Financial Services Growth and Development Board minutes: August 2022

Attendees and apologies

Present

• John Swinney MSP, Deputy First Minister 

• Philip Grant, Lloyds Banking Group – Co-Chair 

• Sandy Begbie, SFE 

• Judith Cruickshank, RBS 

• Stephen Bird, abrdn 

• Sue Dawe, EY 

• Maggie Craig, FCA 

• Nicola Anderson, FinTech Scotland 

• Gerry Mallon, Tesco Bank 

• Sarah Roughead, SNIB 

• Angus MacPherson, Noble Group 

• Koral Anderson, Barclays 

• Louisa Knox, Shepherd and Wedderburn 

• Claire Reid, PWC 

• Alastair Ross, ABI 

• Arleen Arnott, KPMG

Apologies

• Nicola Sturgeon MSP, First Minister 

• Ivan McKee MSP, Minister for Business, Trade, Tourism and Enterprise  

• Andy Curran, Phoenix 

• Barry O’Dwyer, Royal London 

• Vida Rudkin, Morgan Stanley 

• Malcolm Buchanan, Royal Bank of Scotland

Scottish Government 

• Louise Macdonald

• Philip Thomas

• Conal O’Hare

• Kim Mackay

• Linda Anderson

• Euan Mcardle

Items and actions

Items and Actions

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

The Deputy First Minister noted Philip Grant is retiring from his roles at Lloyds Banking Group and SFE later in the year and today will be his last meeting as Co-Chair of FiSGAD. The Deputy First Minister extended warmest wishes to Philip and thanked him for his valuable leadership and representation of the sector over the years.  

Deputy First Minister welcomed the timely agenda of today’s meeting; recognising that a range of interventions, through collaboration from multiple players, is required to steer the country through the current cost crisis, which is similar to challenges faced in 2008/09 and during COVID. Supporting businesses and individuals is now a priority and this forum is designed to bring government and the sector together on this shared common purpose.  

Philip Grant addressed the group reflecting that we have come out of an extraordinary period following the COVID-19 pandemic into a cost-of-living crisis. The economic context of Scotland has changed significantly since the beginning of the year – when the view was more buoyant. It is now apparent the challenges of the current economic crisis will be long-lasting and persistent. This is an inflection point for the economy and although some of the ingredients of the current crisis are historically familiar, there are many interactions, linkages, and causality, on a global scale, still to be played out and the full reality has not yet been fully realised. 

Philip Grant introduced Judith Cruickshank as a new member of FISGAD, replacing Malcolm Buchanan. Philip asked that Malcolm’s contribution to SFE, this forum and government over the last 3 years is noted

Cost of living crisis (item 3) 

Judith Cruickshank presented the following insights:

Consumer behaviour: Consumers are spending more on energy, food and transport with the proportion of their total income spent on these rising

Businesses are passing on costs to consumers as energy prices rise, with retail, leisure and agriculture feeling the impact most at present. 

The impact of these costs rises is still very polarised based on income, with those on high incomes continuing to save, while those on lower incomes who have increased debt using credit more regularly to pay for essentials and cancelling discretionary payments. More worrying is where individuals opt to forgo insurance and pensions contributions entirely. 

StepChange (debt charity) have seen an increase in demand for their services and expect this trend to continue for the next 5-6 months. 

Employment and competition for labour is still high but this is expected to worsen. 

There are warning signs just now however the expected energy rises in October along with increased transport and food costs, businesses passing on costs through price increases in addition to an increasing number of consumers coming off current fixed rate mortgages the economy may experience an eventual tipping point.   

Businesses trying to reduce costs could consider making staff redundant due to rising costs/labour shortages with retail, hospitality and agricultural sectors most impacted - although many are COVID resilient. There is, however, an increase in capital utilisation and use of overdraft facilities due to increased costs.  

Whilst there has been some slowdown there has still been investment. 

Additionally, some businesses are buying the building they lease. 

High consumption industries are seeing their energy bills increase by 5 times or more and although many have liquidity there is a slow-down in capital investment with businesses focussing on short term challenges and not long-term e.g. productivity and transition to net zero. Many businesses feel they no longer have the resource to continue investment in this area while core functions are struggling as costs rise. Instead, businesses are now looking to cut energy usage overall.  

