Financial Services Growth and Development Board minutes: January 2023

Attendees and apologies

Present

• Nicola Sturgeon MSP, First Minister
• John Swinney MSP, Deputy First Minister 
• John McGuigan, SFE
• Sandy Begbie, SFE
• Alderman Nicholas Lyons, Lord Mayor of London
• Chris Hayward, City of London
• Judith Cruickshank, RBS
• Stephen Bird, ABRDN
• Sue Dawe, EY
• Sarah Pritchard, FCA
• Nicola Anderson, FinTech Scotland
• Gerry Mallon, Tesco Bank
• Andy Curran, Phoenix Group
• Barry O'Dwyer, Royal London
• Vida Rudkin, Morgan Stanley
• Louisa Knox, Shepperd and Wedderburn
• Claire Reid, PWC
• Alastair Ross, ABI
• Arleen Arnnott, KPMG
• Sarah Roughead, SNIB
• Reuben Aitken, SDI
• David Pitt-Watson, GEFI
• Omar Shaikh, GEFI

Apologies

• Ivan McKee MSP, Minister for Business, Trade, Tourism and Enterprise
• Angus MacPherson, Noble Group
• Koral Anderson, Barclays
• Jackie Leiper, Lloyds Banking Group

Scottish Government 

• Richard Rollison
• Conal O'Hare
• Kim Mackay
• Jason Dashti
• Matthew Anderson

Items and actions

Welcome and actions/updates from the previous meeting 

The First Minister opened the meeting and welcomed members and guests joining in-person and virtually. The First Minister reiterated the importance of FISGAD in advising Scottish Ministers of key matters within the financial services industry and the Scottish economy, and noted the vital insight members had provided through the Covid pandemic and cost of living crisis. The First Minister also highlighted the importance of continued collaboration between government and the sector through this group to achieve the long-term success, competitiveness and growth of the financial services sector in Scotland.

The First Minister welcomed the Lord Mayor of London to the meeting and said that today is a chance to build on the excellent relationship between Scotland and the City of London, and explore our shared priorities. The First Minister also welcomed John McGuigan as FISGAD’s new Co-Chair and welcomed new members to the board – Sarah Pritchard (FCA) and Jackie Leiper (LBG).

John McGuigan thanked the First Minister and Deputy First Minister for recent engagement with the financial services sector. John then outlined that there were no specific actions or updates from the previous meeting and that today has a packed agenda to cover.

Economic update 

John McGuigan invited Sandy Begbie and Judith Cruickshank to present the Economic Update – the groups standing agenda item.

Sandy referred the group to the Banking Barometer (paper 1) and explained that this gives real time insight into the economy in Scotland and is a balanced view of what the industry is seeing.

Judith Cruickshank provided additional points of context to the information contained in the Banking Barometer:

Personal customers:

• higher income customers have been able to absorb the impact of economic instability and are now benefitting from increases in savings rates
• lower income customers are disproportionately affected by high inflation and have less savings to absorb the impact
• debt charities are indicating an increase in volume of individuals contacting them
• there has been a modest increase in credit card usage but customers are taking the correct steps when struggling by cutting their discretionary spending
• some customers are starting to miss Council Tax payments as they are choosing to prioritise other bills (such as energy). This is a concern as a missed Council Tax payment can trigger the households full year of Council Tax to have to be paid
• banks do not see hidden debt e.g. pay day loans and buy now pay later
• there are a high number of customers on fixed rate mortgages which provides them with a buffer against increasing rates. Banks are closely monitoring this however as the majority of these fixed mortgages are due to roll off
• there is customer concern over possible future risk of unemployment

Business customers:

• there is a continuation of issues previously reported
• main sectors of concern are hospitality, retail and agriculture
• issues in hospitality include 25% increase in business rates + 500% increase in energy costs + 40% reduction in occupancy rate which has led many business opting to close for a number of days each week
• overall businesses are still proving to be resilient with reasonable liquidity
• banks are continuing to perform stress testing on lending as is normal practice
• there has been a slow increase in businesses under heightened monitoring and looking for debt restructuring. Rates of this are lower in Scotland than the rest of the UK
• banks are proactively reviewing portfolios to identify the need for early support with all firms applying an approach, demonstrating their appetite to help

Net zero:

• there has been a mixed effect from economy
• increase in demand to reduce energy costs
• limited appetite from business to invest in large scale renewable energy solutions
• oddities in energy pricing e.g. currently cheaper to switch to diesel than renewable options

The Deputy First Minister asked if intelligence provides a perspective on future employment trends - for example are companies preparing for rationalisation or are they more optimistic?

