A little bit of red tape - good for supply side essays

 

Britain’s £25bn banking problem piling pressure on Rachel Reeves

Santander will have left the Chancellor even keener to rip up the City’s rulebook

10

Michael BowChief City Correspondent

26 January 2025 12:00pm GMT

When Santander boss Ana Botin met Rachel Reeves at the annual Davos jamboree last week, the atmosphere may have been frostier than the ski slopes outside.

Just hours earlier, Botin had been forced to defend the bank’s commitment to Britain after reports that the Spanish lender was preparing to exit after 20 years because of over-regulation.

The gripe touched on widespread concerns in the City that Britain’s rulebook is stifling the economy.

Under pressure to demonstrate a plan for growth, the Chancellor has in recent days promised a light-touch approach to regulation. That means scrapping and simplifying rules across a host of sectors to free businesspeople’s hands. She has hauled in watchdogs to explain how they will boost growth and forced out the chairman of the Competition and Markets Authority, who was deemed not sufficiently on board with the new agenda.

For banks, the first pieces of red tape that should be in line for the axe are ringfencing rules. The measure requires the largest banks to separate retail services like current accounts and mortgages from activities such as investment banking and trading. It leads to duplicated efforts, tied up capital and is a drag on business, the industry says.

“We need to start from a position of no more red tape on banks and then pull back from there. But on things like ringfencing ... Why on earth are we still ringfencing?” says one senior British banker.

Ringfencing rules were introduced as part of the post-financial crisis reforms to end the “too big to fail” banking culture. Banks with over £25bn of deposits must separate high street customer cash from riskier parts of the bank to ensure that ordinary customers are protected if anything goes wrong elsewhere.

More than £1 trillion of customer deposits were ringfenced when the rules came in and the regime cost the banks £3bn to implement. 

Santander has about £75bn of customer deposits, dragging it into the ringfencing regime.

While the reforms may sound sensible, they are extremely frustrating for banks. The pots of money attached to high street banking are stranded, making it difficult for British lenders to deliver the same kind of investor returns as Wall Street rivals.

Santander, for example, has dozens of different branches around the world but cannot syphon off the UK cash to other parts of its business to fuel growth.

Santander boss Ana Botin met Rachel Reeves at the World Economic Forum to discuss the Government’s plans to boost growth Credit: HM Treasury/LinkedIn

Seen through this lens, British banking operations start to look expendable.

“Given the ringfencing, you don’t have substantive synergy capture by having an overseas business in the UK, which means strategically why do you need it? Why is it part of the group?” asks John Cronin, of Seapoint Insights.

Benjamin Toms, at RBC Capital Markets, says the threat of Santander’s possible UK exit was “well-timed” given Reeves’s openness to rolling back the rulebook.

“Santander has traditionally been relatively political in the way that they have negotiated markets,” he says.

“I don’t think it’s a coincidence that we’ve seen these stories when clearly the Government is looking to soften their stance towards banks and stimulate growth in the economy.”

Many in the industry privately complain about ringfencing rules, which are estimated to cost the banking sector £1.5bn annually. UK Finance, which represents the banking sector, says a “significant majority” of its members believe the rules should be scrapped.

The regime is particularly galling to many British banks because they do not apply equally. Wall Street giants like Goldman Sachs and JP Morgan are exempt from the rules.

Goldman, through its Marcus brand, keeps UK deposits specifically beneath the ringfence threshold to make sure they are not subject to the rules. So, too, does JP Morgan’s UK franchise Chase.

International banks who come to the UK get access to a huge pool of cheap money from savers if they stay beneath the cap. It can then be used to fund other parts of their business, even overseas operations, precisely because the pool avoids the ringfencing rules.

“Barclays can’t take a deposit and put it to work in their investment bank because they have to ringfence them,” Toms says. “On the other hand, Chase can build £25bn of deposits and send them back to the US to put in its investment bank without having to ring[fence] them.”

Jeremy Hunt’s Edinburgh Reforms, launched in December 2022 when he was chancellor, included a pledge to reform the ringfencing rules after a review by Sir Keith Skeoch, the former Standard Life chief executive.

Proposals included lifting the cap to £35bn, which would benefit the likes of Marcus and Chase.

While the Treasury was careful to stress they would “not unlearn the lessons of the past”, officials called it a “sensible evolution” of the ringfencing regime. However, bankers want reforms to go much further.

Even if Reeves were sympathetic, she would likely face resistance from the Prudential Regulation Authority (PRA), which enforces the rules.

