Banks face stress tests over impact of spike in energy costs
The Guardian reports that the UK's largest banks will be tested on their ability to withstand a rise in defaults linked to soaring energy prices. This will come as part of the Bank of England's health check of the financial industry, with officials devising a new crisis scenario that will feature a recession and factors which could make it harder for borrowers - particularly businesses - to afford loan repayments. The Prudential Regulation Authority is preparing to release the details of its stress-test scenario, having postponed the annual exercise because of the war in Ukraine. The stress-test scenario will also feature a drop in asset prices, a further jump in interest rates and soaring costs to cover misconduct. The results from the UK's largest banks - which include NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide Building Society and Virgin Money - will be made public in summer 2023. Lenders deemed too weak to cover the eventualities set out in the test could be forced to raise extra capital to strengthen their finances. It is noted that the European Central Bank is assessing banks on similar criteria, with it reportedly asking lenders to analyse how gas shortages could affect their business customers and default rates.
Brits outpace Europeans in digital banking uptake
People in the UK are significantly ahead of other Europeans when it comes to embracing digital forms of banking. Analysis shows that bank users in Britain are nearly twice as likely as other Europeans to favour applying for financial products and services online via website or app. The research found that over half of Europeans prefer to apply for new financial products – such as current accounts, credit cards or loans – in-person at a local bank branch. However, in the UK, only around a fifth would opt to apply in-person. The research was commissioned by consumer and business credit information provider CRIF and sought to gauge attitudes towards financial services. Sara Costantini, CRIF’s regional director for the UK & Ireland, said the UK “leads the way in Europe when it comes to embracing digital and online methods, but there is still more we can do to utilise digital technologies to help more UK consumers to manage their finances.” Noting that some consumers are concerned over fraud and security, she said the industry “should work to allay these fears,” adding that technologies such as open banking “are not only safe but can lay the foundations for increased financial support.”
Goldman Sachs set to cut jobs
Goldman Sachs plans to cut jobs after pausing an annual reduction of its headcount for two years during the pandemic. The Wall Street bank typically trims about 1% to 5% of its staff number each year, with sources suggesting that cuts which could be made as early as this month will likely be in the lower end of that range. Analysis shows that Goldman’s headcount grew to 47,000 at the end of June, with this up 15% from a year earlier. In July, Goldman warned that it might slow hiring as the economic outlook worsens.
Woodford fund investors could see £306m compensation
The Financial Conduct Authority (FCA) is ordering the administrator of Neil Woodford’s collapsed investment fund to ring-fence £306m to pay investors compensation. This comes as part of conditions related to Link’s takeover by the cloud-based software company Dye & Durham. The FCA said it will not approve the deal unless the Canadian company agrees to cover the liabilities related to Link’s role in the Woodford scandal. The money could eventually be used to help compensate the 300,000 investors who were affected by the collapse of Woodford Equity Investment Fund (WEIF). Link was responsible for monitoring and supervising the investments executed by Woodford before the fund failed in 2019. The City watchdog said: “The FCA’s current view is that the redress payment LFS could be required to pay may be up to £306m. This redress proposal reflects the FCA’s current view of LFS’ failings in managing the liquidity of the WEIF.” The regulator stressed the figure was provisional and that Link could challenge any financial penalty it levied.
Regulation rethink is a ‘recipe for disaster’, says former FCA official
Former Financial Conduct Authority (FCA) official Matthew Nunan has warned that Government plans to exert greater control over financial rule-making are a “recipe for disaster.” With ministers looking to grant the Government powers to overturn decisions made by independent City watchdogs, Mr Nunan, a former head of wholesale enforcement at the FCA, said it was not clear why politicians – “few of whom are qualified economists or financial service professionals” – would make “better decisions than financial regulators.” This comes with the Financial Services and Markets Bill set to grant ministers “call in” powers that will allow the Government to intervene in decisions deemed to be in the public interest. Mr Nunan, a partner at law firm Gibson Dunn, said that while he can understand the need for politicians “to set policy goals and to guide state functions and regulators in the direction of travel at a macro level. Having the ability to overturn individual decisions at the micro level seems a recipe for disaster.”
FCA flags ESG benchmark risks
The Financial Conduct Authority (FCA) has warned of the risks of ESG benchmarks, with the City watchdog saying it will be scrutinising how they are constructed and labelled. In a ‘Dear CEO’ letter, Edwin Schooling Latter, the FCA’s director of infrastructure and exchanges, said: “We have concerns that some benchmark administrators have not accurately described the economic reality that their benchmarks measure.” He added that “the subjective nature of ESG factors, and how ESG data and ratings are incorporated into benchmark methodologies, give rise to an increased risk of poor disclosures in ESG benchmark statements.” Warning that the FCA has observed occurrences of poor data quality and controls, he said the regulator is “concerned these may impact the reliability and representativeness of benchmarks.”
