UK
07 September 2010
The UK financial services industry is bruised and battered, but its core capabilities remain strong, and securities lending is leading the way
Image: Shutterstock
As the centre of Europe鈥檚 financial services industry, and a global leader in the securities lending market, the UK has been hit hard by the downturn. Several of the country鈥檚 leading banks have required state support, job losses run into the tens of thousands, and market activity has fallen sharply.
The market has been further hit because of the make-up of the British markets. In the UK, some of the biggest players are banks, who have seen their values plummet and in some cases their credit ratings dissipate; and oil firms, where BP has seen tens of billions wiped of its capitalisation following the notorious oil spill in the Spring. Famous names such as Woolworths have also fallen victim to the downturn, leaving investors reducing their risks wherever they can.
And that鈥檚 not all. There has been a real public and political backlash against the banks. It鈥檚 felt that it was the financial institutions who drove the country - and the world - into the financial turmoil, thanks to reckless investment strategies and shady bookkeeping. While there鈥檚 not a huge amount of truth to this, the public perception of the financial industry is not helped by some banks who still admit they are unsure of how much trouble they are in, and RBS鈥� figures for 2009, which showed a loss that was in the top 10 of all time globally.
鈥淚t鈥檚 not been a lot of fun being a banker in the past couple of years,鈥� says Charlotte Anning, who worked for Lehman Brothers until its collapse and is now taking time out to be with her family. 鈥淲e鈥檙e on about the same sort of level as journalists and politicians in the estimation of the public.
鈥淲hen I told someone at a party that I worked for a bank but had just lost my job, their response was that the best kind of banker was an unemployed banker. There is a real anger out there, but I think this was mostly down to ignorance of what most banks actually do.鈥�
So that鈥檚 the bad news. The good news is that London is simply too big a financial centre to be destroyed by something as small as the worst recession since the 1920s. It鈥檚 the home of every bank that wants to be a player, along with a huge number of hedge funds, and other investment vehicles. The strength of the market is down to its size, and the quality of the businesses that operate within it.
鈥淭here鈥檚 no doubt that we鈥檝e had a difficult couple of years,鈥� says a spokesperson for one of the world鈥檚 largest banks. 鈥淏ut in a way it鈥檚 been good for us. The good times couldn鈥檛 go on for ever, and we鈥檝e strengthened our internal systems and cut our costs, which means that going forward the business we do is likely to be more profitable.鈥�
And while the industry has certainly been in the spotlight, securities lending has been able to fly under the radar in most cases. 鈥淭here certainly were sharp practices going on, including within my own organisation,鈥� says a representative of another major player. 鈥淏ut because of the controls already in place - like CCPs - no-one really made a loss and nothing bad has really come out. There was a much greater focus on derivatives and MBS, where the losses were tangible.鈥�
With the obvious exception of Lehman Brothers and a couple of Icelandic Banks, all the major institutions have maintained a strong presence in the UK, and those that offered securities lending in the past still do so. In fact, the downturn has been good for some organisations - as clients looked for stability, many of them turned away from some of the established names - especially the major US banks - and looked at firms that didn鈥檛 have major internal problems. The likes of BNP Paribas and other European institutions have seen their client base grow in the past couple of years, while the well-known 鈥榮table鈥� banks such as Northern Trust and State Street have also done well.
The money
As is common with most major financial centres, assets pour in from all over the world. US firms are major investors, as are those from continental Europe. There is also increased activity from Asia, particularly China, and the Middle East.
Domestically there is a mature and liquid investment market. Hedge funds are here in force, but this is mixed with the popular tax-efficient ISA schemes, as well as pension funds.
Pension funds in the UK can generally be divided into two strands. Private schemes (which do sometimes apply to public sector employees) are run by investment companies - the likes of Aviva and L&G are major players here. They tend to be more knowledgeable about the market, and happier with involving themselves in securities lending activities. Virtually anyone can join one of these private schemes.
