International groups such as Axa and Aegon have working groups to look at the effects that the single currency will have on their UK businesses. They predict that the main difficulties will be in explaining payments and bonuses to policyholders.

Aifa is also involved in consultation on the euro and the impact it will have on members but has not yet contacted them with the results of its research.

Director of policy Fay Goddard says: “Once clients are receiving their bank account balances and utility bills in euros, they are going to start demanding that their IFA catches up but it will certainly not be overnight.”

IT consultancies estimate that the cost of converting all IFA systems to the euro and data clean-up could be four times the cost of Y2K to the financial services industry.

Some IT systems providers have already developed their life and pension systems to be euro-friendly.

Marlborough Stirling marketing director Phil Heaton-Jones says: “Conversion will be a careful and labour-intensive process, particularly on older legacy systems. Changes will need to be made to even the most basic quote system.”

But Heaton-Jones believes that while advisers are struggling to adopt to regulatory changes, they will remain unwilling to take on board the costly conversions necessary to make their back-office systems euro-friendly. “At the moment, IFAs are more concerned with the impact of depolarisation and Sandler but eventually they are going to have to face the prospect of a change in currency and could find themselves with a hefty bill to change over,” he says.

He sees particular problems for advisers wanting to convert multiple older systems and suggests moving data across on to one simple system, which could make the whole process less expensive.

The European Financial Services Action Plan, drawn up in 1999, is one of the big-gest projects on the single currency. It includes 41 measures to be completed by 2005 which are designed to integrate the UK into a single market through a joint European financial services system.

Schroder Salomon Smith Barney consultant Graham Bishop is frustrated by advisers and providers who are aware of the plan but have done little to incorporate its measures in their business planning.

He says: “Everyone thinks the single currency is a free-standing idea but it is all linked to how, as a country, the UK can hang on to its political influence within an expanding Europe, which will go down with a bump if we ignore the single currency.”

Bishop predicts that one of the direct consequences of closer links with Europe will be changes in UK pensions. The most recent EU pension directive requires all member states to adhere to guidelines regarding the levels of debt that pension funds are allowed to fall into.

While the new minimum funding rules in the Pensions Green Paper allow UK pension funds to rectify their debts within 10 years, other European authorities – for example, the Dutch – expect the deficit to be resolved in a year.

Bishop describes our 10-year plan as crazy and says euro entry will force the UK to address its pension crisis.

But the prospect of the UK entering the euro system remains uncertain. With the appointment of euro-sceptic Mervyn King as the new governor at the Bank of England in June, combined with a bout of general election jitters, most commentators believe that Labour will delay a referendum until 2005.

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