Financial Services Growth and Development Board minutes: April 2022

Attendees and apologies

Present:

• Philip Grant, Lloyds Banking Group – Co-Chair
• Kate Forbes MSP, Cabinet Secretary for Finance and the Economy – Co-Chair
• Sandy Begbie, SFE
• Malcolm Buchanan, RBS
• Stephen Bird, abrdn
• Sue Dawe, EY
• Maggie Craig, FCA
• Nicola Anderson, FinTech Scotland
• Gerry Mallon, Tesco Bank
• Eilidh Mactaggart, SNIB
• Andy Curran, Phoenix
• Angus MacPherson, Noble Group
• Koral Anderson, Barclays
• Vida Rudkin, Morgan Stanley
• Louisa Knox, Shepherd and Wedderburn
• Claire Reid, PWC
• Alastair Ross, ABI
• Sarah Roughead, SNIB
• Arlene Arnott, KPMG
• Sandy MacDonald, SFE
• Chris Brodie, SDS
• Phil Ford, SDS
• Colin Halpin, Barlcays
• Caitlin Cooke, SFE

Apologies:

• Nicola Sturgeon MSP, First Minister
• Ivan McKee MSP, Minister for Business, Trade, Tourism and Enterprise
• Barry O’Dwyer, Royal London

Scottish Government officials in attendance:

• Kim Mackay
• Conal O’Hare
• Matthew Anderson
• Linda Anderson

Items and actions

Welcome and actions/updates from previous meeting (items 1 and 2)

The Cabinet Secretary for Finance and the Economy opened the meeting as Co-Chair and welcomed the return of in-person meetings. She also extended an apology from the First Minister and explained that she is chairing on the First Minister’s behalf.

Philip Grant thanked Barclays for hosting today’s meeting. He also passed on his thanks to the First Minister for her recent promotion of Scotland’s financial and professional services industry during her visit to London.

Philip reflected on the previous meeting, noting there were no specific action points from last time, but highlighted that the challenges within the economy have evolved. The Covid issues which persist in the supply chain have been enhanced by the Ukraine crisis and there has been the emergence of cost of living issues. Philip stated that SFE are confident that their current strategy remains relevant to tackle the problems of today and although the focus may evolve over time, today’s FISGAD agenda is both fitting and action focussed.

Economy: trends/insights/banking barometer (item 3)

Malcolm Buchanan noted that as he reflected on his comments from the previous meeting, the optimism in his outlook that recovery would continue now seems misjudged given the changes that have taken place in the last 3 months. The situation in Ukraine has exacerbated previous supply chain issues and has created new issues in the way of sanctions. This has had a notable impact on both businesses and consumers and the effects could be long term without a forthcoming peace deal.

Malcolm highlighted that there is a lag in economic indicators between events and impacts. Previous insights have focussed on business and non-personal banking but he considered it also beneficial to look at individual consumers.

Although there is currently a low vacancy rate, low labour market and wage inflation, this is being offset by the cost of living crisis and the National Insurance increase, meaning real incomes are flat. There is very notable food price inflation and we are only seeing the tip of the iceberg with this problem. There is no good news on this at the moment with raw food material trapped in Ukraine and Russia. 

Malcolm also flagged that unsecured credit has increased by £1.5 billion in the UK and this needs to be monitored. Despite this, he highlighted that household balances are generally in good shape due to the build-up of deposits/savings made during Covid (no holidays, travel etc) although he noted that these are not the same households that are being impacted the most at the moment. Although we are not seeing a surge in consumer debt currently, the increase in unsecured consumer credit alongside increasing household costs indicates potential concerns ahead.

Malcolm stated that there are no meaningful credit stresses amongst businesses presently, however the impact of labour shortages and supply chain costs etc have still to be seen as these costs are passed downstream. Access and availability of supply chain goods is also an issue. However, he did note that Covid loans are being serviced as expected and cash deposits are not running down with liquidity and profits still good.

Malcom said that uncertainty over the next 3-4 months means businesses are unable to plan and business confidence is still low. The demand for new lending remains weak and there is low utilisation of working capital. There is concern for businesses running at low margins as they are least likely to be able to pass on supply chain cost increases. There is a time lag of price increases passing downstream through the supply chain and consumers, and therefore the impact on profit and cash generation is still unclear. This is different to the uncertainty experienced during the pandemic, it is more complex and global meaning the UK do not have all the levers to influence and mitigate. 

Malcolm concluded that the banks themselves remain strong with good liquidity and funding and therefore have ability to withstand impairments. The Q1 reporting period begins this week but generally the banks have good plans in place to cope with consumer debt and advice, particularly for the vulnerable.

