Financial Services Growth and Development Board minutes: January 2022

Attendees and apologies

Present:

• Nicola Sturgeon MSP, First Minister – Co-Chair
• Philip Grant, Lloyds Banking Group – Co-Chair
• Kate Forbes MSP, Cabinet Secretary for Finance and the Economy 
• Ivan McKee MSP, Minister for Business, Trade, Tourism and Enterprise
• 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
• Barry O’Dwyer, Royal London
• Angus MacPherson, Noble Group
• Koral Anderson, Barclays
• Vida Rudkin, Morgan Stanley
• Louisa Knox, Shepherd and Wedderburn
• Claire Reid, PWC
• Alastair Ross, ABI

For agenda item 7B:

• David Pitt-Watson, Cambridge University – Green and Sustainable Taskforce Chair
• Omar Shaikh, GEFI

Scottish Government officials in attendance:

• Kat Feldinger
• Kim Mackay
• Conal O’Hare
• Matthew Anderson
• Jason Dashti 

Items and actions

Introductions and welcome (items 1 and 2)

Philip Grant introduced the meeting by welcoming the new members to the Financial Services Growth and Development Board (FiSGAD), the First Minister, the Cabinet Secretary for Finance and the Economy and Minister for Business, Trade, Tourism and Enterprise. Philip noted that, thanks to the refreshed membership of the group, this meeting convenes the most diverse and senior audience since the Financial Services Advisory Board (FiSAB) was introduced. 

Philip stated that SFE are healthy and growing with a new and refreshed strategy – led by their new CEO Sandy Begbie and, on behalf of SFE, Philip thanked the First Minister for her leadership through the Covid emergency.

The First Minister gave a welcoming address in which she thanked all those on the call for their membership to FiSGAD – both to those continuing in membership from FiSAB, but particular thanks were extended to those who are new members. The First Minister observed that the financial services industry is vitally important to Scotland and its economy and that this has become even more obvious throughout the pandemic. FiSAB had always proved a useful source of information and expertise but the First Minister stated that it was the right time to refocus and repurpose the group so that it is more industry focussed, more diverse and better placed to deliver on its remit. That is, to continue the industry’s support for the Covid recovery, to further grow and develop the industry and to galvanise green finance and the industry’s contribution to net-zero in Scotland. In particular, the First Minister highlighted the recent Scotwind announcement as a truly transformational opportunity for the economy and the supply chain of renewables.

Terms of reference (item 3)

Philip Grant stated that he would take the Terms of Reference paper in the Board Pack as read - any questions or feedback should be submitted to Philip and SFE following the call. Philip highlighted that the refreshed TOR codified the ambition of the group, as outlined by the First Minister in her opening remarks, and that the activities and success of the group would be enriched by active participation from all. It is the intention to ensure that future meetings give sufficient time for valuable engagement and deep dives into topics.

Sector update (item 4)

Philip Grant introduced item 4 of the agenda by stating that it would be helpful to establish where the sector currently stands and to identify what has changed since the group last met as FiSAB in January 2020. He introduced Sandy Begbie to give this update.

Sandy referenced the Sector Update paper in the Board Pack and that this would be taken as read. He discussed how Scotland are still well regarded worldwide as a financial and professional services centre. The industry is a main contributor to Scotland’s economy and, as Fintech continues to grow, so too does the types of job and the expertise required within the industry. Sandy highlighted that Scotland has certain assets which make the country stand out:

• our access to talent – both in terms of renowned and successful universities but also the strong underlying talent base which exists within Scotlan
• our regulatory strength and reputation
• our lower relative cost and higher quality of life in comparison to other financial centres

Sandy highlighted that SFE now have a refreshed strategy which focuses on four key themes; leading the journey to net-zero, supporting economic recovery, responding to changing customer needs and developing skills and inclusion. Focussing specifically on the journey to net-zero, Sandy stated that there are many centres worldwide who are looking into green finance but Scotland has real assets in this space that we can leverage. SFE and PWC are working together to establish the ambition Scotland should have in this space, what it means to “lead” in green finance and how we can collaborate but also differentiate ourselves from London. Also, regarding skills and talent, Sandy notes that whilst this is a key asset of Scotland it is important to ensure we have the right pipeline for skills development going forward as the industry continues to change.

The Cabinet Secretary thanked Sandy for his update and said the growth and strength of Scotland’s economy and the growth and strength of Scotland’s financial services sector are interdependent. She highlighted the need for tight oversight of progress on the deliverables of both the SFE’s objectives but also the Scottish Government’s objectives in the National Strategy for Economic Transformation.