In 2020, Sam Woods, the PRA chief executive, told The Telegraph he would defend ringfencing “to my last drop of blood”. He said: “I very strongly believe in those things being separated.”

Woods, who was a key architect of the regime as a young Bank of England official, has softened his tone since then, saying more recently he wanted to make the system work “more efficiently”.

PRA chief Sam Woods helped draw up ringfencing rules in the wake of the financial crisis Credit: Paul Grover for the Telegraph

However, a letter to the Chancellor last week explaining how the PRA could boost growth tellingly left the issue of ringfencing noticeably absent.

If Santander were to sell its UK bank, then NatWest, Barclays and HSBC have been touted as a possible buyer for the €10.5bn to €15bn (£8.9bn to £12.7bn) business.

HSBC, in particular, is seen as a likely suitor because it is seeking to bolster its presence in the UK and exit in Mexico.

Coventry Building Society has also been floated as a prospective buyer. The mutual acquired the Co-operative last year and many expect its acquisitive streak to continue after rival Nationwide did its own big deal by buying Virgin Money last year.

For now, Botin has said the Madrid-based bank will stay in the UK as it is a “core market”.

The Advance Union, which represents more than 5,000 Santander UK staff, has sought assurances from senior management who told them there were “no plans to exit the UK market”, general secretary Jim Leonard said.

However, Botin has pointedly refused to rule out a sale in future.

Botin’s strike on the ski slopes has put the ringfencing regime back in the spotlight – and top of Reeves’s agenda.

A bit of red tape (easy to use in essays)

 

Matthew Lynn

City columnist

PRIGOZHIN: TICKS ALL THE BOXES

Sweep away this bureaucratic racket

Money-laundering rules are absurd and restrict competition. It’s time for some common sense

Weall know the drill. Every time you need to open a new bank account, or hire a solicitor, or change your insurance policy, you run into a wall of money-laundering checks. You have to find a couple of utility bills, less than three months old of course, even though no one gets them in the post any more, and if they ask for them to be sent, the postal workers are on strike anyway. You might well need a certified copy of your passport as well. And perhaps of your driving licence. You might well have to record a video of yourself and send that across as well. It has turned into a nightmare. A simple transaction that should take a few minutes, and a couple of swipes on your phone, turns into days of hassle. Not very surprisingly many of us just give up and decide it is not worth the bother. 

It is about to get worse. The Economic Crime and Corporate Transparency Bill will add another whole layer of checks and regulations that we will all have to comply with. Every time there is any kind of financial scandal there are demands for more and more money-laundering controls. It is easy for governments to agree to that. It doesn’t cost them anything and it makes ministers look tough. At the current rate we soon won’t be able to hop into an Uber or buy a drink at a bar without showing our passports and a couple of utility bills. 

A SIMPLE QUESTION 

Surely we should stop to ask a very simple question. Does any of it actually achieve anything? The case of Yevgeny Prigozhin might tell us something important. Prigozhin is probably about as dodgy a character as it is possible to imagine right now. The head of Russia’s brutal Wagner Group, a private military corporation, he is one of Vladimir Putin’s key allies, and responsible for some of the worst crimes committed during the invasion of Ukraine. And yet according to a report in the Financial Times he was able to pass the UK’s money-laundering checks by simply offering a gas bill in the name of his 81-year-old mother. He was even sanctioned by the British and American governments at the time. None of that mattered. He ticked a few boxes and so it was all fine. 

It is not the first time something like this has happened. In 2021 NatWest received a hefty fine for failing to detect money laundering in a case where it accepted £700,000 in cash brought into a branch in black bin liners. But, hey, it was fine as they had a recent council-tax bill. And yet we never seem to hear of any criminals or terrorists actually getting caught. No one ever calls the police because a utility bill wasn’t presented, nor does it ever seem to lead to any arrests. In truth, there is no evidence that any of the money-laundering checks ever catch any real criminals. 

ARE YOU A RUSSIAN WARLORD?

No one wants to go back to the days when you could simply walk into a bank with a suitcase full of cash and open an anonymous account, no questions asked. But our ineffective and meaningless money-laundering rules have become a vast bureaucratic racket. And it is one that imposes huge costs on the economy. The rules restrict competition by making it harder for us to switch from one company to another, and for start-ups to break in to the market. Indeed, one of the main reasons the banking market remains dominated by the big four clearing banks, despite plenty of web-based start-ups with far better service, is that money-laundering rules make it too much hassle for many of us to switch accounts. The same is true of other financial services. The rules are meant to protect us, but what they really do is allow inefficient monopolies to lumber on despite high prices and poor customer service. 