As cost of trading increases, businesses are looking for productivity improvements with some pausing climate change activities.  

The banks are well capitalised, and following on from COVID, will continue to work harder on financial inclusion for all. 

The financial services industry will work proactively with those customers who hit financial trigger points and there is a determination to support customers further by investing in front line staff to support customers in financial distress, open pathways to debt charities, using data to identify proactive action and a targeted approach as well as having early engagement with struggling customers. 

Many financial services firms have increased compensation for lower income employees and, to help in the longer term, will support staff further by addressing skills gaps by upskilling and reskilling.

Philip Grant:

The SFE Banking Barometer will need to pivot more towards the cost crisis. 

Also asked members to consider the long-term economic picture in Scotland and stated the goal should be to leave this crisis not worse off than we went into it.

Gerry Mallon:

Seeing first signs of distress. 

Spend on credit cards is robust, but there is no high cost debt yet and default levels remain limited.  

Low income households are feeling an immediate impact, in particular on more discretionary spend (e.g. pet insurance).  

The sector needs to look forward and begin planning for a response if there is already a sense of default or distress with consumers.   

Banking accounting requires them to account now for potential future distress which is a model that maybe doesn’t work well for the current situation.   

Affordability assessments for lending are being made now on the basis that there will be no mitigation in the market because we don’t know what interventions will be.

Deputy First Minister:

Asked about fixed rate mortgages and if affordability assessments are rolling and if it would be recalibrated if there were interventions? Gerry Mallon confirmed this would only apply to new lending although there may be some recalibration for existing credit card products.

Philip Grant:

The current crisis has different drivers than COVID-19 did where there was an immediate shock to the market and institutions had to assess their corporate book and mortgages held. The COVID-19 pandemic may offer a closer parallel to the current crisis than other examples and learning from the response to the pandemic can inform the response to the cost of living crisis. However, the cost crisis does not have the same cliff edge step.   

COVID-19 resulted in extraordinary provisioning - as it evolved the banks were able to write back those provisions.   

The quarterly bank reporting cycle will be an important indicator to watch.   

The messaging that business produce will also be important during this crisis in particular how they are supporting the public.  

Banks are better capitalised than ever, having come out of the pandemic indemnified by the UK Government. This has left banks in a strong position from a capital point of view.  

The next test will be how the sector reacts and is culturally aligned to forbearance.

Deputy First Minister:

On the point of cultural alignment to forbearance the Deputy First Minister stressed the importance of how this information is shared with the relevant audience and how judgement is applied regarding financial undertakings.   

There are notable concerns being expressed currently about the situation in Scotland and the UK and Deputy First Minister appreciates the forum’s views and confidence that banks are predisposed to help consumers throughout this period.  Therefore it is important to encourage everyone to approach each organisation where they hold a financial commitment.

Angus Macpherson:

The value of sterling may be a better indicator to watch for any significant signals about the economy.  

Significant deterioration may reduce the Bank of England’s room for manoeuvre. 

The current crisis may create opportunities to pursue the net zero agenda.  High fossil fuel based energy prices create  an incentive for transition to renewables.  

Should excess capacity be created in a recession, productivity issues could be addressed by focussing on how these resources are most productively redeployed.

Stephen Bird:

Many countries around the globe are in a similar position but with different emphases.  

Currently witnessing the sharpest reversal of monetary policy happening in many countries with growth de-rated and rotation into value.  

In the US the primary concern is inflation.   

In the UK it is inflation and diminishing growth. 

In China, which is still navigating COVID-19 related lockdowns in some places, rising inflation and slowing growth. 

Concerns the impacts of the ongoing cost of living crisis are being underestimated. Low defaults are disguising the impact of COVID-19 due to the level of support that was provided - COVID-19 related aid represented the largest amount of Government intervention in recent history. This may have disguised weaker business models and deferred incidents of default. Stronger business models will win in the long term especially with the buying and growth of technology.

Philip Grant:

Challenge of how to target assistance. 

