British banks head for a Basel win

SNEAK PEEK

— U.K. banks look set to get capital relief for SME lending.

— Lloyds sets aside £450 million amid FCA investigation.

— Government criticized for delays on sustainable finance.

Good morning! James’ excellent scoop got a mention by none other than the Money Saver himself, Martin Lewis. Not too shabby for a newsletter that is just four days old. We’re all basking in his glory. More details below.

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DRIVING THE DAY

BRITISH BANKS HEAD FOR A WIN ON BASEL: The U.K. banking industry looks set to win some relief from tougher global bank capital rules from the Bank of England.

What reforms? The U.K. needs to implement the final Basel III standards — a set of reforms agreed internationally after the global financial crisis, which aim to make banks safer by getting them to measure risks on their books in the same way.

Global dispute: But the requirements come at a cost for banks. And in the EU and U.S., politicians and regulators have been embroiled in huge fights with the industry — and with each other — about how to bring the final rules into force without damaging the economy.

Brexit twist: Unlike in the EU and U.S., where politicians hold the pen, the technocrats are in control in Brexit Britain. Yet even the BoE’s Prudential Regulation Authority is not immune to pressure to water down the reforms. Read Hannah’s story in full here.

The details: The PRA’s top man, Sam Woods, has been hinting the authority will roll back on plans to totally scrap a favorable capital treatment for loans to small businesses, inherited from the EU, amid pressure from the industry and politicians.

Small businesses: The banking supervisor and rule-maker planned to ditch the SME supporting factor — an EU deviation from Basel intended to protect that core part of the economy — in its initial proposals.

Industry wishlist: But ahead of the PRA’s final plans in May, the U.K. banking industry has warned against hiking those capital charges and pushed for at least a transition. “We’re asserting it should be retained,” said Simon Hills, director of prudential regulation at U.K. Finance. “We hope a middle ground on which we can meet is that there’ll be a sensible transition period.”

The bottom line: Ultimately, even if the BoE backs down on small-business lending, the U.K. stands to be much more faithful to the Basel agreement than the EU. 

United front? Both banks and the PRA will be united in being a little wary of Chancellor Jeremy Hunt’s latest plan to help wannabe homebuyers by offering government support for 99 percent mortgages in next month’s Budget. Within Basel’s strictures, the banking supervisor can always slap extra capital charges on bubbling risks. 

SPEAKING OF THE PRA… The regulator must review its rules in a new obligation given to it under the Financial Services and Markets Act, as part of the deal of it being given additional rule-writing powers. But which rules should be selected for review? Respondents to the PRA’s consultation want the regulator to prioritize the secondary growth and competitiveness objective as a criterion for choosing which standards to look at. But on Thursday the PRA rejected that call, arguing it would “not be appropriate for any single consideration to receive any special treatment in comparison to other selection criteria.”

**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.**

WHAT’S ON

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GREEN FINANCE

GOVT SLAMMED FOR TAXONOMY AND TRANSITION PLANS ‘DITHER AND DELAY’:  MPs today criticized the government for “slipping timescales” on key legislation to green the City of London. Conservative MP Philip Dunne, chair of Parliament’s Environmental Audit Committee, said in a letter to government ministers that the U.K.’s green ambitions are at risk of being undermined by “dither and delay” on issues like the taxonomy — a list of what counts as green — and plans to require companies to produce transition plans.

Waning ambition? The government set out a green finance strategy in March 2023, with plans to consult last autumn on the taxonomy and transition plans. The consultations have still not been published and the Conservative government has since softened its net-zero ambitions ahead of this year’s election. 

‘Comply or explain’ transition plans: Dunne’s committee in November called on the government to require companies to produce mandatory plans to transition away from fossil fuels, rather than use a “comply or explain” approach. But, in the government’s response, published today, Dunne said there was not enough detail and demanded more information and timelines.

Chair’s letter: “The government is not short of ambition on green finance, but continued dither and delay risks undermining the exceptional track record and reputation the U.K. has globally, weakening market confidence, and failing to meet the government’s critical targets on net zero and nature,” the chair said in a letter to Martin Callanan, minister for energy efficiency and green finance, and Charlotte Vere, the Treasury Lords minister.

EU contrast: On the other side of the English Channel, the EU has, after intense battles in Brussels, already agreed on a green taxonomy and legislation requiring companies to disclose more information on both their carbon footprint and how climate change might influence their operations.

