We all know the last few years have been difficult for lenders and regulators alike.
Unprecedented economic events and financial pressures have turned consumers and lenders into risk-averse and somewhat cautious animals. Learning from any major shock or event is to be welcomed but one wonders whether we are continuing to wage war on yesterday’s battles.
To illustrate this point, picture a four-sided box with LENDERS written on it. Four arrows are feeding into each side with the following pressures:
- Prudential regulation
- Financial conduct risk
- Limited market growth and funding
- Board risk appetite.
In basic terms this is a summary of the constraining box closing in around lenders. It is these constraints that are shaping current business plans and strategies in our industry.
The regulatory impact in the prudential and conduct space should not be underestimated. The level of oversight and hands-on regulation is a necessary response to the events in 2005/08 but it comes at a price.
Two sides of this box have experienced significant pressure as lenders are encouraged to stick to the markets they know best and the sectors in which they have most experience.
Greater regulation means more management information, more controls and a higher level of required expertise. The pressure of having visits from both the Prudential Regulatory Authority and the Financial Conduct Authority only adds to the overall workload of lenders and other regulated entities.
The third side of the box shows market growth and funding. The mortgage market until very recently has shown no real signs of growing.
There has been raging debate as to whether this was due to lack of available funding to lenders or an absence of customer demand.
Clearly the lack of growth has been due to a mixture of these factors but it is also dominated by a poor economic background. UK economic growth performance has been, and still is, woeful and it should come as no surprise that consumers and lenders remain cautious.
Funding should improve further as the economy begins to recover in the medium term and bank balance sheets look stronger. The retail savings market should also be able to provide more support to the mortgage sector once market interest rates start to move up from their current record lows.
Although market growth and an improving economy should help lenders start to escape that boxed-in feeling, the final side of the box may prove more difficult.
The boards of many banks remain shell-shocked from the level and intensity of the ongoing regulation they face.
The temptation to stay in one’s comfort zone is an understandable reaction from many board executives. However, ‘sticking to the knitting’ might make for an easier regulatory life for board members but, if banks want to restore their fortunes and reputations with consumers, they will need to do far more.
Innovation, market expertise, resilience and robustness will mark out the successful in this industry. After all, there are no prizes for those who wish to stay in their box.