Here’s a simple suggestion. We should sweep them all away. Beyond simple ID, no one should have to answer any questions to open a bank account or buy a house. Instead, we should just let companies apply a little common sense – such as asking if someone happens to be a Russian warlord before taking them on as a client. That would be cheaper, less bother for the rest of us, and more effective as well.

Lovely bit of microeconomics covering HGV problems

 From CapX, a great source of information:

•  Restrictions on foreign hauliers have doubled the number of empty lorries on the roads
•   'Cabotage' rules belong in the 17th century
•   Both the EU and the UK have over-regulated the haulage sector to protect it from competition

As driver shortages dominate the news, it is curious that few people have picked up one of the main reasons why these shortages have become a problem. While Remainers call for the restoration of freedom of movement, Brexiteers call for more UK drivers to be trained, both sides are missing the point.

In the 1970s, trucking was seen as a cool job – Driving a powerful vehicle on the open road, radio blasting, traversing the country, picking up and dropping off goods, until you head home. Paid by delivery, the crucial thing was just to avoid driving without a load.

But times have changed and long-distance trucking is no longer seen as an attractive profession. The Covid pandemic has created a boom in short-distance delivery driving, so enticing people back into long-distance haulage will not be easy. There are driver shortages everywhere (Poland has over 100,000 vacancies). Shortages are also not a new problem, but date back a decade.

So the question really is why are these shortages such a problem now? The answer is surprisingly simple.

Empty Lorries

Both the EU and the UK have over-regulated the haulage sector with ill-conceived policies that protect jobs from competition that clearly does not exist.

To be precise, they limit the number of ‘cabotage’ journeys a foreign business is allowed to make in their territories.

The consequence of this is that there are many more empty lorries on the roads now than before Brexit.

According to Michael Clover of Transport Intelligence, prior to Brexit an average of 30% lorries were empty for their return journey, but this has now doubled to 60%.

Driving with no load is not commercially attractive. As the driver shortage allows operators to pick and choose which jobs to do, cross-border journeys between the EU and UK have little appeal.

Why do Cabotage rules exist?

‘Cabotage’ refers to the transport of goods (or passengers) between two places in the same country by a foreign operator.

While you may occasionally hear spurious arguments about national security, the reason that cabotage restrictions exist is to protect domestic industry from foreign competition.

Cabotage laws date back to the 1650s when, under Cromwell, the English parliament passed a series of acts, collectively know as the Acts of Navigation and Transport that banned foreign vessels from transporting goods to England or its colonies. Only ships with an English owner, master and a majority English crew were permitted to engage in such trade. They also placed other restrictions on international trade, such as prohibiting British colonies from importing goods from outside the Empire.

Unsurprisingly, these restrictions were very much resented by the colonies themselves, notably North America, where it became a key factor for the ’Sons of Liberty’ movement that led to the American revolution. Somewhat ironically, the ‘Land of the Free’ adopted the policy wholesale after independence, and has retained it in one form another to this day (Jones Act), while the UK changed course.

In 1849, British parliament abolished the Acts of Navigation and Transport.

Mercantilism gave way to the golden era of free trade.

The reason for this was not just fear of a tit-for-tat ban on British vessels in other countries, but because they could see the benefits of free trade in lowering costs for consumers and inputs for business.

However, a century later this had changed. The Great Depression led to the decline of British industry and a resurgence of protectionism. Transport became seen as a public good rather than an industry. Debating amendments to transport legislation in 1947 the Lord Chancellor, Baron Jowitt, went so far as to claim that ‘carriers are in a sense public utility companies rather than industrial or commercial concerns.’

When the UK left the European Free Trade Association and signed the European Communities Act in 1972, it passed the Road Traffic (Foreign Vehicles) Act, regulating international haulage in line with European law.

This permits three cabotage operations for hauliers from other member states in another without being required to register their business in that state.

While Brexit has presented the UK with the opportunity to set its own policy and return to free market principles, this has not happened yet.

Under the terms of the UK-EU Trade and Cooperation Agreement of 24 December 2020, the EU restricted UK hauliers to only two cabotage jobs within the Single Market – and the UK responded by imposing the same conditions .

As a result, the number of empty lorry journeys has doubled. Aside from hurting businesses and consumers, this obviously increases carbon emissions.

Given the government’s commitment to net zero, they should ask themselves how they can reconcile protecting an industry that does not need protection with their environmental agenda. Perhaps Greta Thunberg can give them a push towards free trade?

Nice post on the need for regulation/oligopoly

From Fortune magazine, via CapX - note the gap between EU & US regarding rules; good context for market failure?