Current collective safety net has not safeguarded everyone leaving some cushioned - determining who isn’t being safeguarded is a challenge.  

There are behavioural shifts to note and understanding of the relationship between income and the impacts of the crisis is complex.

Deputy First Minister:

This is a shared endeavour for everyone in Scotland.  

The COVID-19 pandemic was clearer about what had to be done to get to the other side – stabilisation and getting back to ‘normal’ – but this is a different challenge. 

There is a lack of experience on how to deal with galloping inflation.  

The differential impact on people is also pronounced.

Stephen Bird:

Agreed there is still learning to be done.  

The value of assets management are down across the board, including equity and bonds. 

COVID-19 has been a shared endeavour with shared risks but not everyone is at risk during this crisis. Some businesses are struggling while others are experiencing high profits. It is difficult to make sure assistance is appropriately targeted.  

Their own staff, even those on higher incomes, are feeling the impact of the cost crisis.

Sandy Begbie:

The effect on employment is still unknown and Bank of England forecasts an increase into the second half of next year although not yet sure if it will reach the predicted point.  

Some sectors are impacted more in the supply and demand chains. 

It will be important to bring to Scotland the skills which are in demand and growing, such as for data and cyber related work and so there needs to be coordination with universities to create channels to feed students into this kind of work.

Deputy First Minister:

Agreed that it is still unclear where unemployment is heading and this will be determined by the extent of interventions.   

The Scottish Government will deliver an emergency budget review 2 weeks after the expected fiscal event from the UK Government. The nature of their intervention  will determine how the Scottish Government can respond to the crisis acknowledging there will be financial pressures and fixed costs.  

DFM agreed with Sandy Begbie on the importance of colleges/universities to fill skills shortages. The Scottish Government recognises the importance of courses that are relevant and can help future skills planning to address learning gaps. We are  committed to meet the challenges and needs of employment of the future and Scottish Government officials are already involved in these discussions to help create these opportunities.

Philip Grant:

Now is the time to invest in Advisor and Banking sector jobs and skills, with growth and productivity lost during COVID. 

Recent discussions with Scottish Enterprise on the topic of productivity and encouraging businesses to focus on long term investment and sustainability – this is not a time to hunker down.

Claire Reid:

There are still a lot of private equity deals available but they are more ad hoc.  

Some equity is still red hot, while others have slowed down.  

Lending has been in a ‘hot period’ for years now but is beginning to cool off as the crisis unfolds.  

As a large employer, for the first time we are hearing from higher paid staff who are expressing concern about rising costs.  

Smaller firms are facing much more difficult challenges, with some having upwards of 50% of staff on wages that are less than £20k who are struggling to afford the cost of travelling into the office or to put the heating on at home.   

We need to have conversations with staff now on what more support we can give. 

Goldman Sachs has recently announced that they are expecting a UK recession to begin in 2023 and run through to 2024.

Sue Dawe:

Attracting and retaining talent is becoming increasingly difficult due to competition amongst firms in this sector. And if 10% pay rise is not enough, talent will go elsewhere. 

Other firms looking at how they can reduce costs and the easiest way to do this is generally downsizing staff, as such there is expectation there will eventually be issues caused by increasing numbers of layoffs.

Arleen Arnott:

Confirmed that firms are trying to address retention issues with monetary incentives and non-monetary methods, such as greater flexibility of working conditions and other benefits or offers.

Deputy First Minister:

Reiterated the worry of the lack of experience on how to deal with raging inflation, with only a limited amount of expertise available. 

The challenges are so great in organisations that if we can’t find a means in a sustainable fashion, then unnecessary pain and disruption will impact. 

The Scottish Government is interested in working with the sector to reduce the pain felt as much as possible.  

This raises questions around who will bear the cost of raising these funds and how they will be distributed in a way that most effectively targets and supports businesses who need it most.

Stephen Bird: 

We will not be able to stop inflation until the pain is felt. Making tax cuts will make inflation worse. In particular pain will be felt in the labour market.   

Some will choose to leave the labour market as the value of their labour diminishes due to inflation and reiterated his cautioning that we may be underestimating the impacts this could have on the economy and that unaffordable tax cuts can weaken sterling and make inflation worse. 

