Page last updated at 00:13 GMT, Thursday, 11 February 2010

City Diaries: 11 February

Man looking at a falling graph

This week our City Diarists discuss what measures they would like to see politicians take to fix the UK economy. What sort of tax rises and spending cuts are necessary to eliminate the budget deficit?

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.

LAURA

Laura (not her real name) works for a commercial bank in London

I have recently seen several companies who are now laying off staff at the end of the painful process of adjusting overheads to keep up with falling sales over the last 18 months. Many of these will not come into the unemployment statistics (assuming they claim Jobseekers Allowance) until March at the earliest so the slight improvement in unemployment figures look shaky at best.

Job centre
"Several companies are now laying off staff after falling sales"

One company in particular stood out - it had been trading for 30 years and although had seen downturns before it was not in a sector normally affected. The directors had been relatively relaxed about contingency planning as for years our economic growth ensured each year a profit was returned. Now they are down to 10% of the profit they had just over a year ago and have had a rude awakening as their current bank effectively told them to find another lender or else... all within a one month timescale. I won't say the turnover but needless to say it is not small and the company employs nearly 400 people who are blissfully unaware this is going on around them.

A fundamental flaw in our financial system is entirely reflective of the modern world where you can go online and buy something which then arrives the next day in the post. We have an immediate gratification culture which has spread to financial services with online sales of car finance, loans, insurance, savings and even mortgages. With the exception of the latter, all of these transactions can be completed without ever having to speak to anyone let alone meet them.

Many of the FSA regulations are unintentionally ironic and viewed as a simple tick box before lending - this is particularly pertinent to KYC or "Know Your Customer". If you are a British citizen this extends to not much more than taking a copy of your passport and verifying your home address with a utility bill. The purpose of this regulation was broadly supposed to ensure that a) customers are being treated fairly, b) products are appropriate and properly explained, c) you are who you say you are, and d) that the bank knows enough information about you to be able to spot incongruous or suspicious activity early.

A return to locally-based lending and relationship banking is needed

The rise of Northern Rock was a volume-driven growth and the quality level inevitably suffered. However many banks have the same model, particularly with consumer products such as credit cards, loans and mortgages. Volume growth means transactional lending with as little human interaction and staff levels as possible. You are a number not a person.

This strategy has lead to a disconnect between bank and borrower which is not only risky for the borrower but risky for the lender too. Many of the write offs we have all suffered have been on car loans for example, with vehicles just abandoned and the bank having no sight of customer's wider finances to see early warning signs to step in and help. Unaffordable loans have been granted for a variety of reasons on both sides which are now uncollectable and dragging borrowers down.

To adapt a Conservative Party phrase - "British banking in society is broken". A return to locally-based lending and relationship banking is needed. Large institutions can adopt this, as some already have, but the big four need to follow. Return can be increased through appropriate dialogue with customers about their needs and hopefully the lower write off levels that the increased sight and cooperative working between a bank and borrower can bring. As with all things, it should be less about the process and more about the people - something my colleagues and I would like to get back to.

MARK

"Mark" (not his real name) works for a stockbroker outside London.

Greek protesters in central Athens on Wednesday, Feb. 10, 2010
An economic crisis looms over Greece

It was interesting to see George Osborne promise to reduce the UK's £178bn budget deficit ... and then the news that MPs are paying back more than £1m in expenses claimed. Perhaps there is more to run on this story than we first thought. Perhaps George Osborne's plan is simply to make them pay back everything! Joking aside, it is a bold statement that Mr Osborne makes on behalf of the Conservative Party and certainly one that interests those in the business community. It becomes even more important with the crisis that is Greece and warnings from the likes of Simon Johnson, ex-IMF chief economist.

The news that the UK is officially out of recession will be a welcome boost for many. Although this is a mindset enforced by the media, it is tempered by further news that personal insolvency has hit a record high. Added to this is the news that the Bank of England has stopped its quantitative easing programme, and there is, for many, a genuine state of confusion. With an election only a few months away, the Conservative Party is circling like a vulture over the embattled Labour Party and is courting business leaders with its views.

I feel the onus is on the public to realise their personal mistakes

Personally, I think it will be relatively easy for either party, or indeed another party, to reduce the budget deficit. This is what happens, it is part of the cyclical nature of an economy. It is not quite boom and bust but generally, as we exit recession, the budget deficit falls. It is, for me personally, about how we learn about the last 18 months and ensure it does not happen again. Names like Zaavi, Woolworths and MFI are now historic names in British business, but we have to ensure that more names are not added to the list in the future.

Blame culture

Tax and spending cuts are the ways we will reduce this budget deficit and the question that will be asked is which tax should increase and which cuts should be made. I find it difficult to comment on this with too much authority, mainly because I do not see the granular-level numbers, but my overall principles have been to help savers and reduce our dependency on credit. The NHS, education and defence have to continue to grow, and for me these are no-go areas. Taxing the rich is popular with most and Labour, while reducing the likes of CGT is popular with the rich and Conservatives. It is a terribly difficult balancing act that we ask our politicians to undertake - the same politicians that are so dishonest in their claims from the public.

Although government will have much to do with further recovery and reducing our budget deficit, I feel the onus is on the public to realise their personal mistakes. We should not save simply because it is easier to save, or spend within our means simply because credit is more expensive, we should do this under our own steam! I understand the public outcry over the bailing out of banks, however, many of us were happy to take cheap credit when it was available. Is it not double standards to complain? We live in a blame culture and as long as we can blame someone else, we will absolve ourselves of blame.


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