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Daily News Roundup: Monday, 3rd July 2023

Posted: 3rd July 2023


Limit digital pound holdings to £5k, say banks

UK Finance says a digital pound should limit customers to holdings of £3,000-£5,000. In its response to a consultation on the launch of a central bank digital currency, the trade body was more cautious than initial suggestions from the Bank of England and the Treasury for a temporary limit of £10,000-£20,000 to help protect retail banks from a loss of deposits. UK Finance said that members agreed the limit should be permanent and far lower. The trade body also said that the authorities had not yet laid out “clearly what objectives and needs the digital pound is expected to meet and why it is best suited to meet those needs. It is not clear from the consultation what place in the market digital central bank money is expected to take.” The digital pound would be an attempt to create an ultra-safe form of digital money that will deter consumers from using private sector stablecoins. The Bank and the Treasury are carrying out consultations with a view to taking a final decision by 2025. The European Commission last week laid out its legal blueprint for a digital euro, with the European Central Bank due to take a final decision on its creation by the autumn.

Banks told to uphold free speech

The Treasury will reportedly tell banks that they must protect free speech. This comes amid reports that some lenders have been blacklisting of customers who hold controversial views, with leading Brexiteer Nigel Farage and a vicar who criticised his lender’s stance on LBGTQ+ among those who have seen their accounts closed. Chancellor Jeremy Hunt is said to be “deeply concerned” that some banks have closed accounts because they disagree with customers’ opinions and has asked City Minister Andrew Griffith to look into the matter. The Treasury is expected to recommend a more rigid notice period if payment providers want to close an account. Banks will also be required to provide greater detail about why they have decided to shut accounts.

Mortgage applications increase

Figures from the Bank of England show that mortgage approvals increased from 49,000 in April to 50,500 in May. Approvals for remortgaging also saw a rise, from 32,500 to 33,600 during the same period. The increase in approvals came despite higher rates for mortgage deals.


Car production drives up in May

Car production in Britain has increased for a fourth straight month, with data from the Society of Motor Manufacturers and Traders showing that 79,046 cars rolled out of factory gates in May, marking a 26.9% rise compared to May 2022. The 62,858 cars produced for foreign markets in May was a 22.9% increase on volumes recorded 12 months ago. The EU remains the biggest global market, taking 56% of export production.


FCA helps firms provide mortgage breathing space

The Financial Conduct Authority (FCA) has made rulebook changes in an effort to grant households relief from rising mortgage rates. Lenders will be able to offer borrowers a switch to interest-only payments for six months. They will also be able to offer an extension to mortgage terms to reduce monthly payments, with borrowers given the option to switch back within six months. The FCA said these can now be offered without an affordability check. The City watchdog also said that borrowers will not be forced to leave their home without their consent in less than a year from their first missed payment, unless in exceptional circumstances. Sheldon Mills, executive director for consumers and competition at the FCA, said: “Regulation cannot stop rates from rising, but the wider measures we’ve put in place over the past decade will make sure people get the support they need, when they need it.”

Watchdog voices concerns over sustainable loans

The Financial Conduct Authority (FCA) has warned that several issues are hindering the growth of the sustainable lending market. In a letter to sustainability heads at banks, the FCA said the market for sustainability-linked loans (SLLs) – which link borrowing costs to sustainability targets – had “grown rapidly” over the past five years and identified a number of concerns. Among these were weak incentives, potential conflicts of interest, and apparent low ambition and poor design in some SLLs. The FCA said market participants “believe that a more prescriptive framework would improve market integrity and reduce the threat of greenwashing accusations.”

MPs launch inquiry into SME finance

The cross-party Treasury Committee has launched an inquiry into the challenges faced by small businesses when seeking finance. The MPs will look at issues including how easy it is for small firms to access finance and the regulation of small business lending. As part of the investigation, they will look at the Bank of England’s term funding scheme, which incentivised high street banks to lend to small businesses, and assess how useful the British Business Bank is.

Insurers back Solvency II reforms

Insurers have welcomed Prudential Regulation Authority (PRA) proposals detailing potential post-Brexit reforms to the EU’s Solvency II regime. Among changes put forward, the PRA outlines plans to move towards a more principles-based system for assessing firms’ internal models. It also said firms will be given greater flexibility in how they calculate capital requirements. The Association of British Insurers said: “This is another important step towards introducing Solvency UK and enabling our sector to play an even greater role in supporting investment in UK green infrastructure.” A Phoenix Group spokesperson commented: “We believe Solvency II reforms are critical in enabling significantly more investment in productive assets in the future.”

Bowles: FCA 'failing in its remit' with Mifid rules

Baroness Sharon Bowles says the Financial Conduct Authority’s (FCA) interpretation of some Mifid rules means it is "failing" to achieve one of its core objectives and "decimating" the investment trust sector. Baroness Bowles, a former chair of the European Parliament’s committee on economic and monetary affairs, said rules around how investment trust fees are presented mean investors are turning away from sectors such as renewable energy. She also said the Financial Services and Markets Bill is "meaningless if the FCA continues to sit on obvious and unnecessary regulatory damage to the real economy through decimation of the listed closed end investment funds regime."

