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Daily News Roundup: Monday, 31st October 2022

Posted: 31st October 2022

BANKING

Britain’s banks pay more than rivals, even without a windfall tax

Trade body UK Finance has warned that London will lose out to international rivals and become a less competitive place to do business if the Government introduces a windfall tax on banks. It added that the City will already be significantly more expensive than New York, Dublin, Amsterdam or Frankfurt by 2024, even if no windfall tax is introduced. Data from UK Finance shows that UK-based lenders pay a total tax rate of 45.3%. This is above the 27.4% charged in New York and 32.1% in Dublin - and on a par with taxes in Amsterdam and Frankfurt. With the headline rate of corporation tax due to rise from April 2023, the tax rate faced by UK banks will climb to 45.7%. Meanwhile, the end of an extra levy on EU banks means the rates charged in Amsterdam and Frankfurt will fall below 40% and Dublin’s will drop below 30%. Lord Blackwell, the former chairman of Lloyds, said: “The banks are already taxed fairly heavily, and we need to be sure that we don't make them uncompetitive internationally,” while Alison Rose, chief executive of NatWest, said the banking industry “already pays significant taxes” and Noel Quinn, chief executive of HSBC, has pointed to the “large amount of tax paid by the financial services sector in the UK.”

Sources: Bank windfall tax unlikely

Sources close to Rishi Sunak and Jeremy Hunt have played down suggestions that the Prime Minister and the Chancellor are considering a windfall tax on banks as the Government looks to plug a hole in its finances. Mr Sunak and Mr Hunt are said to be looking at the 8% surcharge that banks pay on top of corporation tax. When Chancellor himself, Mr Sunak said he would cut this to 3% and raise corporation tax from 19% to 25%. Banks have voiced concern that their tax burden could climb to 33% as Mr Hunt has yet to comment on reducing the surcharge. However, the senior sources expect the Chancellor to cut the surcharge to 3% as planned, leaving banks with a 28% rate.

NatWest reports £1.1bn profit

Pre-tax profits at NatWest Group remained flat at £1.1bn between July and September. The profits, boosted by higher interest rates increasing its margin between what it charged for loans and paid out to savers, were slightly higher than the £1bn made in the same period a year earlier. Net interest margin rose to 2.99% from 2.72%. The lender took a £242m provision for potential defaults in the three months to September 30, which it said reflected increased economic uncertainty. NatWest said defaults remained low, although it expected them to increase over the next year. Personal loans and credit card balances both increased by £100m, while customer deposits rose by £400m to £190.9bn in the quarter. NatWest’s chief executive, Alison Rose, said: “Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances or behaviours.”

Citizens Advice in mortgage payment warning

More than a quarter of mortgage holders would not be able to afford their monthly repayments if they increased by £100 a month, new research shows. The analysis from Citizens Advice also found that 45% would be unable to make their payments if they rose by £250 a month. One in seven mortgage holders have already cut down on essentials, while one in ten have taken out high-cost credit in order to make ends meet, according to the poll. The Citizens Advice report notes that the Financial Conduct Authority and Bank of England are currently recording the lowest level of mortgage arrears in 15 years – but warns this may be a sign people are not coming forward to ask for help and risk making their situation worse.

AVIATION

British Airways could snap up rivals

IAG, the owner of British Airways, could move to snap up troubled rivals such as easyJet and Portugal’s TAP, reports the Times. This comes after Luis Gallego, IAG’s chief executive, last week said: “We are a platform for consolidation. We will only do what makes sense but we see there are opportunities to be stronger. We are a group that wants to consolidate the industry.”

FINANCIAL SERVICES

Treasury set for power to overrule City regulators

The Treasury is to push ahead with rolling out powers to overrule City regulators despite Sam Woods, a deputy governor at the Bank of England, and Nikhil Rathi, head of the Financial Conduct Authority, questioning the proposed "call-in" powers. These will allow ministers to change rules set by the regulators if they were felt to be holding up reform. A Treasury spokesman said: "We have confirmed our intention to bring forward an amendment to the Financial Services Bill, to include an 'intervention power', that will enable the Treasury to direct a regulator to make, amend or revoke rules where there are matters of significant public interest.” They added: “The Government has always been clear that this is a safety valve that must be balanced with clear accountability, appropriate democratic input and transparent oversight." In a Mansion House speech, Mr Woods, who leads the Bank's Prudential Regulation Authority, said: "Leaving aside the evidence on financial stability, some might think that such a power would boost competitiveness. My view is that through time it would do precisely the opposite, by undermining our international credibility and creating a system in which financial regulation blew much more with the political wind - weaker regulation under some governments, harsher regulation under others."

