Could a new upstart be about the join the likes of London, New York and Tokyo as a global financial superpower? The Malaysian government would like to think so, at least. Recently it announced bold plans to transform the country’s capital Kuala Lumpur into a major financial centre in a bid to raise its profile and spark greater international trade and investment.

The proposed new financial district, covering 70 acres and featuring 11 new buildings with 25 or more floors, has been dubbed “Asia’s Canary Wharf”. Known as the Tun Razak Exchange (TRX), the government believes this project is the foundation on which Malaysia will compete with regional financial superpowers such as Singapore and Hong Kong.

So is this a dream or can it be transformed into a reality? The Global Financial Centres Index, a research-informed measure of the competitiveness of a range of cities worldwide highlights the challenge that lies ahead for emerging centres like Kuala Lumpur.

In the most recent rankings the city dropped one place to 22nd globally but still featured in the Asian top 10. With London and New York ahead of the pack, Singapore and Hong Kong already in strong positions and the dynamism of Shanghai and Shenzhen to contend with, gaining ground on the superpowers will be tough for Malaysia.

And it may be too tough, unless TRX turns to a more niche approach and builds on the country’s established strength in the rapidly growing Islamic financial marketplace.

Islamic strengths

Demand for Islamic financial services is growing both regionally and globally, and Malaysia has been well placed to take advantage of this. It is Islamic finance that provides Malaysia with its advantage over neighbouring financial centres, and those mapping out the country’s future business model would be wise to play to their strengths.

According to its central bank, Malaysia’s Islamic banking assets total US$168.4 billion, a quarter of its banking system. This in turn accounts for over 10% of the world’s total Islamic banking assets.

The country’s Islamic financial sector is characterised by a robust and shariah-compliant regulatory system. It has a strong sukuk (Islamic bond) market – over 60% of the global total – making Malaysia one of the world’s leading Islamic capital marketplaces. This attracts institutions from across the globe and an associated pool of liquid cash.

Banking on finance

Malaysia is banking on the TRX to be a dedicated international financial hub, promoting Kuala Lumpur as a new nucleus of global economic growth. The project is seen as a crucial to the government’s economic plans, creating the critical mass needed to significantly boost productivity and accelerate Malaysia’s growth. The aim is to become a high-income economy by 2020.

But, if Malaysia is to join the top flight of international financial centres, it must leverage its status as an established Islamic finance hub. And it must address the challenges associated with the supply of high quality human capital.

The performance of international financial centres is underpinned by the quality of people, of the business environment, access to international markets, infrastructure and general competitiveness. To outperform Asian rivals on these attributes will be a challenge; there are continued concerns about the quality and employability of graduates, and while the World Bank says the ease of doing business has improved, there are still problems with infrastructure and general competitiveness. And the country’s ability to access international financial markets may depend on attracting major players away from established rivals.

Authorities are confident, however, that they will be able to attract these new players. The central bank estimates that up to 56,000 new finance industry positions will be needed in the next decade, including up to 40,000 jobs in Islamic finance.

However poor scores in international student assessments, declining English language capabilities and persistent concerns about the employability of graduates do not augur well.

Malaysia still has a people problem. Yes, the government may be able to build world-class facilities in Kuala Lumpur and offer tax breaks and other incentives to companies looking to operate from the new district. And yes, Islamic finance will still give the country a profitable niche to exploit.

But without a supply of educated, English-speaking workers, hopes of challenging regional neighbours in Hong Kong and Singapore may be little more than a Malaysian pipe dream.

This blog post first appeared at The Conversation (see  https://theconversation.com/malaysia-plans-to-be-the-first-islamic-financial-superpower-19922)

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When is a current account too complicated?

Regulators and Government have long expressed concern that many financial products, even very basic ones, are too complicated. But what actually makes products ‘too complicated’?

Complicated current accounts

You can’t get much more basic than a current account. However, packaged accounts now account for around one in five active UK current accounts. Over the past few years, a sharp increase in the availability of packaged accounts have led many to argue that what should be a fundamental financial service is often giving consumers poor value for money, and selling it through over complexity.  The complexity starts with the way these accounts are organised. For a fee of £5 to £20 a month, they offer account holders a number of services from insurance, to preferential savings and overdraft rates. In 2011, an FSA review of the current account market found that most people with packaged accounts had been sold products that they didn’t understand or need.

