― Government wants City firms to encourage wealthy clients to give money to charities.
― Market-based finance causing headaches for the Bank of England.
― Hunt warned not to cut taxes without spending review.
Good morning! I hope you all survived the arctic-like weather yesterday and are sufficiently warm enough to read today’s MFS U.K. newsletter.
To kick things off this morning we reveal that the Treasury is keen on getting more wealthy people to prop up struggling charities. We’ve also got the latest on the Bank of England call for more work to assess the risks of the shadow banking sector, plus progress on board equality.
Oh, and an influential think tank has warned Jeremy Hunt about tax cuts (again).
Grab a cuppa, or something stronger, and get stuck in!
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SCOOP: Government advisors are working on reforms aimed at encouraging wealthy people to give more money to charities (via the City of London) in a USA-style philanthropy shake-up, a policy stakeholder familiar with the discussions told MFS U.K.
Under pressure: The Treasury, in conjunction with the Department for Culture, Media and Sport, has reached out to industry stakeholders for their views on changes to charity guidance and policy in recent weeks, the source said. The discussions, which are only in the early stages, are focussed around getting the FCA to provide more guidance to City firms on how to speak to clients about philanthropy, and to make it a mandatory part of training for wealth advisors. The idea is that if firms have conversations with wealthy clients about giving to charity, more will give their money away to boost the struggling charity sector.
Talking tax: People already get tax relief from HM Revenue and Customs for charitable donations.
Cop out: The government’s keenness to rely on greater third-sector investment (aka wealthy people) — much like in the USA where there is significantly more private money flowing to charities — to prop up the public sector comes at a time when many charities across the country are on their knees. This is partly due to increased demand as the cost of living crisis drags on, as well as a lack of investment from the state. So, take from that what you will.
Culture king: In January, culture secretary Lucy Frazer used a speech at an Onward think tank event on philanthropy policy proposals to say the government is keen on “creating a policy environment that makes giving easier and more rewarding” and her department is “working with the FCA and Treasury to explore the possibility of greater philanthropy training.”
Gone to voicemail: The Treasury and FCA were contacted for comment but did not respond by the time of publication.
The Treasury Committee questions the chief executive of the Financial Ombudsman Service, 10:15 a.m.
The Economic Affairs Committee questions economists on how sustainable the U.K’s national debt is, 3 p.m.
The Association of British Insurers holds its annual conference, London.
Bank of England BEAR conference enters its second day, London.
City & Financial Global holds Market Abuse and Market Manipulation Summit, London.
**A message from Nationwide: Unlike the banks, Nationwide Building Society is owned by its members, not shareholders. That’s anyone who banks, saves or has a mortgage with us. Which means we can always focus on what’s best for them. It’s our fundamental difference and what makes us a good way to bank.**
MARKET-BASED FINANCE WORRIES THE BOE: Deputy Governor Sarah Breeden used the U.K. central bank’s research conference on Monday to call for more work to assess the risks of the shadow banking sector to build a “proactive” case for policy action before the next crisis hits, rather than the existing fire-fighting approach.
Rewind: The nonbank financial sector is a big concern for regulators across the globe, but particularly for the Bank of England which has had to step in to prevent several potential full-blown market meltdowns, including the March 2020 ‘dash for cash’ as well as the LDI crisis which stemmed from the U.K.’s memorable Liz Truss mini-budget. The BoE is also worried about money market funds, and with 90 percent of sterling funds based in the EU, it’s been calling for tougher Brussels regulation..
What Breeden said: “A shift in the willingness of market-based finance to lend to corporates, particularly those that are highly leveraged, would have significant implications for the real economy. A credit crunch sourced in market-based finance rather than bank lending, perhaps. But assessing risks in market-based finance is challenging: the complexity and interconnectedness of sectors, activities, markets and participants makes it difficult to identify all risks and predict how they might transmit through the system. These gaps in our knowledge have meant that we have been largely building resilience in market-based finance in response to crises, whereas we should be looking to build resilience ahead of vulnerabilities crystallizing.”
Bear with me: Breeden made the comments at the Bank of England’s Agenda for Research, or BEAR, conference, which continues into its second day today. She called for more academic research on where the risks could stem from, as well as looking at the costs and benefits of potential policy tools.
Bufferati back on the road? Separately, Breeden highlighted the complexity of the bank prudential framework, nodding to her fellow Deputy Governor Sam Woods’ speech almost two years ago which called for a radical new capital framework along the lines of a single capital buffer. He likened it to a concept car: the Bufferati. Breeden brought the idea up again today, questioning the cost of existing regulatory complexity and whether the capital stack could be simplified without reducing resilience.
