Business leaders Otto Thoresen and Peter Ibbetson, shared their insights on the challenges facing the City and the wider UK economy at the latest Warren Partners 'Hot topics for the Board' event. This was held in London the day after the Budget, and attended by chairs, chief executives and other board members from quoted companies and large private businesses in the retail, financial services, banking, education, energy and transport sectors.
Otto Thoresen began by outlining how the City still needs to rehabilitate itself post-crash, not only domestically but around the world as London faces challenges from other global financial centres. He warned that if the regulatory pendulum swung too far in response to the financial crisis there was a risk of stunting the UK's recovery from recession at the national, European and global level.
"EU banking union is a significant issue for the UK. The planned referenda on the UK leaving the EU will mean that the UK's voice is listened to less in the banking union discussions, and this is potentially damaging to the UK financial services industry."
"Achieving the right level of regulation poses an enormous challenge, with significant outcomes for the City and in the political sphere. Solvency II discourages long term investment in higher risk assets, contrary to the UK Government's strategy of encouraging long term higher risk investment in the likes of infrastructure. In its attempt to reduce customer detriment, there is a danger that new conduct regulation will stop people from saving or investing at all."
"This in turn will reduce demand for pensions and insurance, with worrying consequences. New global regulatory solvency rules coming in over the next two to three years could drive up fixed costs, and so not achieve the social objectives of consumer protection and better financial provision originally envisaged."
Turning to the UK economy, Otto said that the country faced extended periods of indebtedness. The ageing population will also contribute to long term pressure on the Exchequer, with the cost of caring for people who are living longer likely to rise to £80-£100 billion a year by 2060. This shift of resources away from the young to the old could contribute to social tensions in the UK, with large numbers of young people facing unemployment. Lack of trust and confidence in financial institutions will also have an impact.
Otto then considered whether the measures to boost housing were something of a populist move ahead of the 2015 general election. The insurance industry is anticipating that its assets may be targeted by the Government as it tries to kick-start the sluggish economy through major infrastructure projects.
He added: "The political environment is a difficult one for long-term decision-making and project delivery. I'm an infrastructure sceptic about projects such as HS2 or green energy production. Government departments shouldn't give the green light to expensive projects where there is not a strong cost/benefit rationale. Decision-making needs to be long term and based around the financial case rather than being influenced by social pressures such as the need to create jobs."
Taking up the baton, Peter Ibbetson looked at the funding challenge and getting money back into the system. He compared the UK's recovery from recession now with the 1930s. Although the last recession was not as deep as that of the 1930s, it has lasted longer and the UK economy is in a worse position as it emerges from recession. He considered three key ways to boost economic growth and confidence:
Lending to quality businesses is a priority. "There is bank funding available for investment in R&D, equipment and export initiatives, but businesses remain cautious about expansion because of global market insecurity, supply over-capacity and a lack of skilled new recruits. Negative headlines in the media don't help to boost confidence, and seem to be at odds with what business confidence indicators are showing."
"We also need to stimulate spending and investment. There has been a positive response from many business leaders and organisations to the Budget, and we know that businesses and individuals have £2 trillion of deposits which could be used to help stimulate growth."
However, there was some concern about a new house price bubble developing, and Peter considered additional ways for individuals to use current savings on areas such as home improvements to stimulate the building sector and secure jobs. In his view, tax breaks would not necessarily promote retail spending, with consumers in the higher socio-economic groups more likely to save any extra income. The retail sector is a prime target for increased spending, which would lead to more jobs to fulfill demand and encourage investment by companies.
Peter concluded by saying that UK businesses need to stop focusing almost entirely on the world's developed economies and sell more to the BRIC nations and less mature economies. For UK consumers, there is the need for a tough reality check. The country has the highest level by GDP of private sector debt, yet the UK culture is still that everyone should own their home. The stark message is that the average age of a house purchaser is now 45, and younger people will have to accept that they can only rent, not buy.
He added: "With an election two years away, these tough messages are not likely to come from Government. This contrasts with the approach of the late Margaret Thatcher, who told people they would have to accept falling standards of living but also that she had a vision for delivering economic recovery. In our times, the solution includes creating employment opportunities for the one million under-25s without jobs. Getting this generation into work will help the next one to turn around our economy."
Delegates then joined in a lively discussion, debating a number of key issues raised by the speakers:
UK banks are bearing the brunt of the blame for the economic crisis, although several factors contributed, including irresponsible borrowing. The City is not yet in a position to speak up for the positive aspects of the financial services industry but its time will come. It is the UK's biggest exporter by far and attacks on the City only serve to damage this key market.
There needs to be national unity among the three main political parties when addressing major issues such as pensions, infrastructure and the environment. Individual party point scoring will only serve to unravel solutions to these issues, as happened with pensions in the past.
The Government should create the right strategic framework for business to flourish, but then let companies get on with generating growth without interference and lots of red tape.
The Government is trying to raise academic standards but skills are neglected. It has not found a solution for young people who are not academic, yet the UK desperately needs engineers and technology experts. Education is the long term answer to the skills shortage, but academic learning is not the only route. It was suggested the Government should offer business start-up loans to young entrepreneurs as an alternative to student loans to fund going to university.
There needs to be a sea change in how people are perceived if they choose not to go to university – they are not second class citizens. Employers can influence this change by being more open-minded in their recruitment processes and looking at people from different avenues to take on leadership roles.
Two key indicators of improving economic activity will be an upturn in China and the IPO market coming back to life. Exports can be a way out of economic problems, but there is a long lead time in terms of identifying markets and building business relationships. The Government could help SMEs in particular by extending and improving the role of UKTI, and offering better credit risk insurance support for exporters.
The UK's manufacturing sector makes up 10% of the economy and has a reputation for excellence. However, it is now a part of the global supply chain rather than controlling the big picture, which makes it vulnerable to decisions made outside the UK. It is also more difficult to penetrate international markets as they are very protected – the UK needs a technology edge that others cannot offer. Other sources of exports also need to be identified to create a sustained attraction for overseas customers to come to the UK.
The public sector has its own problems, particularly in the NHS around care standards and morale. However, the public sector is still a major economic player in the large regional trading cities such as Birmingham, Liverpool and Manchester. Several of these cities have relied on major public sector capital projects for regeneration, for example Manchester and Salford becoming home to the BBC's northern HQ.
Business leaders need to be engaged in making change happen – it is not something the Government can deliver alone. Throwing public money at problems such as multigenerational unemployment is not the answer. The UK needs to become socially energised as a nation and embark on a long term journey to fix our economy and society.
Otto is the Director General of the Association of British Insurers, the representative body of the UK insurance sector which is the third largest in the world and the largest in Europe. A vital part of the UK economy, the sector manages investments amounting to 26% of the UK’s total net worth and contributes £10.4 billion in taxes to the Government. Otto was previously the Chief Executive of AEGON UK.
Peter is the Chairman of Small Business Banking with Royal Bank of Scotland. A highly experienced non executive director, he rejoined RBS in 2008 having previously been the Head of Business Banking with NatWest until 2003. In 2011 the bank provided banking services to around 1.1m SME customers, accounting for approximately 25% of the SME market.
Chairs and other board members interested in attending the next Warren Partners 'Hot Topics for the Board' event can contact Julie Furness at email@example.com for more information.