Then there are the employer schemes, which are usually for public sector workers (although not necessarily - often they include companies that at one stage were nationalised and have since been sold off). These are run by the employer itself, and are there to provide benefits only to eligible people. In many cases, these are huge funds, but often it鈥檚 found that they are happier to stay out of complex interactions. Before the downturn, though, this was changing, with more employer schemes looking to become more active.
However, many of these funds, particularly public sector schemes, remain cautious. 鈥淭he problem is that we don鈥檛 really understand securities lending,鈥� says the head of one mid-size local government scheme. 鈥淎nd if nothing else, what the last couple of years has taught us is that we shouldn鈥檛 get involved in things we don鈥檛 know enough about.鈥� This head, who asked for anonymity, is currently in the process of choosing a provider to carry out securities lending activity - amongst other services - on its behalf, and act as an adviser on more complex financial instruments.
Regulation
The financial crisis led to calls for a raft of new regulations on the banking sector in the UK, and there are still a number of issues left undecided - chief amongst them, the option of breaking up the banks into retail and institutional, which is favoured by the smaller partner of the current coalition government.
But, whether it likes it or not (and many don鈥檛), the UK is part of the EU, and the government seem to accept that a multinational regulatory structure will be a more effective mechanism. The EU is due to publish draft guidelines that will limit short selling activities, in particular naked short selling. It鈥檚 likely that restrictions will be put in place to reduce the amount of naked short selling that can be carried out during times of market turmoil, while at all times those institutions involved in the practice must make their activities public.
Generally speaking, the UK has always had a more laissez faire attitude to regulation than its nearest neighbours, but the past couple of years has seen a greater move towards tighter rules. However, the current UK government is wary of seeing the UK lose its place as Europe鈥檚 major financial centre, and has publicised its concern that the proposed regulations may be too restrictive.
And this thought has been echoed by associations: 鈥淲e would not wish to see short selling banned even in extreme market circumstances,鈥� says Andrew Baker, chief executive of Aima. 鈥淭he crisis experience has shown that imposing such bans does little to calm a market panic.鈥�
So as the jurisdiction and its neighbours wait to see how they will be governed in the future, the securities lending industry is getting back on its feet. Volumes are rising, and confidence is slowly coming back. We鈥檙e unlikely to see the levels of 2007 in the near future, but current activity is a good barometer.
The market has been further hit because of the make-up of the British markets. In the UK, some of the biggest players are banks, who have seen their values plummet and in some cases their credit ratings dissipate; and oil firms, where BP has seen tens of billions wiped of its capitalisation following the notorious oil spill in the Spring. Famous names such as Woolworths have also fallen victim to the downturn, leaving investors reducing their risks wherever they can.
And that鈥檚 not all. There has been a real public and political backlash against the banks. It鈥檚 felt that it was the financial institutions who drove the country - and the world - into the financial turmoil, thanks to reckless investment strategies and shady bookkeeping. While there鈥檚 not a huge amount of truth to this, the public perception of the financial industry is not helped by some banks who still admit they are unsure of how much trouble they are in, and RBS鈥� figures for 2009, which showed a loss that was in the top 10 of all time globally.
鈥淚t鈥檚 not been a lot of fun being a banker in the past couple of years,鈥� says Charlotte Anning, who worked for Lehman Brothers until its collapse and is now taking time out to be with her family. 鈥淲e鈥檙e on about the same sort of level as journalists and politicians in the estimation of the public.
鈥淲hen I told someone at a party that I worked for a bank but had just lost my job, their response was that the best kind of banker was an unemployed banker. There is a real anger out there, but I think this was mostly down to ignorance of what most banks actually do.鈥�
So that鈥檚 the bad news. The good news is that London is simply too big a financial centre to be destroyed by something as small as the worst recession since the 1920s. It鈥檚 the home of every bank that wants to be a player, along with a huge number of hedge funds, and other investment vehicles. The strength of the market is down to its size, and the quality of the businesses that operate within it.
