Britain: New Year Prognosis

New but continuing Parliamentary ‘term’…

The house returns for the New Year on Monday 8 January. Resolution and resolve are indeed the nouns that spring to mind. Against some predictions, Theresa May remains in post. Suffering from clear election-fatigue over the last couple of years, the country is hoping to avoid another trip to the polls, after two general elections in quick succession, plus a spate of regional and Council elections on top of the now infamous EU referendum Brexit vote.

Economic fundamentals?

This time last year, the view was that growth would slow to 1% but growth is expected to have been a reasonable 1.5% for 2017. This year, actual growth could confound the worst predictions, including those of Chancellor Philip Hammond, when he unveiled alongside his budget official forecasts of only 1.4% UK growth for 2018. This is despite some worrying forecasts that the UK could come bottom of 32 OECD countries for wage performance in 2018, according to a TUC study of OECD figures. British workers are expected to see their earnings decrease by 0.7% in 2018.

The consultancy Capital Economics reckons growth could be as robust as 2.2% in 2018, seeing few reasons why resilience among consumers to keep on spending should come to an end. The recovery in the global economy should lift British exports too.

While, British households suffered from sterling’s rapid devaluation in 2017, this is gradually being washed out of the system, and the Bank of England believes inflation probably peaked just above 3% in the final months of 2017 and is on track to fall in the coming months.

But, given economic uncertainties as Brexit talks intensify, the Bank of England looks set to sit on its hands in 2018 – which will help the most hard-pressed households with cheap borrowing costs. At most, interest rates may be nudged higher from 0.50% to 0.75%. It should achieve its target of 2% for the consumer price index (from a peak of 3.1% in November).  Just a third of households have a mortgage on their home and the majority have a fixed rate deal, meaning they will not see any immediate change until the term of their mortgage comes to an end.

Food for Brexit thought

It’s been quiet so far on the Brexit front, but on 4 January the Government announced that farmers will receive payments for providing public goods like community access and planting meadows, in lieu of EU subsidies, which will remain at their current EU level until the 2022 election. Meanwhile, a report published by the All-Party Parliamentary Group on Agroecology (APPGA) warns Brexit trade deals could threaten UK food security if farmers were undermined by future trade deals which permitted imports of food produced with lower welfare or environmental standards.

Meanwhile, former political grandees have been pontificating on Brexit. Most vocal has been Tony Blair, who in a BBC New Year interview (exacerbating Labour’s muddled and disunited position on Brexit), said that “the British people should get another say on Brexit”. He will oppose Brexit “whatever the situation” and believes the deal being negotiated will not satisfy those who voted for it, adding that, “Article 50…can be revoked at any time up to March 2019”.

2018 City kaleidoscope?

It’s a mixed pattern and perspective for the City in 2018. There is much to preoccupy and occupy the City on political, economic and regulatory fronts this year, both from Europe and the UK.

There’s a flurry of EU implementation of Directives and Regulations in January, which started on 1 January with the effective application of the Benchmarks Regulation which imposes new requirements on firms that provide, contribute to or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices.

Plus, the Packaged Retail and Insurance Based Products (PRIIPS) Regulation also came into force on 1 January and requires all intermediaries provide retail customers with a short, standard form Key Information Document (KID) before they invest in any PRIIPs.

The Markets in Financial Instruments Directive (MiFID II) came into force on 3 January. This has far reaching consequences and is poised to transform Europe’s financial industry. The review, which is the EU’s most determined and controversial yet, seeks to apply lessons from financial crisis, inject more transparency, and improve investor protection. The new rules, which shine a spotlight on the commodity, derivatives and securities markets, are already a year late due to their complexity. Regulators had to issue eleventh-hour guidance to financial firms to avoid freezing up trades as well as calming nerves of those not yet fully compliant.

Closely following this on 13 January will be the application date of the Payments Services Directive (PSD II), which is fostering many opportunities for the FinTech sector and other players taking up the opportunities accorded by the new ‘open banking’ environment. There will be wider consequences too for City regulatory and legal teams with the application of the General Data Protection Regulation (GDPR) on 25 May which will introduce strengthened data privacy requirements, disclosure obligations and new powers to levy onerous fines for data breaches.

On home turf, the FCA is bringing into effect the voluntary led package of credit card remedies on 1 April. These measures, designed to change how consumers manage credit card behaviour, will cover promotion expiry and payment date changes. This will be followed later in the year (1 July) by the publication of wider remedies, which will cover borrowing prompts, including a digital credit limit notification.

There is also a fair degree of activity on the investment front. On 1 July the CMA will make a provisional decision on its investigation into the investment consultant and fiduciary manager market which could have far reaching consequences for the sector. On 1 August, ESMA publishes its first set of data for Systematic Internalisers (SI). This is a public register, introduced as a consequence of MiFID II, providing a list of all SIs, in respect of shares admitted to trading on a regulated market. Investment firms must comply with this and submit their first assessment by 1 September. ESMA is also due to provide a second opinion on the functioning of the EU and non-EU AIFMs in the UK on 22 October.

As the year progresses, and Bank of England Governor Mark Carney’s impending departure in June 2019 looms closer, City investors and politicians will start to clamour for clarity on his replacement, which could lead to uncertainty over the direction of monetary policy.