Despite changes earlier this year, which should have forced banks to check that they sell suitable insurance products, that remains the case today. With three to five products on offer with each account, most often low quality products such as mobile phone insurance, it’s in fact extremely unlikely that a consumer will be able to benefit from all of the services they’re paying for. Piling on cheap services can therefore be said to give these accounts a veneer of value, without actually speaking to the needs of the account holder. In addition, an OFT study from this year found that 40% of packaged account holders had paid for an overdraft in the past year, compared with 24% of those with standard accounts. The OFT had no explanation for that but we can speculate that it may be an outcome of the fact that these products often seem to be sold as a solution to high overdraft fees on a standard account.

In this case, then, we can say that bundling a number of products with different eligibility requirements, term lengths and of unknown (and often unknowable) quality coupled with confusing or opaque pricing of additional services (overdrafts, in particular) make for an over complicated product. Although growth in the number of such accounts indicates that many consumers see some value in these accounts, we can still see that their actual value is often very low.

Is the stagnant market to blame?

When these and other issues with the personal current account market have been discussed by consumer groups and regulators over the past few years, blame has almost always fallen on extremely low switching rates. According to this theory, more mobile consumers will lead to more effective competition and that competition will lead to the simpler products that consumers actually want. Yet, looking at packaged current accounts, that seems hard to swallow. These accounts have been created in an effort to induce consumers to move accounts and, in the context of very low churn, they have  had some success. Consumers are paying for these products because they find them valuable and because, facing a lack of choice, they feel it’s worthwhile to pay for a service they once would have expected for free. Competition hasn’t reduced complexity, it’s encouraged it.

We might soon be able to see if that trend continues in a more mobile market. Last month, a 7-day switching service was launched to remove the complicated back and forth that has long been a barrier to moving accounts. Intervention seems to have had a more positive effect, even in the face of opposition from the banks. The OFT estimates that consumers have saved between £388 million and £928 million since the new 2008 rules, for example.

More complexity

Even the most complicated current account doesn’t come close to many insurance, investment and pensions products. In particular, unlike many other financial products, consumers shouldn’t need to seek advice before taking out a new current account.  Concerns about the complexity of many other products often get tied up in the quality of the advice consumers are receiving at point of sale. These are legitimate concerns. Consumers are currently being encouraged to shop around for better annuity rates if their pension fund gives them the option, for example. These products can determine a pension holders income for decades and the wrong decision could leave the annuitants family with nothing when they die; the quality of the advice on offer is as important as the complexity of the products themselves. However, just as with competition, concerns about poor advice risk being an excuse for industry not to address inherent problems with their products which make them too complicated.

Julia Kukiewicz

Editor of Choose, a consumer information and market research site.

All views expressed are those of the author and do not necessarily represent the opinions of the Centre for Risk, Banking and Financial Services

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https://theconversation.com/reborn-tsb-evokes-memories-of-another-banking-era-18076

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Governor Carney has stressed the importance of all having confidence in the banking system and our work here at the Centre for Risk, Banking and Financial Services would echo the need for high levels of System Trust on the part of consumers. All of our research as available at http://www.nottingham.ac.uk/business/forum/publications.aspx. Our research shows that consumers generally trust banks to be reliable, but are far less convinced that banks have their true interests at heart. It will take more than strengthened balance sheets to overcome such doubts.

The Governor is also confident that the Bank has the tools at its disposal to prevent another housing bubble, notwithstanding that it has pledged not to raise interest rates until Unemployment has fallen to less than 7%. He has just been asked WHEN unemployment will fall to 7% and he says he can’t be certain but there is only a 30% chance of this happening within 2 years and is likely to take 3 years or more. Until this time, he pledges that interest rates will not rise, and states that this will provide certainty for business. Of course, it also provides certainty of a less welcome nature for savers!

Most questions are concerned with productivity and investment in business and the fact that the UK needs to improve its productivity…and Governor Carney is confident that the UK economy has the potential to do better.

You can read the transcript of Mark Carney’s speech on the Bank of England website. 

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We all have a duty to strengthen consumer trust

 By Shane Mullins, CEO, Fiscal Engineers

One of the key aims of the recommendations arising out of the Retail Distribution Review was to strengthen consumer confidence. If we take it as read that this has now been achieved we make a dangerous assumption.

