Month: November 2020

As the UK is set to depart from the frameworks of the EU, there is concern amidst London’s biggest share trading venues surrounding the topic of where they may be able to buy and sell European stocks and where they may not.

The dilemma

In order for trading to continue as normal, the EU would have to recognise that the UK and its exchanges are operating with rules and regulations that can be considered ‘equivalent’ to those under which the EU functions. Alasdair Haynes, the Chief Executive of Aquis Exchange who hold 5 per cent of the European Market, is very clear about his view of what is to come. He says, “there will be no equivalence. People are living in a pipe dream if they think it’s going to happen. People are getting prepared to move business over.” 

A declaration of no equivalence means that some EU based institutions will be prohibited from trading in London. That trading will be moved to other European cities, two popular examples of which are Amsterdam and Paris, which leaves London at serious risk of losing its dominance as a share trading centre. 

Currently, London handles up to 30 per cent of the European daily market, the daily market as a whole being worth €40billion. As exchanges opt to move their venues elsewhere in Europe to avoid the implications of share trading obligations (which determine which exchanges investors can trade their liquid stocks in), London’s grip on that 30 per cent will inevitably fall. 

Announced Plans

The London Stock Exchange Group’s share trading platform Turquoise has confirmed through a spokesperson that they now intend to open a base in Amsterdam at the end of November, from which it will trade EU shares. Cboe Europe, the largest stock exchange in Europe who are currently headquartered in the UK, has submitted their application to also establish an entity in the Dutch capital. TP ICAP, who are also headquartered in London at present, has begun discussion with French regulators with regard to setting up an EU base in Paris. While all three of these exchanges intend to keep their London venues where they are, their new plans are indicative of the overriding sense of uncertainty over the shape that Europe’s cross-border share trading market may take post-Brexit. 

David Howson, president of Cboe Europe, stated his concern by saying that “we need to be mindful Brexit doesn’t result in trading reverting back to national exchanges and undo all of the good work we’ve done to bring competition to [the] European equities market over the past decade.” 

Is cash still king? As contactless payment options have grown dramatically in availability and popularity in recent years, we have seen a reduction in the use of cash as a result. While there has been a steady decline in cash withdrawals, and the use of cash transactions in general was to be expected as new technology becomes more widespread, the unprecedented events of 2020 have resulted in a marked acceleration in this decline. The UK in particular provides a stark example of this trend, with the use of cash declining faster than the European average.

Where did the decline begin?

According to the banking trade body, UK Finance, debit card payments overtook cash payments for the first time in the UK in 2017. This moment was indicative of a wider trend, with cash payments falling steadily since 2012 and debit card payments rising at a similar rate. Contactless payments, too, have seen a steady increase in their usage since their introduction in 2007. They broke the £1bn in annual transactions landmark in 2013, seeing a further boost in 2014 when Transport For London introduced Oyster card readers that accept contactless bank cards. By 2018, over 60% of people over the age of 65 were reported to use contactless payments, which is a considerable number of the, historically, least tech-savvy portion of society. In the last three years alone, cash usage has effectively halved. In September 2017, there were 170 million withdrawals from cash machines; in September 2020, there were just 88 million. 

That is all to say, the decline in cash withdrawals and transactions, and particularly relative to the use of other forms of payment, comes as no surprise. The speed at which that decline has accelerated, however, is something of note.

Covid Acceleration

The data from Link, who operate the largest network of free-to-use ATMs in the UK, suggests that weekly ATM withdrawals since the first lockdown was lifted are a third lower than they were before the lockdown began. Accenture has reported that between 17th and 25th March 2020, cash usage in the UK declined by 50%. The report has forecast that across the whole of 2020, compared to 2019, the decline will look more like 40%. With the rest of Europe forecast to see a 30% decline in cash usage, that’s a considerable number. That reduction may well be here to stay. As consumers change their behaviours, and opt to avoid handling cash to avoid physical interaction with others throughout the pandemic, they may not return to older habits as time goes on. Time will tell what lasting impact the pandemic has on the UK’s preferred methods of transaction, but as it stands, the future looks largely cashless.

At the virtual Conservative Party Conference on 6th October, Prime Minister Boris Johnson gestured towards a plan in the pipeline to introduce 95% Loan To Value mortgages in an attempt to reinvigorate home ownership and in his words, “help turn generation rent, into generation buy.” 

While the details of this plan remain unclear, the PM declared that there were up to 2 million potential homeowners who would be able to afford repayments but do not currently have access to a mortgage. His proposed solution is to give young, first time buyers the option of fixed rate, long term loans of up to 95% of the value of the home.

Why is this new?

Up until the pandemic, there were many lenders who were providing 95% LTV mortgages, albeit generally requiring a guarantor. Due to the economic uncertainty and job insecurity accelerated by COVID-19, those lenders have chosen to rescind these products which require lower deposits. The result of this is that would-be first time buyers who have been saving for their first home, no longer have a large enough deposit to secure their mortgage.

The lenders, then, will need good reason to return these low deposit mortgages to their offering. The PM has suggested reducing the ‘stress tests’ that have been in place since the 2008 financial crisis, meaning would-be buyers would have to tick fewer boxes to be considered eligible and able to afford repayments.  

This relaxing of stress tests exposes the lenders to a risk of bad debts, should the economy take a downturn. To combat this, the PM has suggested a state guarantee to lenders. This would most likely come in the form of underwriting the debt; with the average home in the UK costing £220,000, underwriting 10 per cent of a deposit for 2 million buyers would leave the government and the taxpayer liable for £44billion.

The potential knock on effects

A side effect of the temporary reduced rates of stamp duty and the subsequent inflated house prices is that first time buyers are currently hesitant to commit to high LTV mortgages, where they are able to. They fear that they’re at risk of finding themselves in negative equity upon the return of full rates of stamp duty, and the possibility of reduced property value that may come with it. With reduced checks to validate who’s eligible for these mortgages, we could also see a larger portion of new buyers unable to afford their repayments, turning generation buy into generation foreclosed. 

While the state guarantee to lenders could incur a potential risk of £44billion of the public purse, experts believe this to be a high end estimate, and unlikely in practice.

95% LTV mortgages were available before the pandemic, and yet owning a home remained a pipe dream for many. Why this would be different now is up for debate, but time will tell.