Bank of England says Brexit transition desirable for UK, EU banks

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The Bank of England said a transition period after the Britain leaves the European Union would give banks more time to make orderly changes as Brexit poses risks to financial stability.

With UK due to leave the bloc in March 2019, the BoE’s Prudential Regulation Authority (PRA) said it faces heavy demands from Brexit fallout on banks and insurers.

BoE Deputy Governor and PRA Chief Executive Sam Woods said “some form of implementation period is desirable” between Britain leaving the bloc and start of new trading terms to “give UK and EU firms” more time to make necessary changes.

But he stopped short of saying what sort of transition he wanted in a reply to Nicky Morgan, new chair of parliament’s Treasury Select Committee, who asked him this month for his views on the design of such a period.

The UK government has not presented the EU with any firm request for a transition period as it still seeks internal consensus.

UK-based firms are not waiting for clarity and are announcing new hubs in the EU27 to be sure of serving customers there after March 2019 – and avoid the destabilising ruptures in financial links the BoE fears.

Woods had asked banks to spell out how they would cope in particular with a “hard” Brexit where Britain crashes out of the EU with no transition or trading deal.

In a letter to Morgan made public on Wednesday, he said 401 responses were received, which revealed “significant issues for many firms” and the BoE will reach a view on the plans in the autumn.

The submissions provided “further evidence” of risks the BoE had already identified, specifically relating to the continued servicing and performance of existing contracts and restriction on data transfers.

There could be a sharp rise in the number of insurance policies shifted from one country to another, a switch that involves the courts, he said.

“Re-structuring by firms to mitigate risks to their business will in general increase complexity.” Dislocation and fragmentation of markets could bump up costs and cut activity.

The BoE will need to ensure that supervising firms with links between the EU and a Britain outside the bloc, is still doable, he added.

The PRA faces having to authorise and supervise a significant number of additional firms, which could place a material extra burden on resources, Woods said.

London is home to branches of banks from continental Europe and they face having to become subsidiaries, meaning they would be directly supervised by the PRA.

Woods said the issues set out in his response to Morgan “pose a material risk” to the PRA’s objectives as a supervisor, and that this work is a top priority.

“It is incumbent on us to manage this burden but we may have to make some difficult prioritisation decisions in order to accommodate it,” Woods said.


Ban on unarranged overdraft charges considered by FCA

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Charges for unarranged bank overdrafts could be banned, under one option being considered by the Financial Conduct Authority (FCA).

It said the charges for those who go into the red without agreement can be high and complex.

Earlier this month, the UK’s largest lender, Lloyds, said it was getting rid of unarranged overdraft fees altogether from November.

Barclays has already stopped all unauthorised lending.

However, other banks charge about £6 a day, or up to £90 a month.

“We believe there is a case to consider fundamental reform of unarranged overdrafts, and whether they should have a place in any modern banking market,” the FCA said, in its review into the high-cost credit market.

“Maintaining the status quo is not an option,” said FCA chief executive Andrew Bailey. Unarranged overdraft fees were often “significantly higher” than payday loans, he added.

However, the FCA made it clear that an outright ban on unarranged overdrafts was only one option being considered.

It could impose a cap on charges, or demand some affordability checks before a bank lends money on an unplanned basis.

A year ago the Competition and Markets Authority (CMA) decided against a capon charges.

Half of all overdraft users go over their agreed borrowing limit, according to the CMA. In 2014 such customers spent £1.2bn in charges as a result.

The banking industry responded by saying that customers were usually warned if they were about to go overdrawn, usually via a text alert on on a mobile app.

“When used sustainably, consumer credit is important for economic growth, and lenders work hard to ensure the balance is right between helping customers to borrow while ensuring longer term affordability,” said Eric Leenders, head of personal banking at UK Finance.

Motor finance

The FCA has also highlighted concerns about the rent-to-own market, typically used by consumers to buy fridges, freezers and televisions.

“We think that is a sizeable issue, because people are paying three or four times more than if they used cash,” Mr Bailey told the BBC.

The FCA said that one option might be for housing associations to provide such goods instead.

Mr Bailey said there were also concerns about motor finance, a worry already highlighted by the Bank of England.

“We’re looking at affordability tests and the transparency of terms,” he said.

The FCA will publish an update on this work in the first quarter of 2018.

Payday loans

As part of its review into high-cost lending, the FCA also looked at how the cap on payday loans was working.

It said that the cap, first imposed in January 2015, had delivered “substantial benefits” to consumers.

Since then, no one has had to pay more than 0.8% a day of the amount borrowed. The maximum they pay is no more than twice the amount they borrowed.

The FCA said its review found that the cap meant 760,000 borrowers in this market were saving a total of £150m a year, that companies were now less likely to lend to customers who cannot afford to repay, and debt charities were seeing fewer people struggling with ballooning borrowing from payday loans.

Mr Bailey said the FCA would continue to focus its efforts on what else needed to be done in this area.


Bank of England strike to go ahead

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A three-day strike by Bank of England support staff will go ahead after talks at the conciliation service Acas ended without agreement, the Unite union said.