Judith stated that, currently, banks are still hearing that staff shortages is the number 2 concern for most businesses – at all skill levels and across the whole market. However there has been an increase in calls to banks’ HR support services with requests about support if a move to redundancy is required.

The First Minister noted that this is something that would be useful to get more clarity on, along with a better understanding of the accumulated impact of the polarisation in the consumer market - i.e. those who are benefitting versus those who are experiencing acute stress.

The First Minister also wanted to consider if the current economic narrative creates a self-fulfilling prophecy and if continual reports of an economic downturn are influencing peoples decisions. Currently the economic outlook is not as bad as it was a few months ago - therefore can we responsibly inject positive notes into the narrative to influence positive behaviours?

On the topic of green finance the First Minister stressed the importance of an optimistic view and it is the role of this group to develop rich discussions on how to best support companies and consumers in their transition.

Stephen Bird highlighted that global markets are evolving, with the US decelerating and China accelerating, which can feed into a positive narrative for the UK. Mega tech stocks (an area where the UK is less strong) are declining so the UK can benefit from this. Natural sequence for investors is that they can benefit from UK investment and the behaviour of investors is reflecting this change in optimism for the UK.

John McGuigan suggested that, whilst SFE produce the Banking Barometer, they should go into more detail and do deep dives on certain issues – namely the retail/personal customer base and overall economic narrative that is being portrayed.

Lord Mayor of London and City of London Corporation priorities 

The Lord Mayor of London stressed the importance of the relationship with City of London and Scotland and the inter-connected ecosystem that exists in the financial services sector in the UK. An important part of the Lord Mayor’s role for the year is to travel around the world and his first visit was in New York where he spoke with 12 of the biggest firms about investment in the UK and the importance of the UK as a location for international operations.

The Lord Mayor explained that the Edinburgh Reforms announced by the UK Government indicates some movement of the conservatism of UK regulation to be more dynamic. Financing the Future is an important theme for his tenure and increased flexibility will drive growth, investment and a healthy economy. It is not possible to have a thriving economy without a thriving financial services sector.

Three key areas of focus for the Lord Mayor’s term in office:

• infrastructure - there is a need to mobilise long term capital to invest in the UK. Solvency II reform should support this but need to see how the Financial Services and Markets Bill lands in the UK Parliament. It will hopefully move the UK away from the current risk averse position
• green and sustainable finance - There is a strong correlation with Scotland’s ambition. The Lord Mayor wants the UK to compete with the economies that are already pushing in this space but it is a global issue. There is a role for the UK to play to focus the debate and be central to the conversation. It is not enough to focus on 2030/2050 goals and we need to monitor what is happening in the short term as well
• growth economy - there is already a great story around fintech in Scotland and the UK along with start-ups, universities, entrepreneurs. However, the necessary capital for scaling up isn’t available in the UK and there is a reliance on this to come externally. There is huge capital in UK pensions and there is an opportunity for everyone to benefit from success. Canada and Australia have the best pensions systems in the world and when speaking to them they want to help the UK so we can learn from their practice and their previous mistakes. Their funds have a 19% compound annual interest whereas there are £3.4 trillion in funds in the UK which only have a 7% return – just increasing this to 10% would make an enormous difference to the UK economy. There are high quality jobs in the UK and the Lord Mayor’s plea to the financial services sector is to position themselves as the place where young people want to build a career. This will drive an economic recovery that we can rely on for years

The Lord Mayor also outlined that financial inclusion is an important focus for the City of London and that he is hosting a financial inclusion conference that will pull everyone together including regulators, academics, philanthropists. The economic update provided in this meeting confirms that banks are not banking the lowest 20% of people and we need the infrastructure to help the unbanked population. The Lord Mayor also stressed the importance of financial literacy and the need to improve the financial education of the UK, with many adults not having the necessary skills to grasp their financial issues.