RDR is without doubt a significant step in the right direction, but it will not serve as a cure-all for the near-total breakdown of trust that has been allowed to occur over recent years. Such a serious fracture cannot be healed overnight, and it seems unlikely, to say the least, that a transformation of how our industry is perceived was ushered in along with the New Year.

Sadly, it is easy to convince ourselves that we have done our bit. We might congratulate ourselves on embracing a new dawn. We might salute our willingness, however faltering it may have been initially, to toe the regulatory line. We might believe our clients now have nothing to worry about – “and that’s official”. And we might leave it at that until the FSA hands down another edict. Such an approach can only prove counterproductive. It not only smacks of apathy but relies on the presupposition that consumers will forever be content to exhibit a similar bent for lethargy and disinterest.

Rather than celebrating our industry’s supine ability to follow orders in supporting the RDR, we might usefully ask ourselves why so few of us have ever embarked on comparable initiatives of our own and why it has taken one of the most sweeping and seismic changes in the industry’s history to shake us out of our self-imposed stupor. After all, how many of us have ever paused to think about what “trust” actually means from a consumer’s perspective? One depressingly commonplace argument is that trust is a largely intangible concept that cannot be quantified, but such a premise is, perhaps, misplaced. From our research of industry executives during the Question of Trust Campaign, we found that, while almost universally acknowledging trust as one of the most fundamental issues for their boards to address, very few, if any, were actually measuring trust and engagement among their customer base. “You can’t measure trust” was the typical response.

During the initial campaign year we worked with the Centre for Risk, Banking and Financial Services (previously the Financial Services Research Forum), based at Nottingham University Business School and widely regarded as the UK’s most inclusive body for furthering the understanding of financial behaviour. Since 2005 the Centre has produced the Financial Services Trust Index, the only independent benchmark of its kind in the UK, which draws on data gathered from thousands of consumers who take part in biannual online surveys to gauge perceptions of financial services institutions (FSIs). These FSIs are divided into various categories – banks, building societies, general insurers, life insurers, investment firms, credit card companies and financial advisers – and awarded scores on a scale out of 100. Baseline trust (neither positive nor negative) scores scale points of 50. Anything below 50 demonstrates negative trust and anything above 50 positive or “active trust”. The Index represents a concerted attempt to address and measure consumer trust. Instead of airily rejecting it as some kind of abstract form whose existence can scarcely be verified or substantiated, it has sought to define it, quantify it and measure it. As such, notwithstanding that benchmarking is by no means an exact science, it gives us an invaluable idea of where we stand and how we are viewed. What it has clearly established during the past two or three years is that consumer trust has remained remarkably stable since the global financial crisis. Again, however, we should not interpret this as a seal of approval and a cue to relax. This stability is mired in mediocrity. The scores have been consistently unimpressive.

The RDR era may well see them rise. Then again, it could just as easily see them fall if, for instance, the advent of more explicit charging compels clients to re-evaluate the standard of service they receive – and the kind of philosophy that underpins it – relative to what they are paying. A unilateral commitment to raising levels of trust is far more likely to have a positive effect. Customers need to see that the people and organisations they deal with are themselves determined to enhance the client-provider relationship – as opposed to being content simply to bow to the occasional demands of the regulator. At Fiscal Engineers we recently agreed to benchmark our own clients’ perceptions against the industry average revealed by the Trust Index. The experience provided us with an even better impression of how we are perceived by our clients, as well as some important insights into the quality of our offering. Beyond that, though, the exercise demonstrated to our clients that we care about this issue. It also demonstrated that the job of strengthening trust should not rest exclusively with regulators. It sent a message that we do not believe the RDR has done all our work for us and we can therefore sit back and relax until the next decree comes along.

In the words of Professor James Devlin, the Centre’s Director: “It is only through the collective efforts of individual companies to improve their own trustworthiness that consumer trust on aggregate can be enhanced.” The first principle I learned when I entered the profession was that of “uberrima fides” – “utmost good faith”. It remains a principle to which we all have a duty, and neither historical indifference nor the convenient succor of industry-wide intervention should allow us to forget that.

A version of this article was originally published by Citywire.