MPs: Strip watchdogs of immunity

Three MPs have proposed an amendment to the Financial Services and Markets Bill that would see financial watchdogs lose immunity from civil damages claims in cases where consumers suffer financial losses because of a regulator's negligence. The amendment put forward by Peter Grant, Martin Docherty-Hughes and Owen Thompson would make the Financial Conduct Authority (FCA) liable for legal actions for civil damages if consumers claim to have suffered loss as a result of prohibited activity that the City watchdog failed to prevent. For the FCA to face a claim, three conditions would need to be satisfied: A consumer must have suffered material financial loss; that loss must have occurred because of the conduct of prohibited activities, and the prohibited activities must fall within the statutory remit of the regulator. The court would have to be satisfied that the regulator had "negligently failed to take sufficient action to prevent the prohibited activity or activities occurring where it was aware, or could reasonably be expected to have been aware, that the prohibited activity or activities were taking place."

Cost of living crisis forces public to buy now, pay later

Research suggests consumers have been driven to buy now, pay later schemes rather than dipping into overdrafts as the cost-of-living crisis bites. Tech banking firm Yapily found more than a quarter of consumers turned to buy now, pay later services in the past year compared with 18% who had used an overdraft. More than a third of consumers used credit cards for the first time, while 90% said they used money-saving or management products and services. This includes more than two thirds of people using bill management and credit score tracking and 63% using budgeting apps.

Rathi: FCA ‘always open to simplifying regulation’

Financial Conduct Authority (FCA) chief executive Nikhil Rathi says the regulator is “always open to simplifying regulation.” Speaking at the Lord Mayor’s City Banquet at Mansion House, he said the City watchdog is embedding competitiveness further into its approach, commenting: “ We are always open to simplifying regulation whilst delivering the same outcomes and streamlining our processes without undermining rigour.” Saying that as an independent regulator, the FCA has shown it can act quickly, Mr Rathi argued that it is vital this “independence and agility at speed” is not undermined by any proposed call-in power. The CEO also said he has “fundamentally reoriented the FCA” while in the role, saying: “We have greater willingness to take more legal risk, to intervene earlier and to test our powers to the limits.”

FCA to crack down on investment greenwashing

The Financial Conduct Authority is to clamp down on greenwashing, with the City watchdog having warned of "exaggerated, misleading or unsubstantiated claims" in fund managers’ marketing to investors.

Revolut boss renounces Russian citizenship

Nikolay Storonsky Jnr, co-founder of fintech company Revolut, has renounced his Russian citizenship. He previously held both British and Russian passports but relinquished his Russian citizenship following the invasion of Ukraine. His father, Nikolay Snr, was sanctioned earlier this month by the Ukrainian government over his role as director general of Kremlin-controlled Gazprom Promgaz.

REAL ESTATE

Homeowners turn to ultra-long loans

Almost two in five new mortgages are being taken out for 30 years or more as homeowners turn to ultra-long deals to keep down monthly repayments. Traditionally borrowers have signed up for 25-year loans, but the number of households seeking out longer terms has more than doubled since 2007. More than 22,000 home loans agreed in July – 39% of the total – were for 30 years or more, according to trade body UK Finance. Some of these were for 35 and even 40 years. In July 2007 the total was 10,000. Brokers say more homeowners are extending the length of their deals when remortgaging to ease the pain of soaring rates, but warn that they will pay much more interest in the long term.