鈥淭here鈥檚 no doubt that we鈥檝e had a difficult couple of years,鈥� says a spokesperson for one of the world鈥檚 largest banks. 鈥淏ut in a way it鈥檚 been good for us. The good times couldn鈥檛 go on for ever, and we鈥檝e strengthened our internal systems and cut our costs, which means that going forward the business we do is likely to be more profitable.鈥�
And while the industry has certainly been in the spotlight, securities lending has been able to fly under the radar in most cases. 鈥淭here certainly were sharp practices going on, including within my own organisation,鈥� says a representative of another major player. 鈥淏ut because of the controls already in place - like CCPs - no-one really made a loss and nothing bad has really come out. There was a much greater focus on derivatives and MBS, where the losses were tangible.鈥�
With the obvious exception of Lehman Brothers and a couple of Icelandic Banks, all the major institutions have maintained a strong presence in the UK, and those that offered securities lending in the past still do so. In fact, the downturn has been good for some organisations - as clients looked for stability, many of them turned away from some of the established names - especially the major US banks - and looked at firms that didn鈥檛 have major internal problems. The likes of BNP Paribas and other European institutions have seen their client base grow in the past couple of years, while the well-known 鈥榮table鈥� banks such as Northern Trust and State Street have also done well.
The money
As is common with most major financial centres, assets pour in from all over the world. US firms are major investors, as are those from continental Europe. There is also increased activity from Asia, particularly China, and the Middle East.
Domestically there is a mature and liquid investment market. Hedge funds are here in force, but this is mixed with the popular tax-efficient ISA schemes, as well as pension funds.
Pension funds in the UK can generally be divided into two strands. Private schemes (which do sometimes apply to public sector employees) are run by investment companies - the likes of Aviva and L&G are major players here. They tend to be more knowledgeable about the market, and happier with involving themselves in securities lending activities. Virtually anyone can join one of these private schemes.
Then there are the employer schemes, which are usually for public sector workers (although not necessarily - often they include companies that at one stage were nationalised and have since been sold off). These are run by the employer itself, and are there to provide benefits only to eligible people. In many cases, these are huge funds, but often it鈥檚 found that they are happier to stay out of complex interactions. Before the downturn, though, this was changing, with more employer schemes looking to become more active.
However, many of these funds, particularly public sector schemes, remain cautious. 鈥淭he problem is that we don鈥檛 really understand securities lending,鈥� says the head of one mid-size local government scheme. 鈥淎nd if nothing else, what the last couple of years has taught us is that we shouldn鈥檛 get involved in things we don鈥檛 know enough about.鈥� This head, who asked for anonymity, is currently in the process of choosing a provider to carry out securities lending activity - amongst other services - on its behalf, and act as an adviser on more complex financial instruments.
Regulation
The financial crisis led to calls for a raft of new regulations on the banking sector in the UK, and there are still a number of issues left undecided - chief amongst them, the option of breaking up the banks into retail and institutional, which is favoured by the smaller partner of the current coalition government.
But, whether it likes it or not (and many don鈥檛), the UK is part of the EU, and the government seem to accept that a multinational regulatory structure will be a more effective mechanism. The EU is due to publish draft guidelines that will limit short selling activities, in particular naked short selling. It鈥檚 likely that restrictions will be put in place to reduce the amount of naked short selling that can be carried out during times of market turmoil, while at all times those institutions involved in the practice must make their activities public.
Generally speaking, the UK has always had a more laissez faire attitude to regulation than its nearest neighbours, but the past couple of years has seen a greater move towards tighter rules. However, the current UK government is wary of seeing the UK lose its place as Europe鈥檚 major financial centre, and has publicised its concern that the proposed regulations may be too restrictive.
And this thought has been echoed by associations: 鈥淲e would not wish to see short selling banned even in extreme market circumstances,鈥� says Andrew Baker, chief executive of Aima. 鈥淭he crisis experience has shown that imposing such bans does little to calm a market panic.鈥�
So as the jurisdiction and its neighbours wait to see how they will be governed in the future, the securities lending industry is getting back on its feet. Volumes are rising, and confidence is slowly coming back. We鈥檙e unlikely to see the levels of 2007 in the near future, but current activity is a good barometer.
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