Last week, the Scottish Board of Trustees at a small local bank closed down the UK’s last remaining independent savings bank.

It was neither a shortage of capital nor a stampede of customers withdrawing deposits that led to the demise of Airdrie Savings Bank – but rather the wider implications stemming from the structural changes which have swept through the UK banking industry.

What doesn’t kill you makes you stronger

Following the collapse of Lehman Brothers in 2008 and the global financial crisis that ensued, three key forces have shaped the competitive landscape of financial services both in the UK and abroad.

Firstly, a decade of unconventionally low interest rates and sluggish growth has proved especially troublesome for many financial institutions. Lending rates have been squeezed, marking a less profitable period for many banks.

At the same time, the explosion of fintech and digital banking has made financial services even more competitive for traditional operators. Automation has presented an attractive, lower cost alternative for consumers. The result for wealth managers is the requirement to demonstrate greater value in the advisory model or deliver more competitive pricing.

Thirdly, the raft of new prudential and regulatory reforms that followed the high-profile public bail-outs of several high-street banks have had an instrumental impact on the reporting requirements of many financial institutions.

From recovery and resolution planning, to the implementation of the Financial Advice and Market Review – banks and wealth managers now have to adapt to a more stringent regulatory regime, resulting in significant impacts on their cost base.

These changes are placing existing business models under scrutiny – and the impact, in some cases, is having a more tangible and disproportionate effect on some players than on others.

Heavier burden for smaller wealth managers

On the regulatory front, a key structural reform to emerge from the global financial crisis is the requirement for banks deemed large enough to pose a systemic risk to the UK financial system to ring-fence their retail banking operations from riskier parts of the business.

Interestingly enough, this key piece of legislation doesn’t isolate ring-fenced divisions from in-house wealth management services. The Prudential Regulatory Authority (PRA) spearheading this initiative has indicated that ring-fenced retail banks will still be authorised to transfer capital to other parts of their business, including wealth management divisions.

For large diversified players in the market, such as Barclays and HSBC, retail banks will therefore continue to offer a supply chain of new and emerging HNW clients for their wealth businesses, while also providing capital to enhance market competitiveness and meet new regulatory costs.

On the other end of the spectrum, investment management firms without the plethora of retail clients or group-wide profits to tap into will continue to face a disproportionately heavier burden of rising costs to meet new regulatory requirements.

For example, 2014 pre-tax profits at Charles Stanley, an investment management firm, fell by as much as 10% off the back of costs associated with implementing the Retail Distribution Review (RDR); while Brewin Dolphin was forced to raise fees across a number of products and discontinue investment services for clients investing less than £150,000.

Problem shared is a problem halved

So perhaps unsurprisingly, one of the trends we’ve seen emerge is the consolidation of UK’s fragmented financial advisory sector.

In the last 12 months alone we’ve seen Societe Generale merge Kleinwort Benson with Hambros – two of the oldest names in British banking, Cazenove Capital Management complete its acquisition of C Hoare & Co’s wealth management arm, and the pan-European private banking group KBL taking over the Netherlands’ private bank, Insinger de Beaufort – a bank that is also active in the UK and one that not too long ago acquired Brown Shipley and Hampton Dean.

This is therefore a trend that is likely to continue over the coming years, as pure players look to upscale operations to tackle rising costs.

What next?

The issue ultimately becomes one of size for many established players.

Because the regulatory regime is unlikely to abate any time soon, financial institutions find themselves frantically trying to enhance middle and back office operations to meet imminent big ticket reforms such as MiFID II and the GDPR.

And the demise of Airdrie Savings Bank illustrates just how important scale and continued innovation can be in answering the competitive challenges of today’s evolving banking industry.

 News from the world of wealth:

Increased client activity at UBS drivers strong first quarter results –

How Lombard Odier differentiated itself through impact investing – Euromoney

7IM launches a new managed investment service for financial advisers – Private Banker International

Standard Chartered to increase minimum asset threshold for clients – FT

China’s HNA increases its equity stake in Deutsche Bank – Bloomberg

Thought of the week:

“There are good times and bad times, but our mood changes more often than our fortune.” – Thomas Carlyle

DSC00055Author: Nabil Elhihi, Analyst.

Role with us: Nabil is a recent addition to the Scorpio team and is highly involved in market analysis and client experience projects.

Background: Prior to joining Scorpio in 2016, Nabil worked as an Associate Economist at the Foreign and Commonwealth Office. He has also worked as an analyst at a commodities research and consultancy group.

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