Gerry Mallon identified skills and talent as the sector’s big ongoing challenge. There is a need for new and improved talent within the country that isn’t lost elsewhere and setting a skills agenda for medium and long tern alongside the Scottish Government is going to be critical to the success of FiSGAD.

Stephen Bird stated that he didn’t believe Scotland currently thinks enough about global connectivity and that connecting ourselves with other cities and economies is an opportunity to develop the sector in Scotland – particularly, Stephen highlighted the successes Singapore have had in this space. Philip Grant agreed, acknowledging that many of the financial services companies that operate in Scotland are indeed worldwide corporations. Philip noted that Stephen’s points are very relevant to agenda item 6 – SFE’s international benchmarking report.

Economy trends/insights/banking barometer (item 5)

Malcolm Buchanan gave his insight and overview of the current trends observed in the Scottish economy and stated that, whilst Omicron has set the Covid recovery back slightly, the general outlook is positive. There are low levels of problem debt within the economy which is a surprise based on forecasts early on in the pandemic and the percentage of customers repaying or prepaying Government support loans is >90%. Banks are financially strong, well-capitalised and have plenty of liquidity, with many banks writing back provisions previously set aside. They have ability to continue to lend to the market. However, Malcolm stated that recent appetite for lending and investment is subdued and that there is perhaps an unwillingness to take on more debt on top of Covid support. Malcom also suggested that some businesses in problem sectors, such as hospitality, are quite “close to the edge” following a quiet Christmas period and uncertainty about further variants and possible future restrictions. 

Gerry Mallon confirmed that these trends are mirrored in household finances. There is a lack of default and an accumulation of cash has occurred through a buoyant employment market as well as people taking provisions on their spending that weren’t ultimately necessary. Demands for lending are subdued due to a cost of living squeeze and general uncertainty. He also reinforced that large provisions set aside have not been needed.

Maggie Craig commented that the FCA is not seeing an uptake in requests for debt advice – there had been initial concerns that an increase would have been difficult to support.

The Minister for Business, Trade, Tourism and Enterprise highlighted that there are clearly wide sectoral differences that exist and that the lending market mirrors the labour market from 6 months ago in that, the problems and unemployment that were forecasted, ultimately did not occur. He also highlighted that a main challenge now is encouraging investment - if businesses are not running into debt but also not investing how do we promote them to invest and therefore increase growth and productivity?

The Cabinet Secretary echoed these comments and thanked the regular engagement and information she has with SFE and Malcolm which has enhanced the evidence used on where to place financial support during the pandemic. 

Philip Grant stated that financial services are now starting to be more forward thinking in what a sustainable operating model will be. They are focussing less on the short term and more on the medium term (3-5 years) in how to best operate, with an aim of being more proactive and less reactive regarding Covid. 

The First Minister observed that business investment is ultimately about confidence and that it is really difficult to predict the trajectory of Covid and give clarity in order to increase that business confidence. Therefore how do we encourage businesses to focus on their investment priorities and their standard operations whilst still factoring in Covid as an ongoing issue? The First Minister however stated that she is most worried about the short term impact of the cost of living on personal finance. Personal resilience is better in some sections of the population however inflationary pressures will have profound implications for others. 

Malcolm Buchanan agreed and highlighted the recent Bank of England report in which demand for mortgages fell in Q4 2021, except for remortgages, as well as there being a significant uptake in credit cards. There is therefore the hypothesis that, despite the growth in deposits, if a cost of living crisis occurs then credit cards could be heavily used resulting in an increase in unsecured debt. Linked to this, cash in circulation has increased but it is not coming back to the banks.

Due to conflicting engagements the First Minister left the meeting after agenda item 5. Philip Grant thanked the First Minister for her time on the call and the Cabinet Secretary for Finance and the Economy assumed Co-Chair responsibility

SFE International Benchmarking report (Item 6)

Sandy Begbie introduced the SFE International Benchmarking report highlighting that its purpose was to compare to, and learn from, other financial centres that exhibit similar characteristics to that of Scotland such as their size, markets they support and their proximity to major financial centres. He said that the report identified several key focuses for the industry in Scotland:

• to sharpen our language around what our key messages and strengths are (talent, education, asset management, link to London etc)
• to sharpen our prospectus so that we can better market Scotland worldwide for inward investment
• better connect Scotland’s financial services industry globally
• to deepen the sectors relationship with Government and regulators

Vida Rudkin commented that we need to do more on a value proposition which requires more than just sharpening our message and we would benefit from taking a step back to identify new challenges e.g. more is required on the challenges around talent.

