A new bank in town: the approval of Revolut’s banking licence
On the 24th July, the global fintech company, with over nine million UK customers, officially received its UK banking licence, years after it first applied. Whilst Revolut securing a licence is a positive step towards the liberalisation of banking and giving the average person greater freedom of choice, this begs the question as to why this has taken so long.
The news about Revolut’s banking licence approval has been met with great support for diversifying the current banking market, however, the addition of a singular bank falls short of neighbouring countries, such as Germany. The German economy benefits from the thousands of licensed banks compared to the five banks that make up Britain's banking and financial services, making the UK’s banking network one of the most homogeneous in the world. The small number of banks available to the general public has somewhat monopolised the arena for which the average consumer in the UK has very limited choice. In fact, the five leading banks—Lloyds Banking Group, RBS, HSBC, Barclays, and Santander—have an 85% share of the personal current account market, illustrating the limitations for the consumer.
Revolut, who has 45 million worldwide customers, already had licences in Lithuania and Mexico. It now hopes that the UK’s approval will help it to expand its activities in key markets like the US and Australia. It had filed a licence application back in early 2021 but had faced substantial setbacks. The reasons stated included trouble with revenue verification, following delays to the 2021 and 2022 accounts being released, as well as the departure of senior executives and the ownership structure. The entry of Francesca Carlesi, former Deutsche Bank executive, into the company’s leadership back in November has helped subdue the technocrats at the Prudential Regulation Authority (PRA). While there is the argument to be made that filing an earlier application, when the company had been much smaller, which may have helped it secure its licence faster, the argument fails to remove the fault resting on the overly stiffened bureaucracy taking so long to approve one of the most trusted Electronic Money Institutions in the UK.
The company differs from more traditional banks in its focus on primarily online banking - a move which has drawn customers through its accessibility and ease of entry. It is in talks to sell $500mn worth of shares in the hopes of boosting its market valuation from $33bn (as valued in 2021) to $45bn - a move which, if successful, might make it a contender for third place among UK banks, replacing Barclays and being only surpassed by HSBC and Lloyds Banking Group. However, there are growing concerns that the current macroeconomic environment, with a drop in interest rates expected soon, might reduce Revolut’s profits. Considering the fact that interest income had accounted for over a quarter of the company’s revenues last year, this may pose worries.
The three year wait for Revolut’s licence exemplifies the red tape delays in the British banking market produces and, despite the longevity of the wait, the licence provided comes with significant restrictions, meaning that new products from Revolut will be unable to be launched, further limiting the choice of individuals. The Bank of England’s suggestion for the movement into the mobilisation stage, provisioning a conditional phase allowing for finalisation of the IT infrastructure, governance, and risk management frameworks. Revolut must attempt to secure further investments but in the meantime this phase allows greater protection of the Financial Service Compensation Scheme (FSCS) for customers. It must be noted, that the provision of the mobilisation phase does not allow for the complete success of the liberalisation of the financial sector, rather further illustrates the struggle that innovative banks face in licensing agreements.
Whilst Revolut’s licensing has the potential to benefit UK customers, protecting their money, the need for greater removal of red tape around regulation on businesses is essential to economic growth, with the overcomplicated nature of the regulation strangling businesses and growth in markets. The need to reassess British financial markets is becoming ever more obvious and therefore necessary to boost the economy through greater competition between a multitude of banks and attract greater investment, something which the government’s slow pace of reform is limiting.
The Plan to Make Work Pay Will Harm Struggling Businesses
Labour’s New Deal for Working People, which aims to strengthen workers’ rights, end fire and rehire, put an end to flexible contracts, strengthen trade unions and raise the minimum wage, is an attempt to tread the tightrope that exists between pleasing both the unions and big business. But it risks frustrating growth and productivity gains.
Take for instance, the Plan’s pledge to make pay ‘fair.’ Raising tips for frontline hospitality workers, raising the minimum wage to a level that constitutes a ‘living wage’ and of course will ostensibly sound like a good idea, but will squeeze the bottom line of pubs, bars, cafes and restaurants. The hospitality industry continues to struggle post-COVID – with over 3,000 pub club and restaurant closures in the UK since 2017 - and being unable to reinvest tips will only add insult to injury.
Similarly, raising sick pay and the minimum wage will pose a real challenge to businesses – both large and small – and frustrate efforts to keep businesses afloat in a difficult economic environment. The consequences will be twofold: first, it will make life more difficult for individual businesses which are trying to stay afloat and secondly, it promises to push the innovative businesses that fuel British growth out of the country as they seek more supportive and growth-friendly political environments. It speaks volumes that M&S Chairman, Archie Norman – who knows a thing or two about attracting investment and driving growth after returning M&S to the FTSE 100 last year after a four year absence - spoke out against the plan, urging Labour to “consider carefully whether a package that reduced flexibility, makes it more costly to hire people, and seeks to bring unions into the workplace will help attract new investment”.
