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Transcript - Episode 11: Financial Services in a post-Brexit world

Gaenor Bagley: Welcome to the next episode in our series of Beyond Brexit podcasts. Today we’re discussing the future for Financial Services in a post Brexit world.

I’m Gaenor Bagley, PwC’s head of Corporate Purpose and I also chair our EU Steering committee. I am joined by Andrew Kail, Head of Financial Services here at PwC and Mark Hoban, board member at the CityUK.

Mark and Andrew, CityUK and PwC launched a really interesting report over the summer, setting out a new vision for the UK’s Financial Services. Actually, with my role, it seemed to be talking about the purpose of the Financial Services sector. Are you able just to give me an overview of, the kind of, some of the key findings?

Mark Hoban: So I think that, at the heart of it was, a ‘how does the sector respond to the challenges that it sees around it’, not just Brexit, although Brexit is front of mind for many people, but the emerging digitisation of financial services, the growing threat from offshore financial centres in Singapore, Hong Kong and new financial service centres we don’t know about it yet in Africa or the Middle East. But also what was, I think, driving it very strongly was the sense that the sector had lost the trust of people - and the work that PwC did with the citizens jury brought that home - and that to recreate itself, to transform itself, the sector needed to rebuild those gloves of trust and to demonstrate it was there to serve its customers, whether that’s you and me going into our local high street branch, bank branch or insurer, or whether it is great multinational seeking to trade across world. So trying to recreate that sense of trust and that sense of identity, why is the sector here, what it’s for and where, and whose purpose it’s there to serve was really important in driving the report.

Gaenor: Yes, that’s really interesting. But I could say that surely you were always focusing, the industry was always focusing on its customers. So what did the report say that the industry actually had to do to change, in order to become more trustworthy, if you like?

Andrew Kail: Yeah, I think as Mark says, what was interesting about this report, I think other reports produced by the industry have often being self-, could be self-congratulatory, or talk about the importance of the sector - be it tax revenues, or employment numbers. What’s really interesting talking to companies, when we did this study, was them reflecting there has been a need to rebuild that trust with customers and find their purpose and that might be formed out of a view that there's been certain scandals and therefore the public at large, you know they react to those scandals or actually you know the consumers don’t really understand the products, and therefore there is a lack of trust not out of any necessary scandal but also they just don’t trust the underlying nature of the service. So, I think the companies that we spoke to in this survey really recognise us, as well as responding to Brexit, technology and geopolitical type of challenges, really engaging with their customers on a day to day basis providing services they understood today, but recognising buying needs were going to change going forward, they had to invest in trust in a quite a significant way, to drive that sustainability.

Gaenor: Yes, absolutely

Mark: I think we should just emphasize the point that this was something that came not just from customers, but from bank CEOs and chairs that PwC interviewed.  So it wasn’t seen as being imposed upon the sector from outside, the sector saw it was fairly in itself and wanted to correct. I think that’s really important, because I think that recognition that they want to change actually is really important. Because if they don’t want to change, then nothing will happen – so, the leadership is right behind us.

Gaenor: Yes, yes – so, as well as the industry having to change from its own sort of motivation, of course, as you alluded to, there’s lots of external factors, Brexit being one of them; there seems to be so much uncertainty about both timing and kind of the actual details. What do you think the industry should be doing to really maximise its potential against that background?

Mark: So there are a couple of things I would say. First of all, businesses need to be ready for Brexit. People can’t put off their plans for relocation services whether that’s important to serving their customers in the future. But I think that Brexit is only one challenge and I was talking to the CEO of a bank who said to me, you know, it’s really important, Brexit, but the two things that keep me awake at night are digital and Chinese banks. And I just thought that struck me as a very powerful insight, that yes, you must prepare for Brexit, but you must prepare for future as well - prepare for those of emerging challenges.

Gaenor: Yes that’s interesting. Well, you mentioned China, you mentioned Singapore earlier: Andrew, what’s your sense, do you think that in whatever changing world we’re going into that London will remain to be the, kind of, financial hub that it is now?

Andrew: I think it’s an interesting question, if the question is will London continue for the foreseeable future to be a global financial hub. I think, without a question, notwithstanding the challenges of Brexit or other such factors, changing what’s been built over hundreds of years is going to take a lot of time. There is no, certainly within Europe, no centre that could replicate what London does any time soon.

So, I think we are looking at a timing issue but there is a threat, we see, if you go back through history and you see other centres have those challenges, so we certainly can’t be complacent. But I think as Mark says it is critical now that companies plan for the future and that’s investing in talent, it’s investing in technologies and customs and products and services etc. But certainly in the context of the Brexit, companies are having to activate those contingency plans because they don’t currently have the certainty today particularly over transition.

So, I do think we face a period of time, measured in years, where we need to evolve to what life will become post-Brexit, which is what the study tried to focus on, but the here and now for the chief executives in the companies is, how do I respond to an unknown which is exactly how will Brexit impact the country and exactly how will it impact my company?

Gaenor: So, you’ve talked there about, you know, a kind of very confident, flexible way of dealing with the international challenge. What I thought was really interesting about the report was the way it talked about financial services throughout the UK and actually, almost if we did nothing, that’s likely to change quite significantly. Did I read that correctly?

