‘Business as usual’ for commercial and household lending in the UK

There has been little change in borrowing patterns among UK consumers and businesses since the EU referendum, according to figures released on Wednesday by the British Bankers’ Association (BBA).

The trade association for the UK banking sector said that the report for July, reflecting the period immediately after the vote to leave the European Union, shows that net mortgage borrowing and consumer credit annual growth were identical to the figures in June at 3% and 6% respectively.

Meanwhile, business borrowing picked up in July following a mild contraction in June, and household and business cash deposits continued to grow at a rate similar to that seen in the previous two months.

“The data does not currently suggest borrowing patterns have been significantly affected by the Brexit vote, but it is still early days. Many borrowing decisions will also have been taken before the referendum vote,” explained Rebecca Harding, chief economist at the BBA.

“We are also clearly still a nation of shoppers and the Brexit vote has done nothing to change the fact that we use credit cards for short-term purchases. Strong retail sales figures appear closely associated with strong consumer credit growth.”

In the business sector, the report shows that borrowing by non-financial companies increased by ?2.3bn in July after a small fall in June.

Harding noted that business borrowing is not following the same pattern as business confidence. The data shows a clear upward trend in business borrowing for the last few months, indicating that the decline in June was a blip, probably caused by pre-Brexit nervousness.

“All of this suggests that, for the UK borrower, whether commercial or household, it is business as usual for the time being” Harding concluded. “There is no panic exodus or lock down in borrowing but, as many of the decisions to borrow could well have been made before the Brexit vote, we really should look for longer term trends before we can draw any conclusions.”

RBS and and Standard Chartered struggle to pass Bank of England stress test

Seven of the UK’s largest financial service providers banks have been advised to set aside extra capital as a buffer against financial shock, following the latest stress testing by Britain’s central bank, the Bank of England, it was reported on Tuesday.

This is the second year running that the bank of England has carried out stress testing of major lenders in the UK, which measure whether they would survive economic problems. During the latest tests, it was assumed that oil had fallen to $38 per barrel and that the global economy had slumped. The hypothetical scenario also assumed a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test indicated that profits would fall more than they had done during the 2008 banking crisis, but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.

Royal Bank of Scotland and Standard Chartered were found to have the least capital strength, but as each bank had taken steps to raise capital, they were not required to put new measures in place. However, all seven banks were advised that the Bank of England is phasing in a new measure known as a “countercyclical capital buffer”, which requires financial service providers to ensure that extra capital is available that will allow more room in times of economic decline to absorb losses from bad loans and other problems.

Banks are required to allocate more money to protect against lending losses in the UK, but some of this will be brought in from other reserves that the banks already have. The regulator will advise banks when to fill the buffer, setting aside reserves during stable times in the economic cycle.

Bank of England Governor Mark Carney stated at a news conference: “We will not increase capital… the overall level of capital won’t increase in the system. Large capital raisings are off the agenda and banks largely have or have access to the reserves they need”.

UK government to sell remaining 12% stake in Lloyds

HM Treasury revealed on Monday that the UK government plans to divest the rest of its stake in Lloyds Banking Group, with the launch of a retail sale of Lloyds shares in spring 2016.

The government intends to fully exit from its Lloyds shareholding in the coming months and has said that at least GBP2bn of shares will be sold to retail investors as part of the divestment, with applications available online and by post.

Lloyds shares will be offered to members of the public, with a discount of 5% of the market price and a bonus share for every ten shares for those who hold their investment for more than a year. Priority will be given to those who apply for an investment of less than GBP1,000. The value of the bonus share incentive will be capped at GBP200 per investor. Also, military personnel and their spouses stationed overseas will be able to apply to buy the shares, where possible, which is in line with the government’s armed forces covenant that ensures that members of the armed forces should not face disadvantage in the provision of public services.

Proceeds from the sale of Lloyds shares are used to pay down the national debt.

According to the BBC news website, Chancellor George Osborne has described the sale as the biggest privatisation in the UK for more than 20 years.

Osborne was quoted as saying: “I don’t want all those shares to go to City institutions – I want them to go to members of the public”.

Lloyds was bailed out by the government at the height of the financial crisis in 2008, when the Treasury spent GBP20.5bn on a 43% stake in the banking group. Almost three-quarters of public funds used to rescue the bank have been recouped by the Treasury, which has sold the shares to institutional investors.

FCA plans deadline for PPI complaints

The Financial Conduct Authority (FCA), which is responsible for the conduct supervision of all UK regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA), announced on Friday that it plans to introduce a deadline for complaints about payment protection insurance (PPI).

Early this year, the FCA stated that it would be assessing whether there was a need for further intervention in PPI complaints handling generally, whereby consumers would need to make their PPI complaints or else lose their right to have them assessed by firms or by the Financial Ombudsman Service (the Ombudsman). 