The First Minister thanked the Lord Mayor and noted that the alignment between City of London and Scottish Government was striking.

Barry O’Dwyer commented that it was great to have someone with the Lord Mayor’s insurance expertise in his role. Barry highlighted that 2/3 jobs in insurance are located outside of London which is a success story for the industry. On infrastructure, Solvency II reform is a big issue especially as now there are more defined benefit schemes closer to buy out as rates increase, and we need to make sure money goes to the right places. He also noted that there is a tendency amongst politicians to step away once legislation is complete but regulatory support for reform takes much longer and will need additional government support to channel funds as intended. Barry is keen to see continued positive discussion and the insurance sector is keen to support this opportunity to do good but will need help.

The Lord Mayor confirmed his undertaking to do that and highlighted that Solvency II and the Edinburgh Reforms are a result of years of lobbying but that there is more work to be done.

The Deputy First Minister observed that the thread that runs through the Lord Mayor’s themes is “access to money.” The Deputy First Minister rejects the common assertion that there “isn’t enough money” but recognises a need to assemble and collaborate to secure money so that it is better utilised. There are many plans for public sector investment programmes but there is no immediately available hard capital from public finances. The Deputy First Minister suggested there may be a necessity to knock on the private sector’s door for patient investment vehicles to work more effectively for the public sector long term.

Andy Curran noted the urgency and opportunity and the sense of scale. Phoenix is active in Defined Benefit risking market with £13-16 billion moving from corporate to private sector and he highlighted the scale of £3.4 trillion is an extraordinary number. People are now in their retirement phase for longer and they want the buffer of savings. There are benefits for investment, the environment and consumers but it is a challenge for all.

Scotland’s competitiveness internationally as a financial centre 

John McGuigan introduced Sandy Begbie to present the SFE paper (paper 2) on Scotland’s relative competitiveness internationally as a financial centre. He asked members to treat this paper as a discussion paper and said that SFE engaged with many from the sector but that not everyone may agree its contents so it is important to capture everyone’s thoughts.

Sandy Begbie confirmed that the paper is intended to be the start of a conversation. The overarching message is that there is an opportunity to grow the sector in Scotland. The relationship with London is very important and we need to best leverage it. We want to grow assets, the size of the footprint and jobs here in Scotland. There is an interesting point in paper evidencing that the average salary in financial services is £39,020 - growing the tax base has a big part to play and SFE have set a challenge to grow the number of roles and get government support. SFE also want to engage and support on societal issues such financial inclusion and financial literacy.

Sandy confirmed that SFE have discussed with the Lord Mayor about how Scotland can work with City of London to create something compelling for investors that reflects the depth, breadth, maturity, talent, innovation, universities, assets, standard of living and net zero strengths here in Scotland. There is an opportunity to align with the UK ambition but also differentiate with our relevant Scottish assets. Sandy asked Stephen Bird and Nicola Anderson to input on 2 key areas – Asset management and FinTech.

Stephen Bird gave an overview of the Asset Management sector in Scotland. He highlighted the strength of Scottish history and how we are well respected across the world but, despite this, our share of UK AUM has dropped from 12% to 7% assets in recent years. Contributing factors for this include mergers and acquisitions and the relative growth of non-Scottish asset managers.

Stephen asked how do we get businesses to benefit from changing landscapes - when the world is changing then there is a need to change the shape of business models at scale to access customers and clients, and use technology to deliver more effectively. Scotland’s international competitiveness to attract at scale is important and there is lots of good grass roots work happening but we have not yet harnessed their power. Stephen suggested that an overall brand and promotion with so many interested partners (SG, SFE, SDI etc) risks a confusing message. It is very important that Scotland’s branding cuts through this and delivers a full weight of punch to achieve alignment across a very diverse group and effectively communicate Scotland’s strengths so to benefit from the good foundational work going on.

