What an eventful year 2017 was. It’s hard to narrow it down to a handful of moments, but I believe the below were pivotal moments with a high degree of impact on Financial Markets in the mid-term.
- 10 years since the financial crisis – reconstruction of the global financial machinery
Last summer marked a decade since the global financial crisis – what has changed (for the better) in financial markets in that time? The 2017 narrative focussed on incumbents vs challengers; legacy models declined, business models became forward-thinking and began to use tech to enhance customer experience. We saw the honest beginnings of how customers could really start to control their money, and also concreting the concept of financial inclusion. Conversely, 2017 saw serious, high-profile data breaches with Uber and Equifax losing client data to hackers; businesses striving to meet requirements of GDPR before May ’18 deadline to ensure customer privacy, enhance data protection and making a move on digital identity (watch this space).
- Open Banking – the Cathedral and the Bazaar, the Regulation and the Business, Tech and Partnerships
In February, the UK government confirmed the PSD2 timetable – a promising step. Banks must share all the data they hold on customers with competitors (if the customer so wishes). The concept of Payment Information Service Providers (‘PISP’) & Account Information Service Providers (‘AISP’) was born. This is posited to help customers get the best deals. In October, start-up Fintech Bud shared the stage with HSBC UK – paving the way for collaborative relationships between incumbent banks (the ‘CMA 9’) and agile start-ups who realise their vision via technology. Changing the face of banking, the likes of Starling Bank, Monzo, Revolut, Yolt and peers created a splash in the market. The digital-only challenger Starling Bank launched their beta version in March, offering a current account experience without branches or a banking license. It’s Jan ’18 – the compliance with PSD2 may have happened, but the real revolution in open banking (‘the bazaar’) has only just started. Looking at neat API maps here is very different from traversing the terrain with complex dynamics at play.
- Bitcoin and Blockchain
Satoshi Nakamoto created bitcoin as a stateless Digital Currency nine years ago, but in 2017 it gained traction and cryptocurrency markets dominated the public imagination. This set the tone for a competitor, Ether – an ERC20 token on the Ethereum blockchain. Tech commentators felt the need to predict the ‘crash’ of bitcoin – it went up to a high of $19,055 on 11 December; today it sits at $9,700. Distributed Ledger Technology definitely saw more than an uptick in 2017 – Global Blockchain Benchmarking Study by Garrick Hileman showed that the Banking and Finance industry has the largest number of identified DLT use cases. Is Bitcoin really delivering on these promises? We think not. But there is for sure a revolution underway in the way we interact with money, store value, and build ecosystem trust.
- Data Knowledge Graphs
In October, Thomson Reuters used Big Data management principles and Machine Learning techniques, to create their Knowledge Graph – a trusted data source and model for customers to leverage, build their enterprise solutions on top of, and benefit in new, connected ways from the breadth of their open platform – imagine leveraging 2 billion relationships for a comprehensive view: “The largest Big Data challenge our customers face today is managing, and making sense of, their unconnected data” said Geoffrey Horrell of Thomson Reuters in an excellent presentation at EDM Council. It is possible to make a start before perfecting Data Governance and Data Quality.
- Interest Rate Rise by MPC – first since crisis and stress testing
To meet the 2% inflation target, the Bank of England Monetary Policy Committee (MPC) at its meeting on 1 November voted by a majority of 7-2 to increase Bank Rate by 0.25 percentage points, to 0.5%. The 2017 stress testing results for UK’s top banks included a scenario in which the banks would deal with a seven year downturn and increased pressure from FinTechs. Are we good? The open banking revolution and its impacts on SME financing could potentially cause a greater ripple in incumbent banks.
- Brexit – busy with legal entity bingo as worst-case scenario looms
There is uncertainty in financial services due to the, as yet, unknown terms of the Brexit Deal the UK will strike on 29 March 2019; this has caused many CEOs to plan for the ‘worst case scenario’. Legal entities and potential staff moves dominated the headlines. The banking industry was pushing for as much clarity as possible, rather than be left with a ‘cliff-edge’ or ‘chaotic’ Brexit. London sought to retain its status as Europe’s financial capital, but the possibility of regulatory ‘equivalence’ was not quite the ‘passporting’ the industry has enjoyed to date. 2017 could not confirm nor deny what the future would be, while we continue to await the deal terms.
- The Budget from Philip Hammond / Patient Capital
The Budget included a commitment to shore up the UK’s position in technology and innovation post-Brexit. It also set out plans to establish a dedicated subsidiary of the British Business Bank to become a leading UK-based investor in “patient capital” across the UK – something written about a lot in the financial press in 2017. HM Treasury’s Patient Capital Review was a framework to support innovative firms to access the finance, needed to scale up. Xavier Rolet, who stepped down from LSEG in November, was a staunch advocate of SMEs. LSEG’s ‘1,000 Companies To Inspire Britain’ set to drive long term investment in SMEs. Xavier explained; “What they [SMEs] need is long-term ‘patient’ capital, like equity, where people seek investment to grow their business either through individual investors, on capital markets, or through crowdfunding and peer-to-peer platforms.”
- Insurance Industry’s Moment of Truth – Ogden Rate Reform
20 March 2017 saw the PIDR (Personal Injury Discount rate) otherwise known as the Ogden Rate reduced by 3.25 percentage points from 2.5% to -0.75%. The 2001 discount rate influences the lump sum paid to successful personal injury claimants; it was set with reference to the return rate of index linked gilts (ILGs). After several years of campaigning, and borne out of the historically poor performance of the UK economy, the PIDR was reduced to below zero to provide an uplift in compensation: otherwise, the capital sum awarded to the claimant, if invested, would underperform against inflation. This had a shock effect on the market with billions of additional costs in premiums and compensation rises expected. In September, the insurance industry won a major victory by persuading the government to reform the Ogden Rate. It provided some breathing space while the disruptive effects of InsureTechs start to bite, and LMG progressed the London Market Modernisation agenda.
- Passive vs Active Investment
There became a divided camp in 2017 with some insightful commentary in the FT. The ETF market soared with players such as BlackRock leading the way, their operational costs being inherently lower than active fund management – Smart Beta became a rising trend with lower management costs and competitive expense ratios – will this consolidate in 2018? Did active asset management take a real blow? The figures suggest a move towards more of a balance between passive and active investment. In October, borne out of the rise of passives, Fidelity UK announced a new ‘fulcrum’ variable fee model based on performance. The manager would charge a higher fee when delivers outperformance net of fees, but lower if performance meets or is below benchmarks. A step forward to value active management and reduced management fees. 2018 will see these developments play out.
- MiFID II – Major Regulatory Overhaul
Last and not the least. 2017 was the year gifted to the Financial Services industry, as the MiFID II implementation deadline was extended to 3rd January 2018. Capital Markets saw their biggest regulatory overhaul yet, to create a more transparent and accountable industry. Now it’s gone live, the market is scrambling to ensure it will pass the tests in: best execution, information to clients, surveillance, monitoring, governance, reporting, and transparency. Billions in capital and effort were spent achieving a compliant state, and it looks likely efforts will continue well into 2018, even 2019. What wholesale changes will MiFID II precipitate and what will be the unintended consequences? 2018 promises to be a fascinating year.
Did you feel strongly about any other moments that should have made this list?
Please comment and share below freely.
Thank you.
Rajen Madan
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