Subject to consultation up to the end of 2015, a deadline would fall two years from the date the proposed rule comes into force. The FCA does not expect the ruling to become effective before spring 2016, therefore PPI consumers would have until at least spring 2018 to complain. This consultation will also set out plans for a proposed FCA-led communications campaign that will be designed to encourage consumers to complain in advance of that deadline, which will also include a proposed fee rule concerning the funding of the proposed communications campaign.

Following consultation, the FCA said it publish a paper before the end of the year, that will set out the full detail of these proposed rules and guidance; the evidence considered; reasons for the proposals; and an assessment of costs and benefits.

Since January this year, evidence has been gathered from firms, consumers through online surveys and discussion groups, as well as other stakeholders, regarding the PPI landscape and whether it is changing. An assessment has been carried out by the FCA as to whether the current approach is continuing to meet the objectives of securing appropriate protection for consumers and enhancing the integrity of the UK’s financial system.

According to the FCA, current complaints framework and its supporting supervisory work has resulted in compensation being paid to large numbers of consumers who were previously mis-sold PPI.

So far, more that GBP20bn redress has been paid to over 10 million consumers. But the FCA found that the large scale payment of redress has recently been accompanied by other trends such as a high and growing proportion of complaints are being made via claims management companies, with fee costs to the consumers who use them. Also a high and growing proportion of complaints relate to older sales (pre-2005 and even pre-2000), where the documentary evidence held by firms and consumers is likely to have significant gaps and recollections and oral evidence are becoming increasingly stale. In addition, there are a large number of complaints made that have turned out not to have involved a PPI sale.

The FCA said it considers that the introduction of a deadline and running a communications campaign would: prompt many consumers who want to complain, but have not yet done so, into action, resulting in them potentially getting redress sooner, and giving some of them the opportunity to pay off costly debt; and bring the PPI issue to an orderly conclusion, reducing uncertainty for firms about long-term PPI liabilities and helping rebuild public trust in the retail financial sector. Also, the FCA also considers that its intervention may encourage more consumers to complain directly to the firms, rather than using and paying claims management companies.

Financial Ombudsman Service reveals 8% increase in complaints relating to UK financial service providers

The UK’s Financial Ombudsman Service has published its latest figures on complaints about banks, insurers and other financial businesses over first half of 2015, which show an overall increase of 8% on the previous six month period.

Data released on Tuesday reveals that the ombudsman took on a total of 173,994 new cases in the first six months of 2015, compared to 161,649 in the previous period.

Payment protection insurance (PPI) made up 55% of the total cases referred to the ombudsman in the first half of 2015, with 94,091 new PPI complaints. However this figure fell by 10% compared with the previous six months.

Other complaints about financial products increased by 45% to 79,550, primarily as a result of more complaints about packaged bank accounts brought by claims-management companies during this period.

Where the ombudsman found in the consumer’s favour, the average uphold rate was 57% over the six month period. This ranged from 5% to 94% across individual businesses.

In addition, 22 financial businesses were found to feature in the complaints data for the first time, which meant that a total of 222 businesses had 30 or more cases referred to, and resolved by, the ombudsman service in the first six months of the year.

Commenting on the figures, chief ombudsman Caroline Wayman said:

“It’s been seven years since the ombudsman first began to publish data about individual financial businesses.

“This has coincided with a period of volatility and challenge for much of the financial services sector – and this is still reflected in the data we publish today.

“Complaints about PPI continue to make up over half of our workload. And though the number of new PPI cases has reduced in the first half of this year, the decline has not been as steady or as marked as generally expected. This is at least in part due to the continued high levels of activity by claims managers in this area.

“Claims managers have also been largely responsible for the substantial increase in complaints about packaged bank accounts, which have driven up our banking workload over this period by two thirds.”

Wayman added: “Nobody wants “another PPI ”. This is why we’re working closely with businesses, claims companies and their regulators, to make sure PPI is sorted as fairly and as quickly as possible for everyone involved – and that lessons are learned to prevent anything like this happening again. If we can all achieve this, then the next seven years should be a different story.”

The Financial Ombudsman Service was set up by parliament in the UK as a free service to resolve individual complaints for consumers and financial businesses that unable to do so themselves. It investigates complaints about most financial problems involving: PPI (payment protection insurance), banking, insurance, mortgages, credit cards and store cards, loans and credit, payday lending and debt collecting, pensions, savings and investments, hire purchase and pawnbroking, money transfer, financial advice, stocks, shares, unit trusts and bonds.

UK Government sells off RBS shares for £2.1 billion

The UK government has commenced the sale of its shares in majority state-owned retail bank, the Royal Bank of Scotland (RBS), which was bailed out by the government during the financial crisis in 2008.