Nicola Anderson provided a view from a fintech perspective. Fintech has been growing significantly in Scotland and FinTech Scotland are really driving the cluster approach which shows the benefits of synergy. FinTech Scotland’s innovation roadmap has identified 4 key areas of focus: Open banking and finance, innovation to address inclusion, future finance through data and how Scotland can lead conversation for UK on climate finance and cross sectoral opportunities. Nicola highlighted that we have the foundations at our disposal in Scotland to drive forward and maintain opportunities to work together.

John McGuigan reiterated the request for feedback on the paper and that we will bring back this paper to a future meeting to share feedback and have a fuller discussion.

The First Minister confirmed her support for this approach. There is a lot of work already done on brand promotion for Scotland so it is important to not reinvent the wheel but to also think about different audiences and make sure the group takes the time to consider actions properly.

Part of SFE’s paper was to ask for support in developing a growth strategy for the financial services sector, working with Scottish Government and others. There was an endorsement for this approach and an update on next steps as to how this will be taken forward will be presented at a future meeting.

Update on Scottish taskforce for green and sustainable financial services 

David Pitt-Watson introduced himself and provided an overview of the remit of the Taskforce. The Taskforce is not quite at the end of first its year and therefore not yet completed its interim report but the end point will be a roadmap outlining the direction of travel for green finance in Scotland.

David stressed the need to recognise that the reputation of the financial services sector among the populace is not great but that they acknowledge it is an essential sector. Therefore the Taskforce is trying to do something that will plot out how good the industry is for Scotland and the competitive advantages that exist here.

David highlighted that, although not the remit of the Taskforce, there is a concern at the “drift south” of senior positions from Scotland to England on top of the declining AUM share. Nobody, including the city of London, UK and Scottish governments, wants this to happen and David proposed the possibility of an industrial strategy for Scotland.

David said that addressing green and sustainable finance is something that Scotland can be at the heart of. SFE’s strategy already says that it is a competitive advantage and progress is being made in this space. The Taskforce wants to be sure that Scottish centres are linked to global centres for stability and to work with institutions to get a narrative that Scotland is the place for green and sustainable finance.

David said the Taskforce was challenged by Kate Forbes to get money into investible projects in Scotland. Whilst there is lots of good work going on, the issue is in making this happen is not a lack of money in Scotland but is, instead, a lack of a coordinated plan to make projects financeable. The Global Capital Investment Plan already identifies a coordination failure and when David talks to investors he suggests that there is a desire to have a body like the Scottish Government to move things through but there is also a need for some coordination of what is happening and a delivery unit to put finance in.

David also highlighted education in Scotland and the great reputation and history it has. The Taskforce are working with Edinburgh University and others to try and get Scotland known as a centre for green finance education.

David noted the work of the City of London around investment in nature and the opportunity Scotland has for this – Scotland would be a perfect place for any pilots in this area.

The First Minister thanked David for his update and commented that it was striking that there is an overall theme from today’s discussions around togetherness and cohesiveness in work required. We need to make sure all strands of work are pulling in the same direction and the Taskforce’s recommendations will feed into this.

The Deputy First Minister noted that the challenges raised around the scale of projects and investment required are ones the Scottish Government recognise. A lot of work is required to marshal investment to the right place and we would welcome hearing more on the direction of thinking. As an example the Deputy First Minister highlighted that, despite being nowhere near the end of the journey, we are in a very different place today on hydrogen opportunities than 6 months ago due to confronting issues on delivery.

FM added a contextual point that Scotland don’t exist in vacuum and there is a global picture and global trends that are important regarding our position. The job for the board is to make sure this is considered in a strategic sense.

Closing and any other business

John McGuigan closed the meeting thanking all attendees and guests. He noted that the Skills paper (agenda item 7) will need to be presented at a future meeting due to time and that the paper produced for agenda item 5 (Scotland’s competitiveness internationally as a financial centre) should also form the basis for discussion in a future meeting when members feedback is fully incorporated. John also highlighted that there will be an annual review of the group which officials are working on.