UK financial services optimism falls but stronger times lie in wait, claims new survey

BY Fraser Tennant

Optimism fell across the UK financial services sector in the three months to September 2017, despite a broad expansion of business volumes and expectations of stronger quarters to come, according to a survey published this week.

The quarterly survey of 94 financial services firms by the Confederation of British Industry (CBI) and PwC found that while banks and building societies were markedly less optimistic, finance houses, life insurers and investment managers were more optimistic than they had been in the previous three months.

Among a number of key findings, the survey found that: (i) 12 percent of firms said they were more optimistic about the overall business situation compared with three months ago, while 18 percent were less optimistic, giving a balance of minus 6 percent; (ii) 28 percent of firms said that business volumes were up, while 15 percent said they were down, giving a rounded balance of plus 13 percent (this compares with plus 44 percent in June); and (iii) to the quarter to December, growth in business volumes is expected to accelerate, with 34 percent of firms expecting volumes to rise next quarter, and 7 percent expecting them to fall, giving a balance of plus 27 percent.

“While demand in the sector is expected to hold up in the near-term, we cannot ignore the fact that optimism has dropped in almost every quarter for the past two years,” said Rain Newton-Smith, chief economist at the CBI. “With Brexit uncertainty affecting the wider economy, it is vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”

In terms of the future of the financial services sector, survey respondents stated a need for action – including preserving access to talent and ensuring internationally focused regulation – on a number of fronts to ensure that the UK remains a leading financial centre.

Andrew Kail, head of financial services at PwC, concluded: “The financial services sector is at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. A coordinated action is now required by government, financial services firms and regulators to ensure the continued future success of the industry and its customers.”

News: British banks' pessimism in worst run since financial crisis

Tough time ahead for financial services

BY Richard Summerfield

As higher inflation impacts UK households, and as a decline in real wage growth continues to take hold, the financial services sector is in line for a tough 2018, according to the latest EY Item Club Outlook for Financial Services.

The report notes that inflation will peak at around 3 percent in the second half of the year, while real household disposable incomes are forecast to decline by 0.2 percent in 2017 - the first drop since 2013. This fall in household income is likely to decrease the demand for mortgages and other 'big ticket' items and general insurance in 2018.

The combination of higher inflation and decreased real earnings will likely lead to an increase in consumer credit next year, as households look to compensate for any shortfall with increased borrowing. The amount of consumer loans will grow from £204bn in 2017 to £206bn in 2018 before rising to £212bn in 2019 and £218bn in 2020, according to the report.

EY UK financial services managing partner Omar Ali said: "Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit. Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit."

Indeed, the pressures applied to consumer spending in 2018 could dramatically affect the UK’s short term economic prospects. With consumer spending accounting for 60 percent of the UK’s GDP, any significant reduction in consumer spending could have a knock on effort on GDP. With pay growth expected to remain subdued in the short term at least, real earnings are expected to fall by 0.5 percent this year.

The report predicts business lending will rise to £435bn by 2020, but only if the UK is able to strike a transitional deal during Brexit negotiations with the EU. Mortgage lending, however, will fall to £1.1 trillion in 2018, compared to a forecast £1.2trillion in 2017, though it is expected to climb slightly in 2019 and 2020.

Report: EY ITEM Club Outlook for Financial Services

Out of the shadows

BY Richard Summerfield

The ‘shadow banking’ system, which sees unregulated financial institutions offering lending and other financial activities under unregulated conditions, has been a major issue in the financial services space for many years, and is believed to have been a key catalyst for the financial crisis which began a decade ago.

However, according to Mark Carney, governor of the Bank of England and outgoing chairman of the Financial Stability Board (FSB), shadow banking, which has remained a key threat to global financial stability, has finally been tamed thanks to a series of fundamental reforms across the financial services space. Mr Carney suggests the world’s biggest banks are stronger, misconduct is being tackled, and the toxic forms of shadow banking are no longer a threat to the global economy. Though the shadow banking system has grown in recent years, according to Mr Carney, the industry’s more toxic elements have been marginalised by increased regulation in areas such as money markets and securitisation.

At a press conference on Monday, Mr Carney said that though shadow banking has been largely tamed it will continue to represent an ever present and changing threat. “Toxic forms of shadow banking at the centre of the crisis no longer represent a global financial stability risk. The remaining shadow banking activities are now subject to policy measures to reduce their risk and reinforce their benefit allowing for more diverse and resilient forms of market based finance. Shadow banking activities will inevitably evolve, so FSB member authorities must continue to strengthen their surveillance, data sharing and analysis in order to support the risk assessments and any future regulatory response that may be required,” he said.