Demand for homes drops by a third

Demand for homes has plunged by a third in the five weeks since the controversial mini-budget, research by Zoopla shows. Mortgage rates have risen to 6% in the wake of tax cuts announced by former Chancellor Kwasi Kwarteng on September 23, with the increase driving a decline in demand for property. South East England saw the steepest dip, with demand down by 40%. The analysis, which is based on inquiries made by new buyers to estate agents, shows a 38% fall in demand in the West Midlands, a 24% decline in Scotland and a 20% dip in North East England. Richard Donnell, executive director at Zoopla, said: “We don’t expect to see any impact on pricing levels between now and December and this will only start to materialise in early 2023,” adding: “It takes several months for pricing to adjust in the face of weaker demand.”

NatWest predicts 7% fall in house prices

NatWest has warned of falling house prices and a slowing mortgage market in the months ahead, forecasting that house prices are set to fall by 7% in 2023. This came a day after Lloyds predicted an 8% slide in house prices next year.

RETAIL

Retail vacancies fall

New data reveals that the overall shop vacancy rate across Britain fell to 13.9% in the third quarter, 0.1 percentage points better than the previous quarter and 0.6 percentage points better than the same period last year. The British Retail Consortium and Local Data Company revealed that shopping centre vacancies fell to 18.8%, down from 18.9% the second quarter, while high street vacancies decreased to 13.9% from 14%. Empty shops made up 9.7% of retail park outlets.

ECONOMY

BoE expected to hike interest rate to 3%

Economists expect the Bank of England’s Monetary Policy Committee (MPC) to increase interest rates by 0.75 percentage points at its November 3 meeting. This would mark the steepest increase since 1989 and take the base rate to 3%. It would also be the MPC’s eighth consecutive increase in interest rates. Governor Andrew Bailey recently said the Bank was likely to lift interest rates by more than the 0.5 percentage point increase to 2.25% seen at the previous meeting, saying: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.” A majority of analysts at Deutsche Bank expect the MPC to opt for a 0.75 percentage point rise. They also expect forecasts from the Bank to show that “the economic outlook has deteriorated further,” warning: “Conditioned on market pricing, the UK economy will likely fall into a deeper and more prolonged recession.” James Smith, developed markets analyst at ING, said the forecasts “are likely to be dismal – showing both a deep recession and inflation falling below target in the medium term.”

Government debt rose in Q2

Office for National Statistics data shows that government debt increased to £2,436.7bn in the second quarter of this year, making up 101.9% of GDP. This puts the UK 15.5 percentage points above the EU average. UK general government deficit, which measures the gap between total revenue and total spending, was £43.9bn in Q2, with this equivalent to 7.2% of GDP - 5.7 percentage points higher than the EU average.

OTHER

Trading outlook improves but business confidence slips

Business confidence has slipped to a 19-month low, according to the monthly index by Lloyds Bank. Confidence among business leaders fell by one percentage point to 15% in October. This is the lowest level since March 2021 and comes amid forecasts of a recession. Despite the dip in confidence, almost half of businesses (46%) reported better trading prospects, with this up by two percentage points. The survey of 1,200 UK companies saw 39% offer a pessimistic outlook on the economy, up from 36% in September. Almost two thirds said that they expect to raise prices in the next year, up from 59% last month. The number of companies planning to recruit rose to 42% from 39%, marking the first increase in five months.

£1.3trn wiped off value of UK bonds

More than £1.3trn has been wiped off the value of UK bonds in 2022, according to asset manager Collidr. Just over £882bn has been wiped off the value of Gilts and Index-linked Gilts, which have fallen 26.4% and 36.2% respectively since the start of the year. The analysis also shows that the value of UK corporate bonds has fallen by £514.5bn since the beginning of 2022. Colin Leggett, investment director at Collidr, commented: “The unprecedented meltdown in bonds is not just causing issues for pension funds with exposure to Liability Driven Investment Strategies. The fall is also wrecking the returns for any investor with a large exposure to UK bonds.” He added: “With the on-going economic and political instability, we may still only be in the eye of the storm.”

London leads on green finance

London has retained its status as the greenest finance centre in the world, according to Z/Yen Group’s green finance index. The City came out ahead of New York, Amsterdam and Paris due to its adoption of green finance products. Reflecting on a need for firms in the financial services sector to enhance their ESG processes as part of the drive toward net zero, Professor Michael Mainelli, executive chairman of Z/Yen Group, said: “As ESG approaches come under criticism, green finance needs to ensure it is focused on emissions reduction and the Sustainable Development Goals.”

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