Capital Markets Corporate

May 10, 2019

Our Weekly Newsletter

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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.

Cashless Sweden urges citizens to hoard cash

Britain may be edging towards a cashless society, but recent developments in Sweden – one of the most advanced nations for digital payments – suggest this might not be a smooth transition. The Swedish government has issued guidance to every home advising residents to start stockpiling cash in small denominations in case electronic payments systems are derailed by power cuts, a cyber-attack or future war. Natalie Ceeney, who chairs an independent review into access to cash, told a conference last week that Sweden’s big message to the UK is ‘Plan now before you get into a mess.’ (From The Times, 5th May 2019)

Mifid II sparks sponsored research boom

In response to  new Mifid II rules, up-and-coming companies at the lower end of the stock market are footing the bill for “sponsored research” which promotes the company as a stock worth investing in. This research by smaller brokerages gives companies greater exposure at a time when large fund houses have slashed their research budgets – but brokers must use clear labelling to differentiate between sponsored and standard research so investors know what they are reading. (From The Financial Times, 7th May 2019)

Buy-To-Let tax warning

Thinktank the Institute of Economic Affairs (IEA) has accused government of unfairly making landlords the scapegoat of the UK’s housing crisis. Its new report argues landlords are being discriminated against compared to owner-occupiers and warns taxation changes to rental properties – which could see landlords face an effective tax rate of more than 100% after 2021 – will ultimately lead to higher rents for tenants and a fall in the supply chain of rental housing. (From The Daily Telegraph, 7th May 2019)

Interest-only home loans make a comeback

After all but disappearing in the wake of the 2007 financial crisis, interest-only mortgage products are making a comeback. Moneyfacts analysis suggests the number of interest-only products has almost doubled in the past six years. However, those customers interested in this type of loan will have to jump through stringent affordability hoops to qualify and must be certain they have a plan in place to repay the capital once the term ends. (From Moneyfacts, 7th May 2019)

John Lewis adds cyber guards to home cover

In a sign of the new risks faced by modern households, John Lewis has added cyber-fraud cover of up to £50,000 to its specialist home product. This will pay out even in the event of push payment fraud; banks frequently refuse to reimburse victims of this type of scam as the individual unwittingly authorised the payment themselves. Though John Lewis’ policy is aimed at higher-value properties, the move could see other insurers follow suit if there is evidence of consumer demand. (From Moneywise, 7th May 2019).

Savers choose to keep their money close while Brexit looms

More British savers are opting against locking their money away and are instead keeping their funds close by as uncertainties around Brexit linger on. But is this an opportunity for the financial services sector to communicate the benefits of a smart investment strategy?

There is little doubt that a ‘flight to safety’ is happening in the UK. The amount of cash invested in easy-access accounts rose 2% in the year to March to £652bn, accounting for 77% of all high street savings according to UK Finance. In contrast, cash saved in fixed-rate accounts fell 5% to £197bn.

Savers paid £5.4bn into easy-access accounts in the first two months of 2019 — nearly ten times the £572m put into bonds, and more than double the £2.2bn that went into cash ISAs. UK Finance said the trend reflected “the preference among consumers to keep cash close to hand amid ongoing economic uncertainty”. Investors are clearly unnerved.

This is not surprising considering that more than a third of people think their finances will get worse after Brexit, with 27% fearing their income will reduce as a result of the impending EU divorce. In case of an emergency, many Brits are forgoing financial products and services – while 62% surveyed in a recent report have a savings account, more people store their cash in a jar than in an investment ISA (21% and 14% respectively).

Even savvy investors are parking more cash, with the cash ISA having proved more popular so far this year with those clients using a financial or wealth adviser. In March, some advisers reported that clients had postponed investment decision-making until after the initial March 29th “Brexit Day”, only to find the picture no clearer once the exit was delayed. Figures show investors put £1.1bn into cash ISAs in January 2019, compared with only £100m in January 2018.

This ‘flight to safety’ is causing frustration among advisers who have not been shy in noting that now may actually be an opportune time to invest in undervalued British small and mid-cap companies. Experts note that listed UK firms could be seen as a prudent investment as the FTSE all-share could be relatively immune to the near-term tariff hikes that Brexit might force upon many sectors such as agriculture. Other experts note that the best way to protect against Brexit is to move money far away from Britain itself and invest in global stocks and bonds.

Perhaps in these nervy Brexit days, it’s time for the financial services industry to remind savers and investors of some of the key tenets of prudent money management, such as the benefits of a diverse portfolio and the importance of a long-term approach. Uncertainty will prevail until the Autumn, so the time is now to convince customers to achieve a better “Brexit Balance”.

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