Meanwhile, the plan to strengthen trade union powers by repealing the Trade Union Act 2016, the Minimum Service Levels (Strikes) Bill and the Conduct of Employment Agencies and Employment Businesses (Amendment) Regulations 2022, will make it easier for trade unions to strike and and removing restrictions on strike ballotting. As both history and the state of play across the English Channel illustrates, unions are diametrically opposed to productivity, increase consumer prices and carry the ability to bring entire nations to a standstill. For instance, the gilets jaunes protests of 2018 paralysed France for roughly a month and only came to an end once President Macron reluctantly passed an eye-watering €10 billion package of policies, including a €100 per month rise in the minimum wage for roughly five million French households. Empowering unions to the extent that Labour’s Plan vows to could well see the aforementioned disruption and costly concessions make the 20 mile hop across the Channel.
Despite generating - at least in the short- to medium -term - a wage premium, to name just one of the idealistic visions of unionisation, the strengthening of Britain’s unions promises to distort labour supply, restrict employment flexibility and limit research and development (R&D). Restricting flexible employment not only disincentivises productivity as employees are contractually locked-in regardless of personal performance, but it also makes firms less likely to employ experts, who are required, but only on an ad hoc basis - frustrating innovation in the process.
Furthermore, as Hirsch’s research in the 1980s found, the wage increases brought about by unions in essence serve as a tax on any return on investment. If a firm performs well, unions invariably demand a wage increase, and above competitive levels. Once again, this disincentives productivity and inhibits R&D, as return on investment is forcibly channelled into meeting union demands rather than into innovative and growth-stimulating R&D. What’s more, with improved R&D comes more consumer-friendly services and products, which stand to improve the standard of living of the average joe.
Plans to ban unpaid internships will also have myriad adverse effects. The 58,000 unpaid internships offered annually in the UK afford the country’s youngest, most ambitious and curious young people exposure to the workplace across a variety of industries, helping them decide which industry and role is best suited to them while also improving their employability. Equally, it allows companies to discern whether an individual could add value to their firm before investing in them; it’s always a risk for a company onboarding a new employee, who, to a degree, is an unknown quantity at the beginning of their career. Considering some companies simply don’t have the cash to offer paid internships, outlawing free ones would be at the expense of growth, productivity and recruitment and the employability and education of our youth, all the while stymieing social mobility.
Rather than loosening rules for disruptive trade unions, banning flexible contracts, and making it more expensive for businesses to operate, the next government should aim to incentivise small businesses to take on new employees, cut taxes for working people, and grow our economy, creating more high-quality employment opportunities in the process. At a time when our tax burden is at a historic high and the regulatory state encroaches on every area of economic life, more tax and more regulation surely cannot be the answer. Let’s learn from our cousins in Australia and America, who continue to record admirable year-on-year growth, instead of hopping along in the froggy footsteps of our French neighbours.
Louis Plater
Say no to neo-mercantilism!
The Treasury, high on pre-budget coffee fumes, has floated the idea of removing tax relief on foreign investments on international ISAs. To the Treasury, this would increase investment in British companies, reviving our ailing capital markets and support equities. To everyone else, this would decimate wealth and growth opportunities. We hope that this is the Treasury launching kites and seeing what does not fly - without a doubt, this policy would slam straight back into the ground.
Not only is this an unpleasant return to mercantilism, the idea that we get wealthier by just keeping our money in the economy rather than from consumption and trade, but it would wallop households at a time of acute financial uncertainty.
Let’s step back and look at why this policy should be consigned to the shredder.
Individual Savings Accounts (ISAs) provide a tax-free account of up to £20,000 in tax savings for equity, bonds, and fund shares, and they have proved immensely popular. In 2022, ISAs had a market value of £741.6bn, with £459.8bn of that being in stocks and shares ISAs. This forms a solid base for participation in British capitalism and a core component of our financial and relatively high wealth.
No wonder the Treasury is hungry to divert a lot of this money into Britain’s markets.
However, by essentially tariffing international investment and outward FDI, British ISA holders will be left much worse off. As HMRC data shows, it’s everyday Brits who would be most affected. Over 6 million holders of ISAs are in the £10,000 to £20,000 income bracket, and a further 4.8m are in the £20,000 to £30,000 bracket, too. Those on low salaries, who use their ISAs as safety net pools of cash, or the almost £1bn a year withdrawn to buy a house, will be hit hardest.
