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Optimists express confidence that the “special relationship” between the US and Britain will survive despite Donald Trump’s most anarchic instincts. Maybe But our governing values and fortunes are now at sea, at least in the short term, based on American libertarianism on the one hand and Britain’s more paternalistic government on the other.
Nowhere is this more evident than in the financial sector. Consider the performance of the nation’s largest banks in recent weeks. Wall Street has been on a tear. All major U.S. banks have enjoyed a double-digit 15 percent gain in share prices since the Nov. 5 election, led by Goldman Sachs.
There are a large number of drivers. The promise of tax cuts will increase profits. So oil drilling can accelerate. But the biggest win will be Trump’s deregulatory agenda. Already in September, the powerful U.S. banking lobby forced the architects of the so-called Basel III endgame to weaken planned rules on capital and liquidity (even a football game to amplify its message). (also direct appeals to the public through advertising slots). The toned-down re-proposal is reasonably close to the global Basel blueprint and goes some way to addressing regulatory shortcomings that emerged after Silicon Valley Bank and other banks failed last year. But there is now a widespread expectation that even these watery laws will be overturned.
In the name of efficiency, Trump has clearly promised to “slash” regulations of all kinds. For banks that means not only an end to the new Basel rules, but also a simpler system for the mergers and acquisitions they advise on and fewer combative regulators.
The opposite could not be more true with the fortunes of UK banks. Already – thanks to their small scale and weak economy – the value of UK banks lagged badly behind their US peers. But shares in some lenders sank further last month, following a surprise appeal court ruling that outlawed historic car finance commission payments. Close Brothers, a leading operator in the market, has seen its stock fall by about half in value since the late October decision. Shares in Lloyds, Britain’s biggest high street bank and car finance lender, are down more than 10 percent. (Lloyds’s ratio of price to book value of its assets is now just 68 percent, compared to more than 200 percent for JP Morgan, the largest US bank.)
There are echoes of the disappearance of payment protection insurance in the case of car finance – a scandal that cost banks more than £50bn. For motor finance, RBC analysts currently estimate that the industry as a whole could be forced to pay up to £23bn in redress and legal costs.
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There were clearly some great incentives in the car finance industry. Part of the case, which the appeals court ruled on, dealt with an undisclosed arrangement whereby car salesmen earned higher commissions if they were able to lure customers into high-interest loans. But the court went further than that. By outlawing other fixed-commission arrangements, unless disclosed in detail and knowingly agreed to by a client, it set a legal precedent that lawyers and financiers agreed to. are that it can have huge implications: Suddenly any finance you get through a privileged intermediary — from mortgages to buy-to-let. Pay-off loans now to insurance later – potentially a violation of federal law.
Cue an awkward phase of lobbying by financiers and a forlorn hope that Britain’s Supreme Court, as the ultimate arbiter of the law, will intervene. At stake, bankers say, is Britain’s widespread reputation as a promising place to do business. That may partly explain Chancellor Rachel Reeves’ pro-city rhetoric in her Mansion House speech last Thursday, in which she told her cheering audience that financial regulation had “gone too far.” The reforms will include overhauling the consumer redress system “to create a more secure environment for investment” as well as expanding regulators’ growth remit.
While he didn’t explicitly mention the competitive threat posed by Trump and his plans for regulatory insurgents, his reform agenda has clearly gained more urgency. Balancing fair treatment of delinquent customers is a huge challenge – but not as big as the one facing UK banks as they consider the yawning gulf between their investments and their US counterparts. .
patrick.jenkins@ft.com