Pension funds eye unlisted companies

Big pension funds are negotiating a deal where they would invest up to 5% of their assets in unlisted UK companies. Nicholas Lyons, the Lord Mayor of London, is looking to set up a £50bn “future growth fund” to channel pension investment into start-ups and growth companies. While some commentators have voiced concern that defined-contribution pension schemes — in which 20m people have a total of £605bn saved — would be forced to put investments into riskier assets, an agreement delivering a voluntary commitment for fund management firms is reportedly on the cards.

Call for UK to use co-investment with pension funds to drive backing for riskier assets

The Association of British Insurers has urged ministers to encourage greater co-investment with private sector pension funds and ease financial services regulation to make the UK a “more attractive” destination.


Manufacturing vacancies increase

Figures from industry body Make UK show that there were 74,000 unfilled vacancies in the manufacturing sector last year. The report says this has created a £6.5bn economic gap and comes despite overall employment increasing in 2022. While the manufacturing sector expanded by 0.6% year-on-year in Q1, business surveys point to three consecutive months of falling output in Q2. Firms have voiced concern over high energy costs, falling export demand and recruitment struggles amid a tight labour market. Verity Davidge, director of policy at Make UK, said the industry was a vital source of levelling up but requires “bold measures.”


Average house price falls 3.5%

House prices fell by 3.5% annually in June, according to data from Nationwide Building Society, with this following a 3.4% year-on-year decline in May. Month-on-month, prices were up 0.1%, reversing the 0.1% dip recorded in May. The report shows that the average UK house price in June was £262,239. London saw a 4.3% year-on-year decline in house prices, while southern England saw a 3.8% decline and prices in northern England were down 2.7%. On the year-on-year fall, Robert Gardner, Nationwide’s chief economist, said: “Longer term interest rates, which underpin mortgage pricing, have increased sharply in recent months, in response to data indicating that underlying inflation in the UK economy is not moderating as fast as expected.” He added a “sharp” increase in borrowing costs is “likely to exert a significant drag on housing market activity in the near term.”

Property sales slide 27%

HMRC data shows that home sales fell by 27% in May, compared with the same month last year. Across the UK, 80,020 transactions were recorded in May, with this 3% lower than April’s total. Kevin Roberts, managing director at Legal & General Mortgage Services, said that with transactions falling in recent months, it partly reflects a “bit of a return to pre-pandemic norms,” but also shows that “some buyers may be sitting tight, perhaps because they feel more uncertain about their finances and the future of the property market.” Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Transaction numbers continue to come under pressure in the face of higher interest rates and the cost of living.”


Economy grew by 0.1% in Q1 - ONS

Office for National Statistics (ONS) data shows that the economy grew by 0.1% in Q1. The report, which offered a more thorough analysis of figures released in May, shows that GDP was up by 0.2% in April, having fallen by 0.3% in March. Danni Hewson, head of financial analysis at AJ Bell, said: “The UK has limped through the first few months of the year thanks to a surprisingly resilient consumer market and what is likely to have been a rush by businesses to make the most of generous tax breaks on investment before they came to an end.” Ashley Webb, an economist at Capital Economics, said that while the economy steered clear of a recession in Q1, “with around 60% of the drag from higher interest rates yet to be felt, we still think the economy will tip into one in the second half of this year.”

Disposable income declines

UK households' real disposable income - money available after adjusting for inflation, taxes and benefits - was 0.8% lower in the opening three months of 2023 than the previous quarter, according to the Office for National Statistics. The decline recorded in Q1 was the biggest drop since the second quarter of 2022, and 0.5% lower than Q1 2022. The data also shows that the savings ratio fell to 8.7% in the first quarter, from 9.4% in Q4 2022. While this marks the lowest level since the second quarter of 2022, it exceeds the pre-pandemic average of just over 5%.


BoE ‘must stop creating money out of thin air’

The Bank of England has been warned that it must stop “creating new money out of thin air.” In a letter to Chancellor Jeremy Hunt, a group of City figures, economists and think-tank leaders have urged ministers to overhaul monetary policy, calling for the Bank to focus on maintaining the value of the pound “by whatever means necessary.” They argue that the monetary system is “now out of control and needs reform.” Signatories including Geoff Blanning, a former investment manager at Schroders, and Mark Littlewood, the director general of the Institute of Economic Affairs, say the Bank of England “has been creating new money out of thin air to fund the Government’s promises.” The letter accuses the Government and the Bank of being “jointly complicit” in a “debt explosion.” The letter says: “More money in the system, without more goods and services being produced, leads to rising prices which hurts those on low incomes the most.”

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