Counting the cost of silence and some initial Brexit forecasts
With hindsight, it’s a shame the UK banks kept quiet – and arguably they only have themselves to blame.
In the run-up to the Brexit referendum, UK retail banks fell alarmingly silent on the likely cost to their business, their staff and customers of a Leave vote.
Yes, UK electoral law places strict limits on political comment during official campaigns and yes, there was an element of banks not wanting to upset Leave supporting customers.
The UK banks deliberately worded their comments so carefully, they basically said nothing of note.
Even among some of the major vendor community, there was a policy of ‘no comment if pressed for a view on Brexit’.
The UK bankers trade body, The British Bankers Association, apparently contacted all members ahead of the referendum, flagging up how banks should comment at roundtables, conferences, dinners and debates ahead of the referendum.
As for some of the so-called highly paid experts at leading banks: it beggars belief how they got it so wrong, so close to the referendum.
Take the team at JP Morgan, for example. Pity their clients who received and acted on the advice a week ahead of the referendum: “We view the elevated uncertainty due to UK’s EU referendum on 23 June as an opportunity to add to our top UK bank long-term pick Lloyds”
Fast forward a few days and Lloyds shares have fallen by 22% since that share pick was given.
Immediate fall-out of the disastrous referendum outcome is hard to quantify and will only become clear in the coming weeks but here are some safe(ish) forecasts:
The UK government selling off of its stakes in Lloyds and RBS: forget it. This is now a long-term project as opposed to a short-to-medium term one.
Provisions for bad loans will rise in the short-term as economic conditions deteriorate due to fears of a recession.
Mortgage lenders will suffer as buyers may well delay purchases due to economic uncertainty.
Scotland: renewed uncertainty over the future of the UK. Will the likes of RBS and Standard Life again consider the location of their HQ?
Consumer protection: existing EU rules protect €100,000 ($111,370) of customer savings in a single institution; the UK government has done some daft things in recent months but one would hope that Brexit does not result in any weakening of the FSCS scheme. Do not be surprised if the existence of the scheme and its alleged unfairness for the strongest banks comes back into focus.
The compensation limits were last amended in 2010 to bring them into line with European Union directive 94/19/E.
In an attempt to be positive, one can just about make a case for saying that retail banking will not be changed irrevocably by the referendum result.
UK Governments, both Labour and Conservative, have promoted consumer protection and not sought to water down provisions such as the EU Consumer Rights Directive, enacted as the Consumer Rights Act in the UK.
There is a slim chance that a UK government would dare to repeal EU consumer finance protection following Brexit.
The point is in any event irrelevant if the UK government retains membership of the EEA-it will be obliged to retain EU consumer finance provisions.
Any other positives of Brexit? Retail banking may not be as badly impacted as other banking sectors.
The EU reported last December that less than 5% of retail banking loans and less than 3% of credit cards and mortgages were obtained by EU consumers on a cross-border basis.
So while UK banks might lose their right to sell retail banking products on a cross-border basis, they do not have much to lose in practice as UK retail bank lending is focused in the UK.
Any fears that Brexit might mean less UK financial services regulation are probably wide of the mark. The UK government has been more enthusiastic about regulation than EU peers of late: witness the UK retail bank ringfencing regulations due to come in in 2019. The UK stress tests were also tougher than the European Banking Authority tests last year.