Angus Macpherson said that it was important to look at the bond market’s reaction to the current issues. This suggested that the US was likely heading for a recession, but inflation was likely to peak in 2022 and then fall during 2023. He noted that the challenges in the UK are greater than those in the US and Europe in part because of the complexity of Brexit which makes it more difficult to restore the labour market and supply chains. Most central banks only have an inflation mandate and their existing toolkits are mainly to raise interest rates. There is a real challenge for the UK in shifting inflation which is contributing to a weakness in Sterling. He observed the market is starting to “wake up” to the UK’s struggle.

Maggie Craig said that she can corroborate everything that Malcolm highlighted. FCA’s research and information from the third sector suggests that 20k adults used credit for “essentials” in the last month and there is a worry of this tipping into debt. Maggie also said that we are starting to see people make notable cutbacks, for example 1/10 people are thinking about cancelling insurance and protection contracts in order to save on premiums.

Philip Grant commented that the discretionary will tip into other outgoings. Employment is usually a trigger that impacts on financial services e.g. mortgages and property, however the current challenges mean there is unknown territory ahead. Banks and insurance companies will need to consider more product flexibility to support customers and more thinking is needed in this space including giving payment holidays or breaks to customers.

Andy Curran stated that there are similar challenges in the insurance and pensions space. A particular concern is those on fixed incomes, who cannot supplement their income; the population is aging, not working and now being squeezed very hard, what are we doing to help them? How can we help them with how to spend their pension?

Philip Grant agreed and previous models used for those looking to drawdown pensions may no longer be relevant.

The Cabinet Secretary said many of the macro and policy responses to the current issues will need to come from the UK Government. However, she wanted the group to think about how Scotland can best target the limited public spending that is available. Generally this has been focussed on those with lowest incomes but issues appear to also be impacting on middle earners, businesses being squeezed and energy bills. If we can decarbonise homes this will reduce bills, we need to think of alternate options. She flagged the dip in business confidence and stated that we need to think about how we can provide confidence to companies to start borrowing and investing again. Reiterating Scottish Government need to think about where spend is needed most. She also praised the financial services sector for their response to Covid and said that the industry has emerged from the pandemic very well. There is more trust amongst customers and she thinks more and more will look to the industry, instead of Government, for help through the cost of living crisis.

National strategy for economic transformation (item 4)

The Cabinet Secretary provided an overview of the Scottish Government’s National Strategy for Economic Transformation (NSET). She highlighted its 5 pillars (entrepreneurial people and culture, new market opportunities, productive businesses and regions, skilled workforce and a more fair and equal society) and said that they key focus is on NSET’s implementation and on the people who will deliver it. These clarify what the government wants to achieve. 

The Cabinet Secretary also re-iterated the strategy’s focus on entrepreneurialism and how we increase the scale-up and start-up of new businesses – something that Ireland have done very successfully.

The Cabinet Secretary said that the Government are still fleshing out its implementation but said that if we are serious on capitalising on the economic opportunities that exist then Government needs help. The key things she would like to highlight:

• implementation plans are needed to break down the short term and long term aims with a focus on delivery although we recognise it is difficult to lift our eyes from the immediate challenges
• there is a focus on delivery and the government needs help to achieve this. An option is secondments from the private sector, not just big names, but people with operational experience who are delivery focussed to lead each pillar. There is a commitment to putting in place a delivery board to hold the government accountable

Sue Dawe asked if we know why Ireland have been so successful with their entrepreneurship and what can we learn from them

The Cabinet Secretary highlighted that Ireland’s success didn’t necessarily come from a secondment approach but they had clear focus on what they were trying to achieve. They identified clear areas where they were lagging behind and made significant gains in these areas, something which Scotland can mirror as, at present, Scotland’s focus is too broad. Ireland are also more “aspirational” than Scotland, more people in Ireland want to be entrepreneurs than in Scotland (approx. 20% of young people want to be entrepreneurs in Ireland). A task for Scotland is to better identify and support those who can, and are willing, to start their own businesses. There is a need to get behind the data to identify where improvements can be made and public sector bodies need to work together on this with the private sector. 

Nicola Anderson noted that there is an opportunity in fintech and innovation through Fintech Scotland’s roadmap. Nicola also commented that secondments can be very successful and she started in her role at Fintech Scotland on secondment from the FCA.

The Cabinet Secretary agreed and the Logan review update is a great example of what can be delivered.

Sandy Begbie said that SFE have taken an action to contact their membership around the secondment model. He said that this has been done successfully in the past with the UK Government and there is lots to be gained from this approach. He noted that it is important that “secondees” have an appropriate level of authority to make a difference and avoid being dropped into fixed frameworks that do not enable change. The SFE board also have an action to look at what more banks can do to support entrepreneurs and be more joined up, including with SNIB.

Andy Curran suggested that it’s very important how attractive Scotland is perceived to be for investing capital. Investing capital is a “sport” and we need to ask why people would invest in long term projects in Scotland (such as wind farms) over other countries.