Members discussed how the recent approach to supporting businesses and consumers during the ongoing COVID-19 pandemic has potentially influenced how businesses are thinking about the current crisis. It is possible that some businesses are expecting direct government support to resolve their issues or concerns and so are moving relatively slowly to respond to the cost of living crisis themselves.

Deputy First Minister: 

The nature of any intervention could be a help or hindrance depending on how it is managed.  

We are currently in a vacuum as to what the overall picture in Scotland looks like, but a lining up of common interests may help stabilise the markets. 

We do not want to weaken the UK sterling against the dollar.

Philip Grant:

There is a risk of ‘kicking the can down the road’ for the UK and Scotland. 

Focus should instead be placed on productivity and the ways for business to mitigate and manage corporate failure.  

Banks have a real time lens of what is happening in peoples bank accounts and we need mitigation through investment to help. 

Financial inclusion is crucial and there is a real danger critical illness cover is being cut. 

We need commitment from both Scottish and UK governments to build on the COVID base and sharpen it to address the current crisis. 

It needs a fine brush of intervention to address the current crisis rather than the roller used for COVID.

Several members commented on the risks of heavy subsidisation of energy costs, which in the longer-term may reduce the desirability of UK financial assets which are tied to energy costs as expectations about the support and the viability of these assets without that support is considered.

Deputy First Minister:

Thanked members for their helpful and valuable insight and is keen to ensure we continue these active discussions.  

Intelligence needs to be heard to inform thinking and formulate what the Scottish Government can do, recognising it is limited.   

There will need to be much finer strokes and more carefully calibrated interventions. Enterprise agencies, the Scottish National Investment Bank (SNIB) and the Scottish Government procurement process can influence the market and skills which are critical.  

Concerned about having a short-term view of the current crisis due to the recent ‘lurching from crisis to crisis’, which has not allowed for thinking about the long-term view of the economy in Scotland. The example of the effective Scotwind policy interventions and the positive market response is an example of the longer term thinking that is valuable to the economy.  

There is a need for a longer-term view of how to manage and mitigate the long-term considerations for the economy. With this in mind the Programme for Government (PfG) will be published in coming weeks and the central messages will be on the economy and supporting sectors to stay on course to deliver the 10 year strategy for economic transformation (NSET) and net zero commitments.

FCA regulatory update (item 4)

Maggie Craig provided an update from the Financial Conduct Authority (FCA):

The new Consumer Duty introduces a new principle. It underlines the importance on firms to act to deliver good outcomes to customers. Maggie stressed that firms should not treat this as a tick box exercise and that those who are doing the right thing already have nothing to worry about. The FCA will be looking for firms to evidence consumer outcomes and this will help to stop bad practice becoming entrenched. The FCA will use the full powers of enforcement to ensure compliance   

The FCA’s recent research into Borrowers in Financial difficulties found that 32% of struggling borrowers didn’t ask their lenders for support in managing their debt due to embarrassment and that 40% of people thought that speaking to a debt adviser would impact there credit score. It was also found that some firms do not intervene with vulnerable clients until they are already behind on payments. This was thought to also be part of the issue with firms which have blanket approaches to vulnerable consumers, regardless of circumstances. 

Forbearance has been found to not work in many instances, often due to poor training on the part of staff, poor technological tools and a general lack of oversight of the process. Lenders are not doing enough to refer individuals to advice creating a poor journey. This is causing the FCA concern and the next step will be to take targeted action against individual firms. 

A lot of concerns caused by the cost of living crisis go well beyond issues that the FCA can fix but they are working closely with partners and data currently shows that financial resilience is low for many. The FCA is doing more regarding authorisation of firms and reminds firms that the tailored support guidance issued during the pandemic is still in place and should be followed. The FCA are considering what next steps are required in relation to this.  

The FCA notes that high cost credit is more difficult to access due to a lack of availability and bad practices. It was generally expressed that firms should support consumers in avoiding taking loans they cannot afford. There should also be support from firms to assist people in avoiding predatory lending or marketing, which is beginning to proliferate at the cost of living crisis develops. Standards in relation to this will not be relaxed and the FCA are working with the UK Government on options for fair finance and no interest loan schemes. 

