The FCA Business Plan 2016/17 is the fourth since the inception of the FCA. The Plan once again highlights the fundamental objectives that are at the heart of the FCA mission namely; appropriate levels of consumer protection, securing and improving the integrity of the UK financial system and promoting effective competition in the interests of consumers. However, in the face of ever increasing macro and socio economic change can the FCA deliver?
Financial Services has faced a seismic shift in approach due to the fundamental perception or belief that it was to blame for the failure of the global economy
The nature of consumer habits is dynamically changing, owing to the imminent possibility of Brexit, along with a UK economy characterised by low wage growth, increased cost of living, an ever ageing population and shrinking disposable incomes. The question to be asked is – can the products and services firms offer, their need for profitability, consumer satisfaction and FCA objectives truly co-exist?
While many industries have struggled since the financial crisis in 2008, Financial Services has faced a seismic shift in approach due to the fundamental perception or belief that it was to blame for the failure of the global economy. Post crisis with little to no growth in global and key domestic markets the response from institutions suggests that the changes are not temporary.
A recent report by Coalition, a business intelligence firm focused on Investment and Commercial banking markets, highlighted that the world’s top 12 investment banks have slashed the number of traders and high end front office staff in the last five years. With 54,800 staff employed across the front offices of the top 12 banks, down from 69,100 in 2011, this represents a fall of 21%.
Typically, front office staff are considered to be the drivers of revenue and profitability within firms, therefore when banks are choosing to “trim the fat” in these areas, it may be interpreted as a slowdown in business and a period of consolidation until good times return.
However, a prolonged cull over a five year period suggests more than a temporary blip and more a potential structural decay in the sector. This may be part of an enduring crunch and not merely a downturn in the economic cycle.
In the UK further evidence can be seen in announcements from Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland of ongoing culls to staff numbers. All of these indicators along with weakened consumer confidence, an uncertain UK economy, falling profitability and increased regulation mean institutions will have to work harder to reverse the trends.
However, what does this mean within the constraints of a new regulatory landscape?
Within the current Business Plan the FCA provides analysis around a consumer driven economy state:
“…both in the UK and internationally, GDP has not caught up with its pre-recession trend. This slow recovery to date, plus growth going forward being stable around the historical average, may affect business models. While a ‘slow but stable’ forecast may motivate some firms to diversify and seek returns in other ways, other firms may become complacent and less motivated to review business models to reflect the new growth pattern and changed consumer needs. Firms might sell lower than expected volumes, and may respond by reducing their costs, seeking efficiency savings, or trying to sell more products to existing customers. Such changes to business models might create risks to consumers and market integrity.”
When examining these comments in terms of retail banking, in particular the mortgage market, we may already be starting to observe the beginning of implied risks the FCA describe.
In the aftermath of the financial crisis many commentators examining the property bubble focused their ire on the surge of 100% Mortgages or high loan-to-value (LTV) and high loan-to-income (LTI) ratios of five, six and seven times income. It was said that these types of mortgages should not be allowed to return, however, they are back.
When the FSA conducted its post-crash review of what went wrong, it was self-cert mortgages that were placed on the naughty step as extraordinarily, by 2007 45% of all mortgages were granted without lenders attempting to check the borrower’s income. The FSA found no direct link between high LTV, high LTI, and market failure in the UK. While by February 2007, 70% of all mortgages on offer allowed borrowers to put down hardly any deposit, the FSA determined that, in reality, fewer buyers opted for high LTV mortgages than in previous booms. First-time buyers saved more, delaying their first purchase until they were older, or obtained deposits from well-off parents. While the latter is a method still in practice, house prices have steadily recovered and reduced affordability, combined with stagnant wage increases has created an intergenerational wealth gap that shows no signs of abating.
The 100% Mortgage had been the domain of smaller building societies and challenger banks such as Aldermore until Barclays became the first large mainstream retail bank to offer a competitor product. There are still relatively few of these products available and they are clearly subject to the rules imposed by the regulator as a result of the Mortgage Market Review (MMR). However, the fact that there is an increasing demand is because macro and socio economic circumstances are driving the market to offer products to facilitate consumer needs. Indeed the FCA itself states in terms of the economic factors that “these developments affect the dynamics of risk and return, shape expectations and drive consumers’ needs. In turn, they influence the products and services that firms are willing to offer, their profitability and the volume of financial products sold.” At present, these loans are typically 10% of the purchase value and are effectively for those who have friends, or more likely family willing to deposit or guarantee sums of money upfront to act as security. Is this a long term solution to affordability as the appeal is restricted to a “vital few” Pareto principle of the consumer?
The price of property in the UK is almost entirely a function of the amount of credit available, without which a correction would almost certainly occur however, this may not be in the interests of the wider economy, financial institutions or many consumer demographics. As consumers demand the ability to meet aspirations such as home ownership and the market looks to marry those expectations with products, the risks increase.
Recent reports of a large retail bank using “competency standards” as a cloak for sales targets and aggressive selling approaches are potential warning signals of the squeeze on financial institutions in terms of the new market conditions and an attempt to seduce more consumers with ever more attractive products. While systems can be leveraged to monitor, track and assess the conduct, behaviours and standards of the industry, ultimately the structural change discussed earlier is occurring at a point when many still need to keep “the wheels turning”. This has the capacity to assist the perfect storm through which the FCA must pass to achieve its goals, ambitions and objectives. Continuing changes to the economic landscape will bear a heavy factor in the execution of this plan and those that follow it.