HM Treasury and the Chancellor of the Exchequer George Osborne revealed on Tuesday that 5.4% of the government’s stake in RBS has been sold at £3.30 per share, raising £2.1bn that will be used to pay down the national debt.

RBS shares were purchased by the UK government for £45bn in 2008 and 2009. The bank was also supplied with cheap funds.

UK Financial Investments advised the Chancellor on Monday that it would be appropriate to begin the first sale of the government’s shareholding in RBS. Osborne agreed to the share sale, marking the first step in returning RBS to the private sector.

Osborne said: “This is an important first step in returning the bank to private ownership, which is the right thing to do for the taxpayer and for British businesses: it will promote financial stability, lead to a more competitive banking sector, and support the interests of the wider economy.”

CEO of RBS Ross McEwan also stated: “I’m pleased the government has started to sell down its stake. It’s an important moment and reflects the progress we are making to become a stronger, simpler and fairer bank. There is more work to be done but we’re determined to build a bank the country can be proud of.”

According to RBS, its capital position has improved dramatically since 2008. Its loan:deposit ratio is much more sustainable than it was during the crisis and is now at 92% , compared to 154%. The bank’s share price has also appreciated by 330% since its lowest point in January 2009.

However, the share sale is below the price paid by the government and represents a loss to the UK taxpayer of about £1.07bn.

Lloyds profits increases to £1.2 billion while PPI compensation costs rise by £1.4 billion

Lloyds Banking Group has set aside a further £1.4bn to cover compensation claims by customers who were mis-sold payment protection insurance (PPI), but has declared a 38% rise in half year profits to £1.2bn, it was reported on Friday.

A total of £13bn for compensation costs has now been set aside by the bank, which was bailed out by the UK government during the financial crisis and received £22.5bn of taxpayers’ money.

The bank was recently fined a record £117m by the Financial Conduct Authority (FCA) over the mis-sold PPI.

Lloyds is said to have identified approximately 1.2 million previously defended PPI complaints for re-review at the end of 2014, but this figure has now increased to 1.4 million cases. Those cases were being reviewed following a fine by the FCA, as a result of an investigation into the way that around 2.3 million complaints were handled. The FCA investigation found the bank mis-handled complaints between March 2012 and May 2013.

According to reports, the three months to the end of June represents the last quarter in which the bank can make set aside PPI compensation against its corporation tax bill.

Antonio Horta-Osorio, Lloyds’ chief executive, was quoted as saying: “Today’s results demonstrate the strong progress we have made in the first half of the year.

“We remain focused on our aim to become the best bank for customer sand shareholders, while at the same time supporting the UK economy.”

The UK government has reduced its stake in the bank to 15%, down from the 43% that it bought at the height of the financial crisis This stake has been steadily reduced over the twelve months by sales of shares to institutional investors. Analysts expect the government to announce a discounted share sale to the public in the early half of next year, when the stake is set to be as low at 5%.

Co-operative Group suffers heavy losses of £2.5bn in 2013

The Co-operative Group, a British consumer cooperative that operates a range of retail businesses, announced its final results for the 52 weeks ended 4 January 2014 on Thursday, which showed losses of GBP2.5bn for 2013 when compared to losses of GBP529m for 2012, reportedly the worst results in the group’s 150-year history. Group operating loss was GBP148m for 2013, in comparison to profit of GBP142m for the previous year.

According to the group, the losses reflected the impact of its Bank recapitalisation. The Co-operative Bank has losses of GBP2.1bn, which included a trading loss of GBP1.44bn for the year to December, when the group gave control of Co-op Bank to US hedge funds. The group also took another charge of GBP625m when over 70% of the bank’s shares were handed to bond investors.

The results were also impacted by goodwill impairment of GBP226m, which arose on the acquisition of supermarket retailer Somerfield; however the Co-operative Group Food business achieved a robust second-half in like-for-like performance, with an overall 0.6% increase. Full year like-for-like sales in the Food division for the year fell by 0.2%, while LFL sales in core convenience chain rose by 1.6%. The effects of store disposals, a shorter accounting period and price reductions were reflected in lower revenues and underlying operating profits of GBP210m over the full year, which were down from GBP 297m the year before.

Group sales for 2013 were GBP10.5bn for 2013, compared to GBP11.0bn in 2012. Funeral sales were GBP370m, increased from GBP358m the year before, while Pharmacy sales dropped to GBP760m from GBP764min 2012. There was also a fall in General Insurance sales in 2013, which were GBP476m compared to GBP580m in 2012.

As part of the move to meet its obligations under the Bank recapitalisation plan, the trading group syndicate bank facilities have been renegotiated. The group has also reduced its net debt by GBP286m to GBP1.4bn as a result of the disposal and sale and leaseback of property assets and the sale of the remaining motor dealerships.