JPMorgan snaps up Renovite
JPMorgan has agreed to acquire payments firm Renovite as it competes with payment processing challengers Stripe and Adyen. The firm says it hopes to integrate Renovite’s technology to bolster its digital offering. Max Neukirchen, global head of payments at JPMorgan, said: “This acquisition will help us achieve our goal to develop the next-generation payments processing platform globally.”
LEISURE & HOSPITALITY
Martin calls for VAT cut for pubs
JD Wetherspoon chairman Tim Martin has urged ministers to cut VAT for pubs and make the taxes “fair and equitable” between retail and hospitality. Mr Martin said it was not fair supermarkets could use savings from zero VAT charges to sell alcohol to shoppers at cheaper prices.
Accounting sector on course for record year
Turnover in the UK’s accounting sector increased 0.69% from June to July, hitting £3.54bn. Figures from the Office for National Statistics (ONS) show revenues increased 16.65% year-on-year, with accounting firms continuing to profit from volatile economic conditions. Professor Atul Shah said the ONS data serves as evidence that accounting firms are “recession proof,” with major accountancy firms seeing consistently reliable income from their audit segments. He added that firms in the sector have been boosted further by surging demand for consulting services.
500 mortgage deals pulled in a month
There are almost 1,000 fewer mortgage deals on the market than there was a year ago, according to Moneyfacts.co.uk, with analysis showing that more than 500 deals have been withdrawn since last month. The number of available fixed and variable rate home loans has fallen to 3,890, with this marking the lowest level since April 2021. There are now 517 fewer residential mortgages available than in August. In September 2021 there were 4,812 mortgage deals available, 922 more than there are this month. There are also now 1,425 fewer mortgages than there were at the start of December 2021, with the Bank of England rolling out several base rate increases since then. The Moneyfacts.co.uk report shows that the average standard variable rate now stands at 5.40%. This is the highest rate since December 2008.
DFS announces new chair
Steve Johnson has been appointed the new chairman of furniture retailer DFS. The former Matalan executive chairman will succeed Ian Durant, who will retire at the end of the year. Mr Johnson joined the board of DFS in December 2018 and is chairman of the remuneration committee.
Economy grew more slowly than expected in July
Office for National Statistics data shows that the UK economy grew by 0.2% in July, with this falling short of the 0.3% expansion analysts had forecast. GDP fell by 0.6% in June because of two fewer working days, with the country seeing an extra bank holiday for the Queen's Jubilee. Between April and June, the economy contracted by 0.1% compared with the previous quarter. The Bank of England said last month said it expected the UK to fall into recession at the end of this year, with this defined as two consecutive quarters of shrinking output. Paul Dales, chief UK economist at Capital Economics, said: "The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession. Elsewhere, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, believes next week’s bank holiday for the Queen’s state funeral could have an impact on the economy, saying he expects it to hit growth by 0.2%.
Mini Budget on the way
Downing Street says a mini Budget will take place this month, with a "fiscal event" set to outline Government plans to tackle the cost of living crisis and deliver tax cuts. Prime Minister Liz Truss and Chancellor Kwasi Kwarteng are putting together a package that will be unveiled soon after the Queen's state funeral. Ms Truss last week revealed plans to limit energy bill rises for all households for two years, with the typical household energy bill to be capped at £2,500 annually until 2024. Businesses will see bills capped for six months. The Government has not given further details about the scheme, including how much it will cost.
Barclays: Currency crisis suggestions are 'scaremongering'
Barclays has questioned suggestions that the UK could suffer a 1970s-style currency crisis, with Themistoklis Fiotakis, the bank's new head of foreign exchange research, saying deficit concerns raised by some rival banks are overblown. He said: “Crisis fairy tales aside, the extent to which sterling will depreciate versus the euro will clearly depend on the preferences of the central banks.” Mr Fiotakis added: "Scaremongering of a coming UK balance of payment crisis misses the true macro story, in our view." This comes after Deutsche Bank FX strategist Shreyas Gopal said the UK is “increasingly at risk of no longer attracting enough foreign capital to fund the external balance.” "If so, sterling would need to depreciate materially to close the gap in the external accounts. In other words, a currency crisis typically seen in emerging markets,” he added.