The Buy Now Pay Later (BNPL) market has quadrupled since 2020 and is growing exponentially with spikes coinciding with lockdowns in April and Nov. The overall market is still small but growing.   

Companies like Klarna and CLEARPAY are not regulated. 

Yet while awaiting new legislation to come in before setting final rules (likely timeline for this into 2023 at least) the FCA has already begun engaging with these companies and has managed to make some changes to their practices through discussion, including changes to T and Cs that were unclear and unfair. 

Financial promotions require authorisation and there are particular concerns raised around advertising using celebrities/influencers. Beyond this there is limits to what can be done until these products are regulated. 

The FCA will move quickly on companies once the UK Government moves on regulation. The UK Government consultation will be completed by the end of the year.  

Maggie raised concerns from consumers regarding the difference between the high rise in interest rates on mortgages and the significantly lower rise in interest rates for savings accounts. It was noted that banks are not obliged to pass along any increase in interest rates to consumers. It is also noted that banks pay less on savings accounts than they make on mortgages.

Philip Grant:

Interest rates are not a regulatory issue and that there are reputational issues regarding margins in banking.

Judith Cruickshank: 

Increases on savings interest rates can be polarising with marginal benefits to many. 

There is a desire to encourage savings to build financial security for consumers during financial stresses.

Philip Grant:

There lots of little things that are broken, for example, pre-retirement advice, and lots of things are dislocated with no easy solution.   

Dynamic of bank interest rates is the same. 

There are political paradoxes for example potentially rising interest rates coupled with a potential reducing of VAT.

Credit unions were mentioned and the value that they can bring to the economy and the potential for their continued growth in Scotland and the variety of services they can offer to consumers.

Maggie Craig: 

Maggie mentioned the Financial Services and Markets Bill and in particular Access to Cash however due to the amount of information contained within this and time left, this would be discussed at a future meeting. 

Alistair Ross:

Followed up the point about the FCA tailored guidance introduced during COVID and asked Maggie what the FCA felt had worked well. Maggie said the FCA liked to see the industry moving swiftly and being understanding. Moving to tailored support helps develop an individual approach particularly for vulnerable customers.

Stephen Bird:

Followed up the comment on advice. There are 13m adults in the UK who do not know how to protect themselves from inflation, what it means and what actions to take. The current definition of advice is so strict that firms are unable to provide a hybrid journey. Therefore there is a need to liberalise the rules on advice and guidance and this is more pressing now than ever.

Louisa Knox: 

For individuals there are knowledge gaps and a lack of financial understanding which makes it easier for scammers to exploit loopholes. More financial education is needed to help people take control especially when people are frightened. Maggie Craig agreed that changes to existing practice often open the door to scams and bad actors who are seeking to take advantage of the crisis and people’s situations.

Arleen Arnott:

Financial resilience is important. L and G research reported the average person has 19 days before they will run out of savings.  

During COVID some people were able to save more however others did not. 

Even those in a stronger position will quickly see their savings eaten up by the energy crisis. Those in the lowest don’t have protection.

Sandy Begbie:

There should be greater focus on transitioning Scotland to a higher income economy. 1.1m people in Scotland earn less than £25kpa, not enough people earn enough to save.   

This is what we need for Scotland - a higher wage economy will attract people to the industry, in Scotland.

Maggie Craig:

Financial education is also a key part of how to support consumers, in particular for newer assets such as cryptocurrency or other digital assets. Younger people are attracted to these but we have seen that they have halved in value.

Nicola Anderson: 

FINTECH Scotland has achieved the Silver level of Cluster Excellence accreditation by the European Secretariat for Cluster Accreditation (ESCA). The highest level achieved by a fintech body in UK and Europe.   

This is a massive boost to FinTech Scotland and Scotland. 

Nicola acknowledged and thanked the leadership and partnership from around the FiSGAD membership for their help, support and opportunity to leverage our excellence and innovation as a springboard from Scotland and the UK.