Global markets have seen a downturn this month as inflation remains high and economic activity is stagnating in most regions. The exception is the US, which is still showing strong signs of growth.
Both the UK and the US are in the midst of regulatory changes to better protect markets and consumers. But what happens when financial companies bring political views into the mix?
Sustainable, or ‘ESG’ investing is still a key topic in the market, although greater clarity and consistency is needed to determine what this really means for investors.
Consumer Duty – How the UK Financial Market is Changing
A new regulatory reform came into effect on 1st August. The Financial Conduct Authority’s ‘consumer duty’ represents one of the biggest changes in financial services in the last decade.
The rules, and the resulting requirements for financial services firms broadly mean that consumers are entitled to clarity, value for money, and good outcomes when they engage with a financial product or service.
You may see some changes when dealing with financial companies, including:
- Clearer documentation.
- A more detailed fact-finding process, which includes more questions about your wellbeing as well as your finances.
- A change in the price you pay for financial services.
The intentions behind the new rules are clearly in the interests of consumers. While some suggest the new measures go too far, others suggest they don’t go far enough – this may be an indication that they are pitched just right.
For firms, implementing the changes is a significant administrative burden. This could lead to costs increasing and possibly even some smaller firms choosing to exit the industry.
When Banking Became Political
The idea of a ‘politically exposed person’ is not new in the financial industry. It refers to people who are in the public eye due to their occupation and may be at greater risk of financial fraud or manipulation. Usually this includes politicians, royals, or senior members of global companies and organisations. Companies dealing with these individuals generally need to carry out a higher level of due diligence.
In extreme circumstances, the provider can choose not to deal with the person at all. This was brought into the public eye in June when Coutts’ private bank closed the accounts of Nigel Farage. While they initially claimed this was due to the value of his accounts, a subsequent investigation concluded that his political views and connections were indeed a factor in their decision. It is alleged that 10 other banks declined to provide him with an account.
In the aftermath of this, the Financial Conduct Authority is launching an investigation into banks which have denied customers services as a result of their political views. Heavy fines are expected to be applied where banks are found to have acted unreasonably.
ESG – Investing with a Clear Conscience?
ESG (Environmental, Social, and Governance) investing is still a contentious topic in the market. In theory, companies which operate sustainably and fairly should be competitive, and attract investment based on their merits. But in practice, in might not be this simple.
During the pandemic, ‘sustainable’ funds excelled, mainly due to the rising demand for technology and healthcare while many other industries ground to a halt. However today, in the midst of a war and an energy crisis, investors could see higher returns if they put their ethical principles aside.
There is also a question of what ESG really means. A company may score highly due to their green credentials, but have a poor record on employment rights or diversity. There is also scope for companies to manipulate the outcomes, particularly where executive pay is linked to ESG metrics. According to investment managers State Street Global Advisors, the deciding factors can be “subjective, fluffy, and easily gamed.”
The result is an opaque market where investors may have trouble unpicking a company’s ESG credentials. This is one area which may be overdue for a regulatory overhaul – the SEC in the US has already taken steps to bring greater transparency to the ESG market. In the meantime, investing with reputable managers and doing due diligence is the likely to be the only way to ensure your investments align with your principles.
The UK Market
The UK market has seen a dip this month, with the FTSE 100 and FTSE All Share each losing 2.1% – 2.2%. Market trends are slightly confusing, as while economic growth and consumer confidence increased in the second quarter of the year, retail sales are dropping, and unemployment has started to increase.
Inflation is starting to ease, with an annual increase of 6.8% as of July, however this is still three times the Bank of England’s target. High inflation coupled with slowing growth suggests that we are entering a period of stagflation.
Top performers this month include Hochschild Mining, technology company Kin and Carta, and currency company De La Rue. The lowest performing companies include Capita and Abrdn in the financial industry, fashion retailer Superdry, and Oxford Biomedica.
The Global Outlook
The main global indices have all seen a downturn this month, although to varying degrees.
The European market has dropped by around 2% as the region continues to face pressures due to the Ukraine war and general cost of living. The European Central Bank indicates that the money supply has shrunk for the first time since 2010 – this means lower levels of lending and short-term bank deposits. While this is the inevitable effect of interest rate increases, it may point to a financial downturn in the near future. Additionally, EU companies have reported around €100 billion in losses as a direct result of the war.
The US has fared better, with a small dip of 0.1%. While inflation is still a concern (and further interest rate rises are a possibility), the economy grew by 2.4% in the second quarter. Employment data also looks positive.
Like the UK, the US is in the process of introducing significant changes to regulate markets and protect consumers. Guidance is still to be finalised, but one of the measures is intended to crack down on misleading ESG credentials.
The Asian market has fared even worse than the UK, with a drop of 3.7% in August. China, the largest economy in the region has dipped into deflation and faces a liquidity crisis in the property market. Growth and production continue to lag as global demand weakens.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered
The content in this article was correct on 31/08/2023.
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