Sam Woods isn’t beating about the bush. The deputy governor of the Bank of England and head of the Prudential Regulation Authority (PRA) says practical complexities arising from Brexit pose “a material risk to our objectives” and “we may have to make some difficult prioritisation decisions”.
This is strong stuff. Central bankers tends to prefer qualification and nuance. Woods couldn’t be clearer in describing why a transition period is needed to make the Brexit process orderly, at least in financial services.
It would be wrong to dismiss the warning as special pleading for more money, or even as a “told you so” whinge from Threadneedle Street about the dangers of the UK leaving the European Union. Woods was precise on details.
First, there are there dangers for financial stability if services fragment and it becomes harder for banks and other firms to hedge risks. That would affect the other 27 EU countries, as well as the UK. A UK-specific risk would arise in the event of upsets to the economy. Banks would have to be strong enough to keep lending in an environment of “higher loan impairments, increased risk of default and lower asset prices and collateral values”.
Second, cross-border insurers sound daunted by the scale of work needed to transfer contracts between entities. Third, the general restructuring of banks and insurers to comply with likely new rules adds scope for confusion. The Bank needs to ensure that its post-crisis supervisory regime isn’t undone by a mass of inter-connected firms that span the UK and EU.
Fourth, the Bank will have to authorise and supervise a new collection of firms. There are about 70 non-UK banks incorporated in the European Economic Area that are entitled to accept deposits through a branch in the UK. The checking process will not be a quick job, and does not take account of insurance companies. One can understand why this could be “a material extra burden” on resources.
The only encouraging news here is that the Bank, despite the pressures, is not contemplating a huge increase in resources. The sum is about £5.4m, or 2% of the PRA’s budget.
The sums will be much larger in other public institutions that are obliged to draw up contingency plans for Brexit. Nicky Morgan, chair of the Treasury select committee, has performed a useful service in extracting Woods’s update on the Bank’s preparations. Other committee chairs could do similarly in their areas – everything from the NHS to education to border forces is relevant.
By the end of such a process, we may discover that the biggest upfront cost of Brexit probably won’t be the divorce bill, which, even if it is €36bn, will inevitably be paid over a couple of decades. The immediate strain will be on public institutions that have to cover new risks and contemplate their own “difficult prioritisation decisions”.
No wonder chancellor Philip Hammond, already struggling to keep a cap on a public sector payroll where a 1% increase equals £1.8bn, is so keen on a transition period. It won’t just make the process smoother, it will make it cheaper.
Indigestion over Standard Life and Aberdeen deal is wearing off
It took ages, but shareholders in Standard Life and Aberdeen Asset Management have decided they like the £12bn merger after all. Back in April, a month after the deal was announced, Standard Life’s shares touched 350p; now they are 442p. Aberdeen’s stock has marched in step, as you would expect in an all-share deal. Perhaps it was the thought of the ridiculous sums disappearing in advisory fees (£97m) and retention payments for fund managers (£35m) that caused the indigestion.
In the end, the enthusiasm of the clients is what matters most. They are hard-wired to be suspicious of upheaval, fearing fund managers will take their eye off the ball as their bosses seek to cut £200m costs. Standard Life’s last set of figures as a standalone company showed few signs of defections but, as chief executive Keith Skeoch conceded, it’s early days. “Clients and consultants have taken a ‘wait and see’ approach,” he said. The defections number is one to watch.
So – strange as it sounds – is the number of chief executives. Skeoch and Aberdeen’s Martin Gilbert intend to perform a double act, an arrangement that is either brave or foolhardy. You won’t find many old City hands who think both men will still be standing two years from now. Wait and see is the correct stance on that front too.
Paddy Power Betfair chief is taking ill-advised punt with hasty exit
Another day, another 4% off Paddy Power Betfair’s share price. It’s not surprising. First-half operating profits improved by a fifth to £180m but the rate of revenue growth halved to 9% from a year ago. It’s a bad moment for lauded chief executive Breon Corcoran to decide he’d prefer to do something more interesting. He led last year’s £5bn merger. Skipping off 18 months later is too hasty.
News source: The Guardian