Indeed, regulators must remain vigilant in the coming years if the threats posed by shadow banking are to be kept in check. The spectre of ‘reform fatigue’ must be fought off, says Mr Carney, as the next round of banking reform, including increased transparency regarding the over-the-counter derivatives markets, kicks in. Mr Carney also called for the next-step Basel III banking reforms to be completed “urgently and then implemented faithfully”.

Though there is more work to be done, significant steps have been taken to reform global banking in the 10 years since the crisis began. Banks are stronger, have better liquidity and are subject to greater and more stringent regulation. Shadow banking is still an issue but its influence has waned.

News: Toxic forms of shadow banking' no longer represent a global financial stability risk, says international watchdog

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Dodd-Frank dead?

BY Richard Summerfield

Since the financial crisis, banks and other financial institutions have grown accustomed in increased regulatory oversight and scrutiny. However, following calls from president Trump to overhaul the regulatory regime established under former president Obama, the US Treasury Department this week announced a wide ranging plan designed to remake the country's financial regulatory framework.

The nearly 150-page report produced by the Treasury has recommended more than 100 changes, most of which would be made through regulators rather than Congress. The most notable proposal concerned the easing of restrictions big banks now face in their trading operations, lightening the annual stress tests they must undergo and reducing the powers of the Consumer Financial Protection Bureau (CFPB) which has been has been aggressively pursuing financial institutions over their malfeasance.

Regarding the proposed changes, Treasury Secretary Steven Mnuchin said, “We were very focused on, what we can do by executive order and through regulators. We think about 80 percent of the substance in the report can be accomplished by regulatory changes, and about 20 percent by legislation."

The new plan would greatly expand the authority of the Financial Stability Oversight Council, as well as change the way global capital standards are implemented to help US banks compete with overseas rivals. Smaller banks will also stand to benefit from the new plan; those banks with less than $50bn in assets would be less constrained than their larger rivals who would be subject to greater – though reduced – regulatory oversight.

These changes, should they win approval, would be welcomed on Wall Street and by many financial institutions which have long complained that the existing regulatory framework was too overbearing. The promise of lighter capital and liquidity standards and reduced supervision has already helped boost shares of Goldman Sachs and Morgan Stanley.

Away from the US, the Treasury’s report was also critical of international standard-setting bodies including the Basel Committee on Banking Supervision and the Financial Stability Board, noting the bodies had “overlapping objectives” and displayed a lack of transparency in their deliberations.

One of the key tenets of President Trump’s election campaign was the reduction of regulatory oversight in a number of key areas, including financial services. With the publication of the Treasury’s recommendations, the beginning of the end of the Dodd-Frank Act may have begun.

News: U.S. Treasury unveils financial reforms, critics attack

Rise of the robots

BY Richard Summerfield

Robotic process automation (RPA) and artificial intelligence (AI) are being increasing harnessed by organisations across a number of different sectors, according to a new report from PEX Network.

The report, which was produced following a survey of over 150 banking, financial services and insurance executives, sets out the key challenges, priorities and strategies for AI and RPA utilisation in 2017.

For the financial services, banking and insurance industries in particular, AI and RPA could have a truly transformative effect over the coming decade. Accordingly, it is imperative that companies embrace automation and robotics as quickly as possible.

Some companies have begun their implementation process with respect to RPA. Thirty-five percent of respondents have set about integrating RPA and are looking to expand their usage of automation where possible.

However, the firms that have invested thus far have typically only dipped their toe in the water. Around 80 percent of firms have invested less than $1m into RPA thus far. AI investment also remains on the low end of the spectrum, with 60 percent of respondents investing less than £100,000. Just 11 percent of firms have invested £1m and above.

The relative immaturity of RPA may have served as a roadblock to implementation to date. Twenty-six percent of survey respondents cited a lack of process standardisaton before RPA implementation as the main obstacle in implementing an RPA solution, 16 percent of executives cited a lack of resources to allocate to RPA implementation and 13 percent cited a lack of available budget as primary reasons that their firm had not yet implemented an RPA solution.

For those firms looking to automate their services in the future, they must begin by considering which of their processes would be suitable. Also, they must evaluate the forms of AI and FinTech technologies available to them. Fifty-seven percent of firms are considering cognitive RPA, while 53 percent are evaluating machine learning and 50 percent are exploring Big Data.

In the coming decade, technology solutions, including RPA, AI, Big Data and the blockchain, will have a transformative effect on the financial services, banking and insurance sectors. Companies would be wise to embrace these technologies early, when the price points are low and the potential returns are much higher.

Report: 2017 Benchmarking Report: The future of robotic process automation and artificial intelligence