By CHARLIE THAXTON 

April 3, 2019

Your money’s no good here. At least, that’s true at a growing number of stores and restaurants that are ditching cash and switching entirely to credit and debit cards. Cashless retail is still relatively uncommon, but it’s on the rise and has begun to concern some lawmakers. New Jersey recently banned cashless retail. Philadelphia has done the same. Other cities may soon follow.

So far, the debates leading up to these laws have mostly centered on how cash-free establishments impact the many low-income people who lack bank accounts and credit cards. But there’s another major problem with going cashless. Cashless retail—and credit cards in general—allow a handful of giant banks and credit card monopolies to siphon more and more revenue from the productive economy, at the expense of consumers and businesses.

Retailers are essentially locked into a “partnership” with financial services monopolies. To get a sense of how inflated our rates truly are, the EU has capped rates at one-seventh of ours and, believe it or not, credit cards are still a profitable and growing business in the European economy.

We need to do the same. Unless the U.S. follows suit, banks and card networks will continue to extract a kind of monopoly rent across a growing share of consumer spending, skimming money from both consumers and businesses, and dampening real, equitable economic growth.

Cards are big business. Over half of all credit cards are issued by the Big Four banks: JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America. Interchange fees alone—the “swipe fee” retailers pay to the banks in order to process cards—netted these and other card issuers $64 billion in 2018, more than doubling the revenue of 2012. Processing associated with those fees made the card network market’s uncontested duopoly, Visa and Mastercard, about $15 billion last year.

Those numbers are so elevated because the U.S. has the highest swipe fees in the world, between 1.5% and 2%—and oftentimes nearly 3%—of a transaction, depending on the type of purchase. And the market is highly concentrated: Visa is a credit card titan, controlling 60% of the credit and debit card market last year. Mastercard had a full 25% of the market and American Expresscaptured 13%, which left Discover to clean up the dust, with just a 2% share.

This market dominance allows the networks to largely dictate card fees to merchants. Retailers and restaurants cannot feasibly refuse Visa and Mastercard, ensuring there is no true competition in the market. Card network technology has only become more efficient over time—yet, fees keep rising, forcing merchants to pay more for the same service year after year.

While big retailers like Walmart and Amazon have some leverage to negotiate down fees, small independent businesses do not. This all but ensures that the increasing use of cards favors big business, and shifts the largest cost burden to those who have the least ability to negotiate. Small businesses are forced to both accept the fees and pay a higher relative price than the chains do. In other words, concentration in the card market is helping to propel growing concentration in retail.

This is further exacerbated by Amazon’s new fleet of “Go” stores, for which cashless (and cashier-less) retail is central to the business model.

Such stores will lead to death by a thousand cuts for the American economy. The cashless trend puts more power and control in the hands of billion-dollar credit card companies and trillion-dollar banks—who play an inconsequential role in the doings of your local restaurant, bookstore, or independent retailer. Yet, these giants profit handsomely from inserting themselves between you and your neighborhood businesses. And their gain comes at a real cost: Local retailers are stuck paying tribute to monopolists far removed from the operation of their businesses, instead of offering better wages, adding new services, or lowering prices.

Ultimately, the high cost of cards is passed down to consumers in the form of higher prices. Whether they use a card or not, consumers are effectively paying a premium to subsidize the banks and card companies. Federal Reserve data shows strong credit card issue and spending growth year over year, which means consumers are not only using their cards more, they’re paying more—millions more—in hidden interchange fees every year to do so.

No consequence, legal or economic, stands in the way of card companies hiking their rates. And that’s exactly what they plan to do in April.

So what’s the solution? In 2015, the EU took charge and set a strict cap on interchange fees at 0.2% for debit and 0.3% for credit card transactions, keeping more money in small businesses’ hands. Visa and Mastercard make a little less, but millions of businesses and consumers make a lot more. People still use credit cards all the time in Europe.

In the meantime, legislation to ban cashless on the local and state level is a good starting point. Cities like San Francisco, Chicago, Washington, D.C., and New York are all considering cashless bans. None of these proposed laws forbid the use of credit cards, they merely require businesses to honor their customer’s cash. That protects consumer choice, and allows those unbanked Americans to participate in the economy.

Cash, for all of its contingencies, is a much more anonymous, resilient, and democratic system. Cities and states are right to insist that it continue to be an option for consumers. But with card transactions almost certain to become more expensive, we also need to cap these hidden fees so that giant financial interests cannot continue to use their monopoly position to drain more revenue from the economy.

Charlie Thaxton is a researcher with the Institute for Local Self-Reliance’s Community-Scaled Economy program.