Employees are unhappy about a below inflation pay rise of 1%.

Protestors are planning to gather outside the Bank of England building wearing masks of Governor Mark Carney.

It will be the first time for over 50 years that staff at the Bank of England have been on strike.

Unite members at the Bank of England working in the maintenance and security departments will be taking part in the strike.

In addition, staff in the Bank of England “parlours” which are meeting rooms on the ground floor of the Bank’s building in Threadneedle Street will walk out. The staff are involved in a variety of work including security and catering as well as conducting visitors around the bank.

A Bank of England spokesperson said the Bank had been told that the industrial action called by Unite would begin at midnight for three days.

“The Union balloted approximately 2% of the workforce,” the statement said.

“The Bank has plans in place so that all essential business will continue to operate as normal during this period. The Bank has been in talks with Unite up to and including today and remains ready to continue those talks at any time.”

The last time Bank of England staff went on strike was in the late 60s and involved print workers in Debden, who were employed by the Bank of England at that time,

Unite said the dispute centred on the “derisory” pay settlement that the bank had imposed on staff without the union’s agreement. It was the second year running that staff had received a below inflation pay offer, it said.

Unite London and Eastern regional secretary Peter Kavanagh said its members had “been left with no choice but to take industrial action”.

“Mark Carney should come to the picket lines outside this iconic British bank today and explain why hardworking men and women deserve to face years of pay cuts.

“They are struggling to pay their bills and feed their families because the bank has unjustly imposed a below inflation or zero pay rise,” he added.

Inflation was 2.6% last month, according to official figures.


Rise in personal loans dangerous, Bank of England official says

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A sharp rise in personal loans could pose a danger to the UK economy, a Bank of England official has warned.

Outstanding car loans, credit card balance transfers and personal loans have increased by 10% over the past year, the Bank’s financial stability director Alex Brazier said.

In contrast household incomes have risen by just 1.5%, he said.

“Household debt – like most things that are good in moderation – can be dangerous in excess”, Mr Brazier said.

Mr Brazier, in a speech to the University of Liverpool’s Institute for Risk and Uncertainty, added that this increase in debt was “dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy”.

He warned that High Street banks were at risk of entering “a spiral of complacency” about mounting consumer debt levels.

“Lending standards can go from responsible to reckless very quickly.

“The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy face – are actually growing,” Mr Brazier added.

Mr Brazier hinted that the Bank of England could force banks to take further safeguards against the risk of bad debts if it was deemed necessary.

Just last month, the Bank of England told banks to beef up their finances against the risk of bad loans.

They were told to set aside £11.4bn in the next 18 months in case future economic shocks meant some borrowers could not keep up their repayments.

Mr Brazier said by September the Bank will have assessed whether the rapid growth in consumer lending “has created any small gap in the line”.

“If it has, we’ll plug it,” said Mr Brazier.

In June, Bank of England governor Mark Carney said lenders appeared to have forgotten some of the lessons of the financial crisis.

Despite these concerns, Mr Carney stressed that the UK financial system was far stronger than at the time of the great banking crash in 2008-09.


Co-operative Bank agrees £700m rescue package

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The Co-operative Bank has secured a £700m rescue package to stop the lender from being wound up.

Investors have agreed to swap their debt for a stake in the bank.

The bank also said it would to separate its pension fund from the Co-operative Group’s scheme, which has £8bn of liabilities.

The Bank of England’s Prudential Regulation Authority said it had accepted the plan to return the bank to a firm footing.

“Supervisors will remain closely engaged with the bank while the actions announced today are taken forward. Implementation is subject to certain regulatory approvals,” said the PRA, which is responsible for supervising the UK’s banks and insurance companies.

The debt-for-equity swap with hedge funds means that the Co-op Group’s stake in the bank will fall from 20% to about 1%.

The Co-op also said that the relationship agreement between the group and the bank, covering the promotion of bank services to members of the wider business and other matters, “will naturally fall away and come to a formal end in 2020”.

It added that it “is supportive of the plan and intends to vote in favour of the capital raising”.

The Co-op Bank has been been struggling for four years since an abortive attempt to buy 632 branches from Lloyds revealed a £1.5bn hole in its finances.

After failing to find a buyer for the bank, the existing owners, which are predominantly US investment funds, have agreed to write off £443m they are owed and will sell £250m worth of new shares.

Ethical banking

The bank, known for its ethical approach, has been under intense supervision from the Bank of England for many months. Wednesday’s injection of fresh money will spare the regulator the job of stepping in to manage a wind-up of the bank.

The investors will also pump £100m into the bank’s pension scheme over the next 10 years to secure its separation from the wider Co-op Group pension scheme.

Despite its troubles, Co-op Bank’s customers have proved loyal, with nearly four million account holders and mortgage borrowers sticking with the bank despite its financial difficulties and a sex and drug scandal involving its former chairman, Methodist minister Paul Flowers.

The bank says it will continue to run itself with the ethical values it has observed since its founding in 1872.


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