Labour's Consumer-Focused Lending Could Impact UK Banks' Profits
UK banks have been enjoying strong profits in recent years. This has been thanks to healthy lending margins, low rates of loan defaults, and not having to pay much interest to savers on their deposits. However, if the Labour Party wins the upcoming election on July 4, this might change.
Labour's Approach to Banks
In the past, Labour was seen as unfriendly to banks. But under the leadership of Keir Starmer, the party has tried to win over banks by promising stability and a more balanced approach towards taxing the financial and professional services sectors. These sectors are important as they contributed over £110 billion to the UK tax receipts in 2023.
Potential Changes in Lending Policies
One of the key proposals from Labour is to review the benefits of longer-term fixed-rate mortgages. This means that homeowners would not have to worry about sudden hikes in interest rates. Think of it like renting a house: instead of your rent going up every year, you pay the same amount for several years.
Labour's focus on these changes is to help making homeownership more accessible. For example, first-time buyers could gain greater financial security. However, these fixed-rate mortgages might be more expensive for banks. Currently, only 3% of UK mortgage deals offer a fixed rate for 10 years or more, according to Moneyfacts data.
Implications for Banks
Banks like HSBC, Barclays, Lloyds Bank, and NatWest have reported record profits bolstered by strong lending margins and low loan defaults. But with Labour's proposed changes, these profits could be affected. For instance, longer-term fixed-rate mortgages can be costlier for banks to maintain. Moreover, a rise in costs for interest rate swaps, a financial instrument banks use to manage risks, has added additional financial strain.
Expected Policies
Labour is unlikely to impose a bank windfall tax or change how the Bank of England pays interest to banks, as per industry sources. These policies had been suggested under Labour's previous leader, Jeremy Corbyn, but are not expected now. However, Labour has pushed for "bringing face-to-face banking back to the high street" by opening up to 350 banking hubs over the next five years. This move goes against most banks' plans to cut costs by closing branches.
Other Impacts
Labour's Freedom to Buy scheme aims to help more Britons buy homes. But analysts believe it won't lead to a significant increase in profits for banks since it’s anticipated to help 80,000 first-time buyers over five years compared to the much larger mortgage market that handles over a million deals each year.
Bank profits might also come under pressure from drops in interest rates and increased scrutiny over credit card and current account markets.
Summary
In simple terms, while Labour's proposals might make it easier for people to own homes and access banking services, it might lead to lower profits for banks. However, some policies like the opening of banking hubs and assistance for first-time buyers won't hugely change the banks' overall profit outlook. The focus will be on balancing consumer needs with banks' ability to maintain their profit levels.
James Daley from Fairer Finance notes that the main reason bank profits could fall is due to falling interest rates and increased scrutiny on credit card and current account markets.
This article aims to keep the readers informed about potential changes in the UK's banking industry with the incoming Labour government. It also emphasizes the importance of aware customers who understand how financial products like mortgages and savings accounts work.