Mark: You did and there are 2.2 million people working in financial and related professional services, two-thirds of whom are outside the M25, but when you look at where the value is created, it is predominantly in London. Now, one of the big strengths of this report is a clear vision for how we ensure that centres outside London grow and how they can generate more value. So it’s not just a back office function that’s happening in Birmingham or Bournemouth or Belfast or Glasgow, it’s front office, it’s middle office, it’s the professional services, it’s the lawyers, the accountants, who support and sustain these operations - and I think that’s one of the transformative things about this: you can’t just assume it will be London in the future that will provide the core of the UK as a global financial centre, it has to happen at a regional level as well.

Andrew: I think what’s really powerful, if you look at the report, it talks about a 16 billion impact on financial services - as Mark says, much of which will sit outside of London. If you apply the multiplier effect of what a more efficient financial services sector could do to the economy as a whole then that becomes 43 billion, so the dividend here of taking this approach is very significant.

Gaenor: Yeah that’s really interesting, I thought it was really interesting that the growth rates outside London were really quite dramatic, so if you think the impact that will make on Manchester or wherever that’s really important. So, another kind of Brexit-related issue is obviously talent, and you know, I know from my client work, I’m sure you’re the same Andrew, that you know, London attracts people from all around the world but also from Europe - and the financial services industry seems to be ahead of others - how is it reacting to the uncertainty about the flow of talent, where talent is going to come from?

Andrew:  When we did the report and we were speaking to the companies, they identified a multitude of factors that were obviously important to them going forward, but, without question, the single most important factor was access to talent.

Time and time again, chief executives were saying that if we don’t create and sustain an industry, where the very best people in the world want to work in this industry from wherever they may, sort of originate, then the industry is under threat. So I think what we tried to do with the report is explore how we might do that, and I think in quite an innovative way, came up with the idea of, for example, the Digital Skills visa, where recognising the importance of the Fintech sector, the ability of technology to transform this industry - without those world class skills working in the industry, in the UK, London or the regions, the industry was going to suffer. So, the idea of a skills visa that provides certain natural advantages, will allow talent to come here and stay, I think is a very strong recommendation and one that would really make a difference.

Mark: So do you think we should just remember that and that’s the importance of business to develop their own talent as well. We can import skills that we need and sometimes I think over the last few years we’ve been right upon the markets for skills, we bought them as we needed them, we talk in the report about the need to develop things with universities. Some very good examples in Belfast for example the relationship there between businesses and universities. Firms are paying a lot now in the apprenticeship levy, so how would they use apprenticeship levy to recruit apprentices who perhaps don’t want to go to university or use that money to retrain older workers. And so I think it’s a combination of having the right immigration and migration policies in place, but also making sure we grow our own talents as well for the future, particularly to meet the digital skills that we need for the future.

Gaenor: Yes, so that’s was what was really interesting about the report, there’s a lot of dealing with the, actually how can the industries themselves not solve the problem, but take responsibility for adapting to this changing world across a whole range of areas. Do you think that we’ll start to see announcements coming quite soon, given the point about the clock ticking, we’re heading towards 31 March 2019, about some members of the industry actually taking some quite dramatic moves in reaction to Brexit or other changes they see coming?

Mark: I think people are doing it slowly and steadily and quietly – and so, people are putting into place their plans, people are implementing their plans, and you’ve seen people announce relocations, you’ve seen banks move to Frankfurt, insurers to Brussels to Paris, asset managers from Dublin to Luxemburg. This is happening and no one is going to just stick their head above the parapet and say “and we moved X thousands jobs this week” - but it is starting to happen and we should be very alive to the fact that the longer we take to get a transition deal, the bigger the impact is going to be, in an adverse sense, on the sector.

Gaenor: Yes absolutely, absolutely

Andrew: I think a factor that’s related to that, if we cast our minds back to that time before Brexit, the issue was grappling with a whole number of issues that we cover in the report - and businesses were responding in certain ways and that was attacking their cost base, it was looking at their business model, and of course, that meant moving people around internationally. So Brexit, whilst it’s a hugely headline-grabbing topic, it’s just another factor that these businesses are now putting into their operating model to decide, you know, how and where they organise their resources.

Gaenor: So, the questions are finished then. If you were able to summarise, what would you each say was the key message of the report?

Mark: So from my perspective I think it’s this - that the industry has to change for it to remain relevant and for it to continue to grow in the future, but it can’t change simply by itself. There is actually, it needs the government, at central and local government level, and regulators to work with it, to bring about that change. So what are the barriers to grow that we need to remove, who is going to help to meet the skills gap, to get the right migration policy, and the right infrastructure? So, at the heart of this is a plea, by the industry, to work in partnership with government and regulators, so we actually continue to see the UK being a global financial centre.

Gaenor: Absolutely, I think that’s very clear

Andrew: And for me building on that, which I completely endorse, is this need for the industry to rediscover the trust in society. I think financial services products are incredibly important. I’m not sure consumers always realise the importance of them until they are reminded of that fact, but the industry has such an important role to play in society, rebuilding that trust with its customer base for me alongside the partnership is critical.

Gaenor: Yes very good point, very good point to put it together. Thank you very much to both of you - that was really an interesting discussion. And thank you to everyone for listening. Please sign up for further episodes of our podcast and you can listen to past episodes by logging on to our website


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