CHALLENGING OUTLOOK FOR FINANCIAL STABILITY: The outlook for financial stability remains challenging despite steady global growth and moderating inflation, Klaas Knot told G20 finance ministers and central bank governors. Higher interest rates are still being fed through to borrowers and exposures to certain sectors like commercial real estate “bear close monitoring,” Knot, chair of the Financial Stability Board, wrote in the letter to leaders ahead of the Feb 28-29 G20 meeting. Knot also warned about growing risks from the nonbank finance sector, noting the FSB’s plans to publish this month revised recommendations to address liquidity mismatch issues in open-ended funds.
WARNING SHOT: Researchers at influential think tank the Institute for Fiscal Studies (IFS) used a media briefing on Monday to warn Chancellor Jeremy Hunt that further tax cuts at the spring budget are not a good idea. Instead, deputy director Carl Emmerson said any cuts should be delayed until the Treasury conducts a detailed spending review.
MFS U.K. thought bubble: This will definitely not happen as Hunt wants an electoral boost by cutting taxes. Plus, announcing he will wait for a spending review before deciding on tax cuts isn’t exactly sexy.
Cuts cuts cuts: Hunt is under serious pressure from conservative backbenchers and a certain former PM (ahem, Liz Truss) to cut taxes again. And, according to multiple reports, the chancellor will bend to their demands and use the March 6 spring budget to cut National Insurance (NI) again, or go for a 1p to 2p income tax cut. There are also rumors swirling that he could raise the long-frozen personal allowance and high income threshold, but this is unlikely.
High taxes: Unfortunately for Hunt, even if he cuts NI (again) or income tax, the IFS thinks tax revenues as a share of national income will be £66 billion higher than they were pre-pandemic, in part because the government needs the extra revenue to reduce debt. So even if Hunt slashes taxes he cannot offset the various tax rises the public has been hit with by successive chancellors since 2018-19, Emmerson said. In other words, short-term tax cuts will do little to help people with the cost of living crisis due to a historically high tax burden, frozen allowances and thresholds, and fiscal drag — grim.
Alternatives: The IFS’ Emmerson said: “We’d advise him to engage in some tax reform, which is easier when they have money to spend. We suggest growth-friendly tax cuts like cutting stamp duty on shares and property, which should be at the front of the queue instead of cutting inheritance tax, NI and income tax.”
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MORE WOMEN AT THE TOP OF BRITISH BUSINESS: Just over half of FTSE 350 companies have achieved or are on their way to achieve the target of 40 percent of women in leadership by the end of 2025, according to a report published this morning by the FTSE Women Leaders Review, an independent business-led initiative supported by the U.K. government.
The good news… Female representation on the boards of the 350 biggest U.K. companies has reached 42 percent, just above the 40 percent target. Women in leadership roles — the two levels of roles beneath the board— increased to 35 percent.
But, in the world of finance: It’s a mixed bag overall. Banks are the fifth best performing sector in terms of women in leadership roles, but there’s a lot of variation. The leadership team of Virgin Money, for example, is 52 percent women, whereas Barclays is just under 27 percent.
How does Britain look? Pretty good: Britain is second only to France. And, not to rain on France’s parade, but it’s worth mentioning that France (and many other European countries) have legislation based on quotas, while British companies are making changes entirely on a voluntary basis. Also, France’s sample is top 40 companies only — a considerably smaller number than Britain’s FTSE 350.
Strength in diversity: In financial services, diversity is not just a tick-box exercise. In the words of the FCA and PRA in their landmark proposals published in September: “Increased diversity and inclusion in regulated financial services firms can deliver better internal governance, decision making and risk management.” Next week, five major central banks are hosting an event looking at the issues encountered by under-represented groups in economics, finance, and central banking.
To mark the launch of MFS U.K. we are answering questions from readers — send yours in here.
Q: Why does the U.K. not abandon the Alternative Investment Fund Management Directive? Post-Brexit, it has lost its value to UK investment managers.
A: The U.K. has amended many of the key pieces of EU legislation inherited after Brexit, but there’s more to be done on rules for funds. The U.K. wholesale abandoning AIFMD seems unlikely, but it looks like there are changes on the horizon. The Financial Conduct Authority closed its discussion paper on ‘updating and improving the U.K. regime for asset management’ in May last year, and looks set to amend the AIFMD rulebook this year. The FCA is prioritizing: making the regime for alternative fund managers more proportionate, updating the regime for retail funds, and supporting technological innovation. It’s no longer bound to the EU directive and, in theory, could tear up the rulebook and start again. But as with many rules inherited from the EU, it’s more likely there will be targeted changes to aspects that don’t work as well for the City of London. Writing a whole new piece of legislation, getting industry feedback, going through any requisite parliamentary processes and finalizing it in the regulatory rulebook would likely take too long.
Citigroup appoints top investment banker from JPMorgan, writes the Financial Times.
The Financial Conduct Authority is planning to name firms under investigation in a deterrence drive — also from the FT.
Car insurance quotes higher in ethnically diverse areas, reports the BBC.
Pay row heats up for Virgin Money’s boss: The Times has it.
Thanks to: Fiona Maxwell, Izabella Kaminska, Giulia Poloni
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