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We are delighted to announce that the Financial Services Research Forum has merged with the Centre for Risk and Insurance Studies to create the Centre for Risk, Banking and Financial Services.

The Centre for Risk, Banking and Financial Services (CRBFS) aim to be an inclusive, collaborative research centre based in the Business School at the University of Nottingham. Our aim is to produce world-leading research, insight and commentary focused on financial services consumers, markets and institutions. We seek to enhance understanding of:

•  Consumer financial behaviour and any developments in the financial services sector and global economy that are likely to have profound implications for financial services consumers and their interactions with financial services markets.
• The analysis of the performance and efficiency of banks, insurance companies and other financial institutions.
• The international regulation of banks.
• Risk management issues in banking, insurance and financial services, as well as issues in management and practice in insurance markets.
• Regulatory and policy developments in financial services and related impacts on consumers, institutions and markets.
• Global and cultural perspectives on financial services with a particular focus on Islamic banking and finance
• Other issues in the sector that are likely to have a profound impact on financial services consumers, markets and/or institutions.

CRBFS was formed in 2013 through an amalgamation of the Financial Services Research Forum and the Centre for Risk and Insurance Studies, two existing research centres based at Nottingham University Business School, each with its own well established heritage of research in the area. The new Centre provides a wide-ranging, inclusive forum for the discussion and dissemination of relevant, impactful research in the area. It is a unique collaboration between all stakeholder groups in financial services and works with a network of practitioners and academics at Nottingham, across the UK and internationally.

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Few topics in the area of consumer finance have received as much attention as interest rate ceilings on (in particular short term) consumer debt products. Entering the term “interest rates ceilings” into Google produces about 775,000 results. Among the contributions to the subject are a very large number of academic studies. Most of these studies are sceptical about the value of caps, although many are sympathetic to some of their stated aims. The Coalition Government had also made clear its doubts about ceilings. It is against this background that the Government’s U-turn, in the form of a decision to allow the Financial Conduct Authority (FCA) to set such ceilings, took many observers by surprise.

The arguments for and against ceilings are so well-rehearsed and well-developed that I cannot do justice to them, let along add to them, here. There are ideological arguments against restrictions of choice. There are also claims that the charges levied on short term loans are not excessive given (a) the small amounts borrowed; (b) the short term nature of the loan; and (c) the fact that consumers are choosing such loans, even if the suggestion in the Financial Times by the Chief Executive of Wonga that its customers “do not borrow from us out of economic hardship” might raise a few eyebrows. But the most compelling argument against ceilings is that they are liable to produce unintended consequences. Such consequences may involve in particular (a) the removal of the supply of legal short-term loans (described typically as “payday loans”) and (b) the replacement of these with credit from illegal loan sharks. So the argument goes, the (legal) supply may go away, but the demand will not. The literature on ceilings adds some weight to these arguments. For example, the Review of High Cost Credit published by the Office of Fair Trading in 2010 concluded that price controls “would not be an appropriate solution to the particular problems found in these high-cost credit markets”.

Yet despite these arguments the Government has changed course, albeit not quite in the way it is sometimes presented. “Payday loan interest rates to be capped” said the FT’s headline in November. Well, probably, is the reply. The Financial Services Act 2012 does not place a cap on rates. The Act instead gives the FCA the power to set a cap on rates. Lord Mitchell, whose amendment might well have led to defeat for the Coalition, recognised this, stating that the amendment “puts the responsibility squarely into the hands of the FCA”. But the Government’s comments could be taken as an indication that it expects the Authority to act. Lord Sassoon stated that “the Government is, like all of us, concerned about the appalling behaviour of some firms in this sector and the harm vulnerable consumers suffer as a result.” High profile campaigning by the likes of MP Stella Creasy and the intervention of incoming Archbishop of Canterbury Justin Welby (who described some rates as “usurious”) may further compel the Government to push for action. In addition, given the enormous public pressure on the FCA to show that it has “teeth” (something its predecessor, the Financial Services Authority, was perceived by many to lack) it would be surprising if it did not feel some pressure to take advantage of its new powers.

One interesting development is that the Government is expected imminently to take delivery of yet another report (this time from the University of Bristol) on the impact of interest rate ceilings. If this follows the trend of previous works and raises questions about the utility of such ceilings, the Coalition may find itself in a difficult position indeed.