Capital expenditure was lower at GBP239m in 2013, compared to GBP410m in 2012, which reflected the necessity to provide capital for the Bank and to reduce debt.

Interim Group chief executive of The Co-operative Group, Richard Pennycook, stated: “2013 was a disastrous year for The Co-operative Group, the worst in our 150-year history. Today’s results demonstrate that but they also highlight fundamental failings in management and governance at the Group over many years. These results should serve as a wake-up call to anyone who doubts just how serious the challenges we face are.”

Chair of The Co-operative Group, Ursula Lidbetter, commented: “During 2013, it became apparent that our governance had fallen far short of the standards to which we aspire as a co-operative society. Now is the time to put that right through fundamental reform – we have to act with urgency if we are to lay the foundations for a stronger, healthier co-operative business in the future.”

US banks see higher earnings on capital market activity, mortgage refinancing

Increased capital market activity drove stronger earnings and increased profitability for major US banks in the third quarter of last year, according to ratings agency Fitch Ratings.

Fitch said that strong debt issuance, tighter fixed income spreads, and an equity market rally fueled a healthy rebound in capital markets revenues from depressed levels in Q3 ’11 and subdued activity in the prior quarter.

Core profitability for the major banks was slightly improved and better than expected during the quarter.

The mortgage refinance boom further contributed to stronger revenues for the quarter. This reflects the effects of theFederal Reserve’s quantitative easing measures, which have brought long-term rates down to very low levels.

Although refinance activity will continue into 2013, Fitch expects that it will level off and thus current levels are not considered sustainable.

The larger US banks began disclosure of expected Basel III Tier I common ratios in Q3. Although this guidance is not finalized, Fitch expects that most rated banks will be in compliance ahead of full implementation.

BBC Radio 4 explores ways to fix Britain’s broken banking system

On Saturday afternoon BBC’s Radio 4 reached the halfway point in a new series looking at what is wrong with British banking and how it might be repaired.

‘Fixing Broken Banking,’ presented by Michael Robinson, is an often wistful look at British banking’s past, present and future.

While the series’ first episode explored the emergence of contemporary British banking stained by scandals and a mechanical drive for efficiency and profit, the second episode, aired on Saturday, showed the personal touch still can thrive and prosper.

‘Fixing Broken Britain’s first episode explored the recent scandal of Payment Protection Insurance (PPI).

Theoretically existing to protect borrowers who find themselves unable to make loan repayments because of unexpected events, PPI was quickly transformed  from a form of protection into a hugely profitable form of attack – on the public.

Banks targeted the sick and the self-employed who were never eligible for payout  in the first place. Deliberately complicated fine print hid badly structured policies that many were unaware they actually bought. Bank customers handed over up to £5.5 bn per year for the High Street banks at its peak in the mid-2000s.

‘A fire hose of money coming in then going straight out,’ is how one PPI insider describes the practice.

‘I always thought the point of insurance was to protect people,’ says one interviewee. ‘Instead, it became a kind of insurance racket.’

Related article: Streets paved with gold: the Council that works for banks

Radio 4’s ‘Fixing Broken Banking’ places the responsibility for the scandal at the feet of a rotten banking management culture and automation.

A former consultant with McKinsey described how the drive for efficiency saw computers outflank decision-making by local bank employees with a knowledge of their customers.

While the financial regulators finally intervened in the PPI market in 2007 after finding evidence of harm done to consumers, the reputational damage to British banks was already done, Robinson argues.

In the second episode, aired on Saturday, Robinson travels to North England and Germany to find possible remedies for the reputational damage. There he finds banks successfully toiling under the ‘local banking for local people’ banner.

From Cumberland Building Society in Cockermouth to Handelsbanken, a successful new arrival from Sweden which now has 132 British branches; Robinson discovers that small and local can often thrive.

The success of Cumberland Building Society, which reportedly sailed largely unscathed through the financial crisis, is due to it following ‘one of the old rules of banking,’ Robinson says: ‘ Really knowing who you lend to.’

Eschewing the automated lending assessments of High Street banks, banks such as Cumberland and Handelsbanken use trained individuals to decide loan applications.

Travelling to a town in southern Germany, near Stuttgart, Robinson praises another El Dorado of ethical financial services where ‘nearly everybody banks locally.’

‘I’m not allowed to go outside my area to solicit customers,’ says the German local bank manager before adding, ‘I compare it to going to your doctor. You have to take down your pants. It’s the same going to your bank.’

The rationale is simple. While Plato may have written ‘Know Thyself,’ the aphorism to successful modern banking appears to be ‘Know Thy Customer.’

Fixing Broken Banking continues on Saturday 18 August at 12:00.

Written by  of  The Bureau of Investigative Journalism.