Sue Dawe pointed out from the report that a lot of the other centres appear to be good at highlighting and promoting their strengths – but these are strengths that also exist in Scotland. She agreed that better connecting ourselves globally would allow us to communicate our strengths in the same way. This will need resource, funding and commitment from SFE and the sector.

Stephen Bird stated the need for Scotland to be “hard headed” and that whilst messaging on Scotland’s attractiveness is important for investment – ultimately any investment decisions are made around certain principles such as; currency and FX risk, a country’s regulatory regime, a country’s tax regime etc. Stephen highlighted that, at the moment, large variables exist in these areas for Scotland. If we are to encourage inward investment, this is where we need to focus. Stephen also suggested that there were lessons to learn from other countries highlighting Singapore as an example where bold decisions have been made.  Philip Grant agreed that it is not just brochures which help but the actual business environment in Scotland has to be correct.

Alastair Ross suggested approaching the centres from the benchmarking report to see what information can be shared. He suggested forming a type of “second cities alliance” with them in order to learn their best practices whilst acknowledging that these are centres we are ultimately in competition with. Sandy Begbie agreed and stated that it is a future aim to communicate regularly with these centres and also for SFE to join shared boards with their respective representative bodies.

The Minister for Business, Trade, Tourism and Enterprise thanked SFE for the work that went into the report and highlighted it as a piece of work that other sectors can learn from. The Minister also highlighted that, in order to increase Scotland’s reputation, it may be best that we specialise in the areas we are good at. We need to determine where our strengths lie and then double down.

Journey to net-zero and the Scottish Taskforce for Green and Sustainable financial services (items 7A and 7B)

Sandy Begbie outlined that the journey to net-zero is a strategic priority for SFE and it is important for us to establish the level of ambition Scotland can have in this space. We want to be a global centre of expertise on green finance but what does this look like? Sandy highlighted that there are 3 important tasks for SFE to establish and then these need to be communicated to Government on what is required to achieve them:

• what is Scotland’s ambition with green finance and the journey to net-zero?
• how do we support businesses and consumers in their transition to net-zero?
• how do we make the transition to net-zero inclusive for all – noting in particular those SME’s who can’t presently afford to transition, recognising the work already being done with the energy sector on this and the role of financial and professional services to support? 

Philip Grant agreed that we need to identify the key areas to collaborate on and find tangible ways to make things happen.

Louisa Knox agreed and said there is still a long way to go on the journey to net-zero and currently there is a disparity in understanding across the sector of requirements and best practice in this space. There an opportunity for SFE to address this. 

Nicola Anderson sees climate finance and the journey to net-zero as a significant opportunity for FinTech innovation. It's an area of significant interest across Scotland's Universities and climate finance is a prominent theme in the soon to be published FinTech Research and Innovation Roadmap. Nicola confirmed that FinTech Scotland are publishing this Roadmap on this in the next few weeks and offered to present this at a future meeting. FinTech Scotland is keen to develop more collaborative opportunities with SFE on this important topic.

Alastair Ross highlighted that making changes to operations is relatively easy and there are investment opportunities e.g. pensions, but there are challenges for the insurance business e.g. repair instead of replacing damaged goods will be a big cultural shift in consumer thinking. 

On the topic of net-zero and green finance the Cabinet Secretary for Finance and the Economy introduced David Pitt-Watson to give an overview of the new Green and Sustainable Taskforce which is set to hold its first meeting in February. 

David Pitt-Watson outlined that Scotland has a very important competitive position on green and sustainable finance – we are already responsible for 11% of the UKs responsible investing market, outpacing our 7% share of the conventional market and we have a rich pool of skills and talent to draw from with a high concentration of universities upskilling and encouraging innovative thinking in this space.

David said that the objective of the Taskforce is to outline how Scotland can capitalise on the opportunities for financing the journey to net-zero and how we can promote Scotland as a world leader in sustainable finance. The Taskforce will report on progress and policy recommendations to FISGAD, thereby remaining aligned with existing Scottish Government and industry structures for government-industry collaboration and it will encourage industry collaboration via FiSGAD to promote ESG values. The Taskforce will be active until March 2024 with the option of a one year extension (subject to agreement of Scottish Government and members).

Conclusion and AOB (Item 8)

Philip Grant concluded the meeting by thanking David Pitt-Watson for introducing the taskforce and stated that SFE will be connected to the Taskforce and that they, and their members, look forward to contributing.

No other business was identified and Philip highlighted how he, SFE and Scottish Government officials would welcome feedback on how to utilise future FiSGAD meetings productively. FiSGAD will next meet on the 25th April 2022.