"Barclays, buy-to-let and boosted growth: Janet Hontoir's March news round-up"

01 April, 2016
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From CPI and coffee to consumer spending and churches, take a look at some of the biggest financial news stories of the month, compiled by Janet Hontoir, Academic Course Leader for ifs University College's BSc (Hons) Banking Practice & Management.


1 US growth boosted by consumption

Statistics from the US Bureau of Economic Analysis show that US real GDP rose at an annual rate of 1.4% in Q4 2015, giving a rate of 2.4% for the whole of 2015. This reflects positive contributions from consumption, residential fixed investment and federal government spending and also from a fall in imports, although these were partly offset by negative contributions from non-residential fixed investment, exports, private inventory investment and state and local government spending. Consumption spending was particularly positive, reflecting the improving labour market, rising wages and low oil prices. However corporate profits fell by 11.5% in Q4, with many companies being hit by the low oil prices.

2 Oil price stabilising, says the IEA

The International Energy Agency (which coordinates the energy policies of industrialised nations) says that oil prices are stabilising and may begin to rise again, mainly due to a fall in supply. The US and other countries have reduced their output and many oil companies have cut back their exploration investment, meaning that future supply will also be lower. The IEA expects non-Opec producers to cut their output; and the contribution of Iranian oil after the easing of international sanctions has been less than expected.

On the other side of the market, demand has risen in response to low prices and China and India have been stockpiling supplies. However the IEA believes that 'the risks to global oil demand growth are almost certainly on the downside' and it expects flat growth during 2016 from the US, which is the world's largest oil consumer. Indeed, a rise in the oil price would weaken demand again.

3   UK trade deficit narrows 

ONS figures show a narrowing in the UK’s deficit in goods and services in January, to £3.5bn from £3.7bn in December. This is attributable to a narrowing gap in the trade in goods, in particular in unspecified goods and fuels; but the deficit in other goods widened. However, taken over the longer period of the quarter to January 2016, the deficit on the trade in goods widened by £1.5bn to £32.3bn; the fall in goods exports (particularly chemicals) was partially offset by a fall in imports of goods. Over the same period the surplus on trade in services narrowed by £2bn to £20.5bn. The total trade deficit for 2015 was £36.6bn. In January 2016 the deficit on trade in goods with EU countries widened by £0.7bn to £8.1bn; and narrowed by £0.8bn to £2.2bn with non-EU countries it narrowed. But the current account deficit for Q4 2015 was at a record high of £32.7bn; for the whole of 2015 it was £96.2bn or 5.2% of GDP.

4   Changes to the CPI shopping basket

Every year the Office for National Statistics reviews the items which are included in the 'typical' shopping basket reflecting consumer expenditure in its compiling of inflation figures. The items included must represent current consumer spending patterns. Around 180,000 separate price quotations are used every month, covering around 700 consumer goods and services. Here are a few of the main additions and subtractions made in 2016.

Additions include coffee pods, pouches of microwave rice, lemons, computer game downloads and women's leggings. Large chocolate bars replace small ones and boys' t-shirts replace boys' branded sports tops. Seasonality is reconsidered, with women's short sleeved or sleeveless formal tops being included all year round instead of in the summer only. Removals include rewriteable DVDs and CD-Roms and entry fees to nightclubs. Cooked sliced turkey has been replaced by cooked sliced poultry and gloss paint and non-white emulsion have been replaced by a combined paint item.

5   Barclays profits fall

Barclays profits for 2015 fell by 2% to £5.4bn, reflecting a PPI provision of £2.77bn during the year. This will result in a cut in dividends. More fundamentally, the bank aims to simplify and restructure its business by 2019 by forming two main core divisions – Barclays UK and Barclays Corporate and International. There are plans for reducing its 62% stake in Barclays Africa over the next few years. Barclays also reduced its bonus pool for staff in 2015 by 10%, meaning that this has been cut by 50% over the last 4 years.

6   Bank of England consults on new buy-to-let rules

The Prudential Regulation Authority is concerned that lenders of buy-to-let mortgages might relax their underwriting standards [PDF] in order to meet their growth plans. So it is seeking views on its proposals to change the minimum standards which lenders should meet. It is proposing that all firms should use an affordability test when assessing a BTL mortgage contract. There would be an interest coverage ratio (ICR) test, which is the ratio of the expected monthly rental income from the rented property to the monthly interest payments. There would also be an Income Affordability Test (IAT) where the borrower expects to support the mortgage payment with personal income. In all cases, an interest rate affordability stress test should be carried out to ensure that the borrower will still be able to afford the repayments if and when interest rates rise, and assuming a minimum interest rate of 5.5%. The PRA expects that these restrictions will result in a fall of between 10% and 20% in the number of new mortgage approvals by Q3 2018, although it also expects that the BTL market will continue to grow. 

7   Financial Advice Market Review addresses the 'advice gap'

The Financial Conduct Authority and HM Treasury have published the Financial Advice Market Review, a joint report on financial advice. This aims to identify ways of making the UK's financial advice market work better for customers and it looks at specific issues, including saving in a pension plan, taking income in retirement and investing. It makes recommendations under three headings:


- Affordability: customers with small amounts of money cannot always afford to pay for face-to-face advice and the Report recommends more streamlined services; 
- Accessibility: people often lack confidence on making financial decisions and the Report recommends that information should be made more easily available and that 'nudges' should be developed to encourage customers to seek support at key stages of their life;
- Liabilities and consumer redress: advisers are discouraged from giving advice because they are afraid of future liability and the Report makes recommendations on increased clarity and transparency in how the Financial Ombudsman Service deals with consumer complaints.

8 FCA investigates closed-book insurance products

The FCA has reported the findings of its review on how insurance firms deal with their closed-books (life insurance products that are closed to new business) and on whether they are treating their long-standing customers fairly. It finds that customers who are not seen as central to a business are treated only in strict compliance with the terms and conditions of the contract, with no further action being taken to ensure a fair outcome. It also found that exit fees are sometimes charged without the customers being told, and these can outweigh the growth in the fund. The FCA wants all customers to be kept well informed about their products, including the performance of the policy and the charges incurred, and firms must be proactive in applying fair treatment in these areas. Customers should not face unreasonable barriers or unfair charges if they exit or stop paying into a policy. 

9 Innovative Finance ISAs to be launched

On 6th April 2016, the UK government is introducing the new tax-free Innovative Finance ISA, which will be available via peer-to-peer (P2P) lending platforms. Savers will be able to use some or all of their annual ISA investment allowance to lend in the P2P market in return for tax-free interest and capital gains. The new IFISAs are somewhere between a cash ISA, which is safe but low-return, and a stocks and shares ISA which carries a higher risk but which can earn a higher interest rate. The money invested is lent to P2P borrowers and is spread over a number of individuals in order to increase diversification.  The rates promised by P2P lenders on IFISAs could be higher than those paid by banks or building societies cash ISAs but the money invested will not be covered by the Financial Services Compensation Scheme. 

10 Ethical financial services promoted by religious groups

The Church of Scotland and the Islamic Finance Council UK are to form a joint venture to create ethical financial services which will be open to everyone, 'regardless of religious or ethnic background'.  It will 'examine the practical commercial viability of new models which can tackle inequality and poverty' and is based on a shared belief that 'existing financial institutions have in recent years lost their social conscience'. Both organisations agree that the current system is wrong and are concerned to promote ethical finance which will 'make a tangible change for those most affected by poverty' (CoS, 2016) and to 'allow an avenue to address the aspirational dissatisfaction growing within the industry' (IFC, 2016).
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