MARKETS

EU PREPS NONBANK PUSH INCLUDING MMFS: The European Commission is weighing tougher rules for asset management, investment funds, insurance, and pension funds, according to a document obtained by our EU sister newsletter — including for money market funds as U.K. authorities tried to apply pressure at a conference in Ghent this week.

Question time: The EU executive has asked national experts to weigh in on the macroprudential treatment of the sectors for its next five-year mandate in a crackdown on risks stashed outside the banking sector. Among the questions, the Commission asks experts whether “a more holistic approach” to regulating nonbanks in the EU should be considered, and whether EU countries have views on “a more widespread use of liquidity and other stress tests” across nonbank sectors.  

But, but, but: The request for the next mandate, after European elections in June, means the policies won’t even be considered until later this year, while U.K. authorities want the EU to act now on wobbly money market funds. Still, the document does mention the U.K.’s main concern — liquidity, or the mismatch between the speed of withdrawals and the ability to sell assets in the funds.

ECONOMY

LISA LIMELIGHT: Consumer champion and founder of MoneySavingExpert, Martin Lewis, was ecstatic on Thursday morning after reading about the MFS U.K. LISA scoop. In fact, a certain financial services reporter has had to mute his Twitter/X notifications after Lewis name-dropped on social media.

What happened: In a nutshell, Chancellor Jeremy Hunt is considering shaking up the LISA by increasing the property limit on which the savings product can be used, and reducing a penalty charge for individuals who withdraw money from their accounts early, or if they purchase a house over the property limit, according to two industry figures involved in the discussions.

Praise, people: Lewis called in to POLITICO towers to say he is “delighted” the government is considering the move. Steve Webb, a former pensions minister and now partner at consultants LCP, said if Hunt scraps the penalty for taking money out of a LISA it would be a “very welcome move.”

BANKING

LLOYDS SETS ASIDE £450 MILLION FOR POTENTIAL FINES: Lloyds Banking Group used its full year results yesterday to drop that it has set aside a whopping £450 million in case it has to pay out over potentially dodgy historical car loans.

Regulatory probe: The FCA announced in January that it is investigating the car loans market to see if commission payments to brokers were too high. As of December 2023, 10,000 people complained to the Financial Ombudsman Service that they were overcharged.

Please, sir, I want some more: Lloyds provision is pretty large, but it could get a lot worse. Analysts at RBC estimate that Lloyds could be forced to pay as much as £2.5 billion.

Banking blues: Lloyds isn’t the only bank on the hook. RBC thinks Santander would have to pay out £1.1 billion and Barclays £350 million. The latter has not yet made a provision for redress, a press officer from Barclays told POLITICO. Lloyds “broke ranks this morning as the first of the banks to make a provision,” said Will Howlett, financials analyst at Quilter Cheviot.

Big problem: If the entire financial sector’s total compensation bill for the loans hits the £16 billion analysts expect, it would make it the costliest consumer banking scandal since the mis-selling of payment protection insurance (PPI) in the noughties and 2010s — which has cost over £38.3 billion in redress to consumers. 

MFS U.K.’s takeaway: This obviously isn’t a good look for the banks, and particularly for Lloyds, which paid out the most to consumers in the PPI scandal. Still, an estimated bill of around £2 billion is only about 10 percent of what the bank had to cough up as a result of PPI. And as it’s early days for the car finance scandal, no one really knows how exposed lenders are. The FCA will provide more information in the third quarter of this year, so watch this space.

WHAT WE’RE READING

London risks losing another major company to New York Stock Exchange, reports Bloomberg.

The FT reports that the LSEG is using a US benchmark to for its CEO David Schwimmer’s pay rise, that must be approved by shareholders.

Morgan Stanley bankers dropped a ‘nuclear bomb’ on my business, says Mike Ashley, in the Telegraph.

Thanks to: Kathryn Carlson, Fiona Maxwell, Izabella Kaminska.

**A message from Nationwide: To help us deliver fairer banking, Nationwide would like to work with policymakers on the issues that impact our customers and the products and services we offer them. Our focus is on helping people manage their everyday finances, own a home and save for their future. To support first time buyers, we would like to see the Government commission an independent review of the first time buyer market, looking at the supply and demand issues that are preventing people from owning a home. This review should look at issues including the difficulties in building the right number of homes, enabling access to home ownership and the development of future fit mortgage products. Find out more.**