Peter Cartwright (Professor of Consumer Protection Law, School of Law and Integrating Global Society Research Lead for Finance and Society)

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Here at the Forum, we have been reflecting recent research concerned with attitudes, expectations and behaviour in pensions. A report by the National Association of Pension Funds, in conjunction with the Institute of Fiscal Studies, provides an excellent indication of how attitudes have to change and become more realistic if people are to enjoy a comfortable retirement. The research focussed on the over-50s and Defined Contribution (DC) pensions. The first notable finding is the highly unrealistic expectations held about likely retirement age compared to probable income in retirement.. Over a third of women either have, or still expect to retire at 60 and over 20% hope to retire before 60. For men, over 40% either have, or expect to retire by 65 and only 9% expect to retire after 65. Both women and men underestimate how long they are likely to live in retirement, meaning that they will tend to under-provide and also that annuity incomes will appear relatively unattractive. Although in many cases somewhat confused about likely future pension incomes from DC schemes, expectations as to likely future income tend to be over optimistic, with an average increase in DC fund value of 77% required to meet expectations. Overall, the message is clear; to enjoy the expected relatively comfortable retirement people will have to save more, work longer or a combination of the two. People are also harbouring unrealistic hopes about how comfortable their retirement will be, and although not a popular message, the Government and policy makers should arguably be doing more to disabuse people of such expectations before to is too late to act.   The NAFP/IFS report focussed on the over-50s, the segment generally considered to be in the most favourable position in terms of pensions. Another recent report by the Pensions Institute looks at a broader age group and considers the impact of auto-enrolment. Auto-enrolment began in October and will be phased in fully over the next 6 years. The aim is to ensure that all private sector employees (except the very lowest paid) have a private pension scheme into which they and their employer contribute. The National Employment Savings Trust (NEST) scheme has been championed by regulators and designed in accordance with DWP guidance on default fund investment strategies and is available to employers who seek to meet their obligations under the 2008 Pensions Act. It is also a low cost scheme, with an Annual Management Charge of 0.3%. NEST undoubtedly represents an excellent, low cost option for most potential savers. However, companies do not have to use NEST if they have an existing scheme and existing schemes are not tightly regulated in terms of charges and default fund investment strategies. The Pensions Institute encountered charges of up to 4% for existing small funds and noted that only 10,000 of the 205,000 existing DC schemes have more than 100 members. Therefore many existing funds are not sufficiently large to be efficient, meaning that many investors will be paying high fees and may well not even be aware of this fact. The Pensions Institute estimates that such charges could result in pension incomes being halved for some savers. Such outcomes are obviously not in savers’ interests and although pension companies have a duty to ensure that default schemes are competitively priced and the ABI is working on disclosure of charges to employees, arguably policymakers need to do far more to protect savers from the corrosive impact of high charges. Otherwise auto-enrolment will have far less of a positive impact on retirement situations than hoped and we may be witnessing another mis-selling scandal in the making.   The Pensions Institute suggest a target total charge of 0.5% for any scheme deemed appropriate and recommend a “Kite-Mark” approach for schemes that meet this target and have good investment governance. Kite-Marks have a chequered history in financial services, with CAT standards for mortgages, ISAs etc having been widely regarded as an abject failure. A report written by the Forum for HM Treasury on why CAT standards (and Stakeholder Products) failed argued that a combination of supply and demand side factors accounted for such failures, but that a “Kite-Mark” based approach, along with an obligation to justify recommendation of/use of products that do not meet such standards may provide the most suitable approach. This finding echoes the arguments of the Pensions Institute and a Kite Mark approach is arguably the most effective way to ensure that those saving in an auto-enrolment scheme enjoy a retirement income that has not been eaten away by unreasonably high fees.

