Profiting from Brexit: cutting down on financial red tape
- Sun, 03 Sep 2017 20:29
Dick Jenkins: 'We have ended up with a regime that imposes burdens irrespective of an organisation’s size or complexity' © FT Montage/Gareth Iwan Jones
Not all of Britain’s financial services bosses fear the consequences of Brexit. For some, such as Dick Jenkins of the Bath Building Society, leaving the EU could present more of an opportunity than a threat.
The chief executive of one of Britain’s smaller building societies, Mr Jenkins argues that the UK’s exit from the EU presents a one-off chance to redesign a rule book that bears down on domestic lenders that pose no real threat to the wider financial system.
“We have ended up with a regime that imposes burdens irrespective of an organisation’s size or complexity,” Mr Jenkins says. “As we leave the EU, we should look again to see we have the rules to sustain an important segment of the financial market.”
Mr Jenkins speaks for a small financial institution. With a balance sheet of just £300m, BBS has two branches in Bath, a picturesque 18th-century spa town. It operates six additional agencies in the surrounding area in the south-west of England.
Many of Britain’s biggest banks remain fixated on securing post-Brexit access to EU markets, and the possibility that they will have to move some of their operations to Europe. But Mr Jenkins’ arguments resonate with many businesses in what is a substantial domestic financial sector.
The UK’s 44 building societies still account collectively for nearly a fifth of the country’s retail savings. While regulated at the EU level, Britain’s insurance industry also overwhelming caters to domestic investors and savers.
Mr Jenkins says that “one size fits all” regulation — largely springing from EU legislation — forces BBS to adhere to costly compliance and reporting procedures that are designed for bigger, more complex companies.
“If I look at compliance and risk together, it probably accounts for about 15 per cent of my operating cost base,” he says. “Of the 60-strong workforce, I have probably got 8-10 people tied up on that alone.”
Among his bugbears are requirements for exhaustive disclosures on everything from risk exposures to remuneration.
“I wouldn’t mind, but you feel you are filing stuff that no one is ever going to read,” he says.
There are also the requirements of the European Markets Infrastructure Regulation (Emir), a complex piece of securities legislation aimed principally at large commercial and investment banks. The regulation obliges small institutions like BBS to clear through a large bank the relatively few swaps it needs to write fixed-rate mortgages against its floating rate liabilities.
This is neither a trivial nor a cheap exercise, as most clearing institutions are reluctant to deal with small lenders, and the higher costs threaten to make BBS’s mortgages uncompetitive. Mr Jenkins says only one bank, Société Générale, is willing to clear BBS’s swaps.
The Building Societies Association has said that the cumulative effect of UK rules and EU regulation weighs particularly heavily on smaller societies. A survey conducted by the industry group last year showed that while larger lenders reported the cost of compliance to be about £45 per £1m of assets, for smaller societies it was £450.
Robin Fieth, chief executive of the BSA, says that as a result, extra costs are passed on to investors, while it becomes increasingly difficult for local societies to remain in business.
“This is not a question of governance or management, it is about well-run and often innovative institutions that cannot afford to stay in the game,” he says.
Ironically, in the short term, Mr Jenkins’ best chance of reform may come from Brussels itself. The EU plans to amend Emir in ways that would carve out smaller financial institutions like BBS from some of its requirements.
Mr Fieth says he hopes that the UK repeal bill and associated legislation will lock in any such changes before Brexit.
But he maintains that the full rigour of the international Basel bank capitalisation regime, as enforced by the EU, is unnecessary for simple institutions, and should be made lighter for smaller lenders. The rules force building societies to reserve more capital against individual mortgage loans than considerably larger and more complex banks, because the latter have the resources to assess their own level of risk.
“The EU decided that Basel should apply to everyone regardless of size,” says Mr Fieth. “It is not the case in the US, where there is a lighter system for smaller players such as community banks.”
He adds that the ever-increasing emphasis on compliance is making businesses such as BBS more cautious about pushing new ideas, he adds, simply because the lender’s management does not have the time or resources to devote to innovation.
“Before the crisis I spent 10 per cent of my time on risk and compliance,” says Mr Jenkins. “Perhaps that was on reflection too little. But now it absorbs roughly half of my time.”