Stephen Bird noted how a key aim of NSET is to create a “wellbeing” economy. He asked what the targets are around this, how will we know if we have been successful in achieving this in 10 years?

The Cabinet Secretary said that NSET had previously included metrics on this point but they were taken out of the final publication and instead are included in the implementation plan for the strategy. She said it can be very difficult with metrics as, for example, what constitutes successful entrepreneurship? We could do very well with increasing the number of start-ups but if none of these scale up and fail within 5 years can that be considered a success? The Cabinet Secretary explained that we do aim to publish some metrics but these will have a more “holistic” view of the future economy

Skills strategy for the sector (item 5)

Catlin Cooke (SFE) presented the industry’s plans for a new Financial Services Skills and Inclusion Hub, work that was done by SFE in conjunction with Skills Development Scotland.

Caitlin highlighted that the proposal is to attract and promote skills and talent within the industry. The way the industry operates is changing with an ever increasing move to digital and technology jobs and therefore, so too are the skills required. The Financial Services Skills and Inclusion Hub has the aim of filling 50,000 roles in the next three years and has 3 key elements:

• skills: driving inflows of people and key skills into Scotland and promote upskilling and reskilling throughout financial services careers – making them easy and accessible to everyone

• pathways: simplifying and joining up the landscape to ensure pathways into our sector meet skills needs in an accessible and inclusive way

• promotion: challenging the industry to be a truly diverse and inclusive place to work and communicate the attractiveness of our industry to everyone who could thrive within it

Caitlin said that we need the Hub as financial services are losing talent to other industries and there is still a poor perception of the industry with it being “elitist” and “exclusive.” As an industry there is a shared ambition to attract and retain people and the Hub will help achieve this by providing 3C’s “clarity, consistency and collaboration.” The aim of the Hub is not to replace other work that is already being done within the industry but instead to be the first point of contact for skills and talent.

Colin Halpin (SDS) who sponsored the programme welcomed the initiative and highlighted that a key feedback point was around the apprenticeship programme within Scotland. We need to make it more accessible for people to obtain apprenticeships within the industry.

The Cabinet Secretary agreed on the apprenticeship point saying that there is clear evidence that changes need to be made. She also said the Scottish Government are fully on board with the Skills and Inclusion Hub and are keen to both support and get momentum behind it.

Sue Dawe said that they key to the Hub’s success will be the promotion of it, the responsibility of which lies with everyone within the industry.

Philip Grant also welcomed the Skills and Inclusion Hub and said that one of the biggest challenges that the sector faces is resourcing. The Hub will help tackle attrition to other industries and shows a desire to help colleagues who wish to return to the industry. He highlighted that the opportunities of remote working has opened up a wider geographic landscape for the industry, people can now be hired from anywhere instead of necessarily having to work within Edinburgh/Glasgow.

Fintech Scotland research and innovation roadmap 2021 – 2031 (item 6)

Nicola Anderson presented FinTech Scotland’s Research and Innovation Roadmap to the group. She said that fintech is a successful and growing sector and the Roadmap looks at what financial services and financial services technology will look like in 10 years’ time. The Roadmap has 4 key themes; Open Finance Data, Climate finance, Payments and Transactions and Financial Regulation.

Nicola said that FinTech Scotland will use 2 types of action. Innovation Calls and Collaborative Actionable Research.

Innovation Calls encourage solutions for known or emerging industry challenges. Examples shared included the innovation calls LBG and Phoenix Group are currently progressing. (April 2022)

Collaborative Actionable Research aims to gain momentum across the industry on pre-competitive issues as well as the application of new and emerging technologies. More will be achieved if the industry connects and works together.

Sue Dawe noted to connection between the FinTech R and I Roadmap and NSET. Through innovation and collaboration then the industry can deliver on NSET’s aims, including the broader entrepreneurship goals.

Sandy Begbie flagged the Climate Finance theme and said that this is a big focus of both individuals and businesses. Many SME’s don’t actually know a starting point around ESG and a connection point for them is required. SME’s are still dealing with the Covid impact and other issues ahead of any ESG concerns.

Nicola Anderson said there is an opportunity to link Open Finance Data and Climate Finance. Through improved digital tools, SME’s could be more informed and supported to focus on their ESG/climate work. Greater consistency and standard setting will help with this.

Philip Grant also highlighted the opportunity around carbon accounting. This is going to be a significant change in future regulation and it’s a change that can be capitalised on by Scottish fintechs.

Philip Grant noted LBG’s success in driving innovation through focused calls for innovation, working in collaboration with FinTech Scotland.

Nicola Anderson noted FiSGAD as an appropriate forum to provide regular updates on the progress of the FinTech R and I.

Closing and AOB (Item 7)

No AOB was identified. The Cabinet Secretary concluded the meeting thanking everyone for their time and said that we now have plans in place which the industry and Government can take action on and start delivering results