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Recently, the FSRF sponsored a detailed research project into how narratives of Corporate Social Responsibility/Irresponsibility may provide a useful lens through which to view the financial crisis. A detailed blog post on this topic can be found here:

https://blogs.nottingham.ac.uk/betterbusiness/2012/08/22/no-more-business-as-usual/

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However, in the wake of a financial crisis and the loss of office, it seems that the Labour Party has shifted its position both on the financial sector and the filthy rich, not least because its seems that many of the latter were doing all they could to pay as little tax as possible.  Responding to the growing public distaste for financial excesses and malfeasance in an era of austerity, Ed Miliband, Labour leader, and Ed Balls, Shadow Chancellor, used the latest UK financial scandal – the fixing of LIBOR rates by employees of Barclays Banks, which resulted in the exit of its chief executive – to launch their reconsideration of the social and economic role of the banking sector.  They argued that retail and investment (or ‘casino’) banking should be forcibly divided along the lines of the recommendations of the 2011 Independent Commission on Banking which would free the state from the responsibility to bail out banks ‘too big to fail’ but also allow retail banking to be recast as a more benign supportive activity for the rest of the economy, which Miliband described as ‘Stewardship banking’, and would see banking once again become a trusted and respected profession and public servant, on a par with teaching, medicine and law.  Balls and Miliband also argued that the UK needs a more competitive retail financial sector, to improve the lot of consumers, with the creation of at least two ‘challenger banks’ that could be given a head start by forcing incumbent banks to hand over some of their branches to create a ready-made banking network.  In addition, Labour seem to be returning to the issues of financial exclusion and inclusion, an area of policy they championed while in office, but which in practice was limited by an implicit agreement that it should not derail the competitiveness of the sector nor do anything that would seem unduly at odds with a market-oriented sensibility.  Now, in opposition, Labour seems to be gearing up for a much more direct engagement with the problems of financial exclusion, with Miliband referring indirectly to the US Community Reinvestment Act suggesting that government could force UK banks to disclose information on the geography of their lending behaviour to identify socio-spatial exclusionary practices, arguing that ‘Some of the most deprived areas of the country are currently almost entirely excluded from banking services’.

On the one hand, this refocusing on financial exclusion and inclusion is to be welcomed, not least because it has not been a priority of the Coalition government since 2010. In part this is because of the pressing problems of the financial crisis more generally, but also because, as Conservative politicians have admitted off the record, that financial inclusion is so associated with Labour that it is difficult for the present government to embrace it.  In addition, the focus on the geography of financial exclusion is also welcome, not least because significant research on this subject has been undertaken at the School of Geography at the University of Nottingham over the last decade and more, research which has been supported by the University’s Financial Services Research Forum.  Indeed, we are currently in the process of undertaking an update of our longitudinal database of bank and building society branch locations in Britain which goes back to 1989 and reveals the extent to which leading retail financial institutions have pruned their branch networks.  This a process has been geographically uneven with closures focusing disproportionately on areas of economic and social deprivation.

On the other hand, however, Labour’s recommendation that the leading banks be forced to hand over a significant proportion of their branches to two new challenger banks may not be as punitive a sanction that it appears.  Branch divestment has been an objective of the leading banks over the past 25 years, so while the enforced sale of branches to new competition may mean the loss of some branches in prime locations, the loss of physical infrastructure is hardly something that goes against the grain of the UK retail banking industry.  More important would be the location of those branches, so a divestment policy such as this would have to be careful not to expedite the shedding of infrastructure in locations that banks would be all too happy to abandon, and where they may be maintaining a presence in part to avoid the bad publicity that is generated when they close the last branch in a community, a process that has been well documented over many years by the Campaign for Community Banking.  But even if challenger banks inherited a representative sample of branches, banking is more than simply managing a portfolio of real estate.  There was a time when branch networks acted as an effective barrier to entry within retail banking, because it was in branches that the key work of the business went on, where credit risks were assessed, money was deposited and loans were made.  Branches were central to banking business.  Banks and building societies needed an effective branch network to compete.  However, in the past 20 years or so power has ebbed away from branches as the core competencies of retail banking are having effective credit scoring and customer relation management systems, both of which enable banks to manage their customers at a distance.  Moreover, banks are now not so reliant on branches for raising funds in the first place, as these can be raised directly in financial markets although, as thinly-branched banks such as Northern Rock found out to their cost, in times of crisis when capital markets dry up, having access to a reliable supply of branch-based deposits can make the difference between survival and going out of business.  But, while the gift of an already-existing branch network would help a challenger bank, it would not be sufficient in itself.

Therefore, while Labour’s reconsideration of the banking sector has the potential to be an important break point in public policy, to be effective it requires a consistent attention both to the uneven geographies of financial provision and the contemporary practices of 21^st century retail banking.

Andrew Leyshon, School of Geography, University of Nottingham

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