Additionally, the scheme would create yet another barrier to the efficient allocation of capital. By removing tax relief on foreign investments ISA holders would be artificially incentivised to invest into less efficient UK firms.
This would be reasonable in a world without international trade, but when the UK imports 33 percent of all its goods consumed, it’s a bad idea. Investment in German cars, French wine and American oil will bring far greater gains, in terms of quality of product and price to UK consumers than investment into UK based alternatives. But this is exactly what such a policy would encourage. Free trade, allowing for the efficient allocation of capital not only within but across nations, has improved standards of living across the globe, it's what made Britain rich in the first place. Policy today should be encouraging this process, not restricting it to score political points.
If the Treasury wanted a more British focussed financial product, they would do well to listen to UKFinance’s call for a British ISA, and advertise it widely. With UK households only holding around 11% of their assets in equities, compared to much higher percentages in the G7, this would be a fantastic opportunity for British savers. However, a tariff led approach to investment simply will not work. As ASI Senior Fellow Sam Bowman has pointed out, “The FTSE 350 is up 6% over the past five years. The S&P 500 is up 80%.” Why invest in Britain, when the world is giving much better returns?
The Treasury’s intention misses the fundamental causes for the lack of investment in UK equities markets, and instead looks for a quick fix which is destined to calamitously explode. We know that there isn’t enough liquidity in the system for firms to list in UK markets. Placing a tariff on outward FDI would only temporarily address this. Shortly after coming into effect, we would see a substantial bubble, inevitably set to burst when this capital floods the market and is poorly allocated.
What the UK needs to do to address weak equity market performance is to take a serious look at reforming the supply side of the economy, addressing cumbersome planning regulations that stop real business growth, sky-high energy bills which push ever larger bills through post boxes and then SMEs into bankruptcy, and the loathsome salaries that skilled workers can expect.
Liquidity is only one spoke of Britain’s mangled wheels. Indeed, liquidity is the result of well-functioning markets, not the other way around. Fixing our capital markets will take more than one poorly-thought out policy.
Finally, the big question is, how would this be enforced? It sounds, in the words of one financial stakeholder I spoke to, like a complete nightmare to manage. Whether retrospective, or going forward, the enforcement mechanisms would be byzantine, full of loopholes, and ultimately too expensive and ineffective.
As Adam Smith himself said: "The proprietor of stock is properly a citizen of the world and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition in order to be assessed to a burdensome tax and would remove his stock to some other country where he could either carry on his business or enjoy his fortune more at his ease."
The Adam Smith Institute's Response to the Smoke Free Generation Consultation
Following a call for evidence by the Department of Health and Social Care earlier this year, the Adam Smith Institute submitted a response urging the Government to be cautious with its reforms. Covering enforcement and liberty concerns, through to the importance of vaping flavours and heated tobacco for those looking to quit smoking, you can find a summary of our response below.
Revisions
Following the Office for National Statistics’ revision of GDP figures by 1.7% today, we thought it would be important to illustrate this precedent through satirical historical examples and the damage such sloppiness could cause.
1. Edward Gibbon revised his figures to find that the Roman Empire did not in fact collapse, but instead expanded its border size by 2%, in the year that it was alleged to have fallen.
2. It has been found that Vladimir Lenin celebrated prematurely at the fall of the Tzar and the rise of the Soviet Union by around 2 years, according to new revisions by historians.
3. The great Khan, Genghis, has been found to have saved 100,000,000 lives, rather than prematurely ending them, as statisticians had confused the + and - signs in their calculations.
4. New research by Historic England has found that Henry VIII had more wives than previously thought, which could result in a serious change in the way the Church of England functions.
5. Abraham Wald’s Bullet Hole Problem, according to new estimates, has been found to be misplaced. Armour was incorrectly applied to airplanes, leading an increase of 2% of casualties.
6. The number of Popes has been revised by the Vatican. The Great Western Schism has been corrected to the Somewhat Discord, reducing the number of overall number of pontiffs.
7. Protestants are in shock, as Martin Luther’s 99 Theses has been revised to 97, fundamentally shaking the Western Order and theology as clerics and theologians know it. Indulgences are back on the table for the Church of England, plugging their fiscal gaps.
8. Famous rapper Jay-Z has miscalculated how many problems he has, sending shockwaves through the charts.
9. After new documents came to light, the 1922 Committee has discovered that it was founded in 1925, undermining a great deal of its power.
10. The number of Disciples has reduced by 1, following a late night meeting of the ONS (the Office of Nazarene Studies).
The revisions by the (actual) ONS are, of course, welcome news for all of us. However, this is a severe blow in confidence in the machinery of government - hopefully the ONS can take more accountability for its statistics, given how much they influence day-to-day government decision making.