Goldman’s consumer finance push, Mifid II and Citigroup’s trading warning
Patrick Jenkins and guests discuss Goldman’s decision to expand its nascent consumer business to the UK, the ructions in research caused by Europe’s looming Mifid II rules and what Citigroup’s warning means for the rest of Wall Street.
Presented by Patrick Jenkins and produced by Aleksandra Wisniewska
Welcome to Banking Weekly from the Financial Times. With me, Patrick Jenkins. Joining me in the studio today is Emma Dunkley, our retail banking correspondent. down the line from Dubai we have Laura Noonan, our investment banking correspondent. And also down the line we have Rhydian Lewis, the chief executive of RateSetter as our guest this week. Today we'll be discussing the latest incursion into consumer lending by Goldman Sachs. Secondly, a look at the latest preparations for MiFID II and what that's meaning for the research market. And finally, a look at the warning from Citigroup about trading revenues being down sharply in the third quarter of the year. First though, to that story about Goldman Sachs, thought of as the arch investment bank of Wall Street, but they're reinventing themselves gradually. 18 months or so ago they launched into consumer finance in the US. And now they're coming to the UK. Emma, what's all this about?
That's right. So Goldman Sachs is looking to make its first foray into the UK'S retail banking market by launching online savings accounts that offer to pay high rates. So this will be its first move into the UK savings market. And it comes after the Wall Street investment banking giant launched a similar platform in the US some 18 months ago. The bank has also launched a consumer lending site in the US called Marcus, and it could look to also unveil something similar in the UK once it's established its online savings range. The launch comes at a time when there's mounting competition, however, in the UK savings market. Rates are still very low, given the record low Bankrate 0.25%. Nonetheless, there are more challenger banks coming into the market and competing for customers' deposits, so competition will be high. At the same time, it's also worth noting that a lot of banks are struggling to gain traction in this space. But one positive for Goldman Sachs is if it doesn't go for the current account market, then it won't have to be subjected to some of the onerous regulation that comes with that.
OK, so yeah. It's an interesting time for Goldman to be doing this. Obviously it's got its own reasons for wanting to come in. It wants to diversify its funding away from wholesale funding. And I think it wants to grab what it sees as a potentially profitable segment of consumer finance, which is booming at the moment. Let me bring in Rhydian at this stage though from RateSetter. Rhydian, you're one of the biggest peer to peer lenders in the UK. This kind of upstart model that's been facilitated by online platforms, which basically link people who want to invest their money with those who want to borrow it. First of all, what do you make of Goldman's entry into this market? As Emma was saying, it's a pretty crowded segment of the market. Is it surprising?
I think it's a sign of the fact that they want to-- the resilience of funding. You know, this decision may have been born six or seven years ago when there was a shock in wholesale banking at how flighty funding was. And that the decision seems to be taking on some retail funding. And that brings resilience and if you build a good brand, it's a very stable source of funding. I think one takeaway from our side is that the UK retail savings market is big and it's attractive. And a firm like Goldman Sachs targeting it is a demonstration of that.
It's interesting timing, though because we've had kind of signs of caution shall we say, or even worry from regulators in recent months, haven't we? About potentially overheating consumer lending market.
Yes, I mean, I think it's notable that they-- in this announcement, whereas in the States they announced concurrently a launch of a savings product and a loan product. In the UK they're just going to start with the savings product. And maybe they'll see what the market's like in a year's time and decide whether they actually want to go into consumer lending. Whether they'll just concentrate on a savings franchise. And they may consider going into other forms of lending. I mean on the subject of consumer credit, there has been a lot of headlines and a lot of concern and right at the top in terms of the Bank of England putting out some signs of concern. The key thing I guess from any lender's perspective is understanding the trends and also understanding pricing. Because it's one thing absolute levels of defaults going up. But really in lending, the important thing is to be able to take an appropriate risk margin for those defaults. And it might be that actually the cycle's turning a little bit there in the sense that in anticipation of higher defaults, lots of lenders are retreating, which is resulting in risk margins that make those people who continue to lend actually quite sustainable. So it's a lot to do with pricing as well as absolute defaults.
And that point is a key one for a business like yours as a peer to peer lender. Obviously traditional banks take that risk between the pricing they put on loans and the pricing they put on deposits onto their balance sheets. But you as a kind of platform intermediary are kind of linking up those two sides. And in effect the risk to borrowers goes on to those who are providing the funding. How are you navigating that whole space?
Yeah, I mean, we see our key responsibilities to make sure that we understand the risk of people borrowing through our platform. But also making sure that we price that correctly and that goes into a provision fund. And so long as you actually price the risk effectively, then you can go through various different cycles.
And the recent stress that you've had on that, tell us a little bit about how you came through that challenge.
Yeah, I mean, that was a-- the challenge was outside of our core kind of consumer lending. And it was to do with a wholesale lending division that we've subsequently retreated from. And actually for a young business, we have felt that we have ridden a difficult episode in a very resilient way. And in the last three or four months, the amount of money coming into RateSetter has ticked up. And everyone fears in a young industry when something becomes a challenge, and really it's only when you're put to the test and come through it the people begin to trust your competence. And actually we see some of the scrutineered peer to peer lending in the last three months, six months is something to be very welcome because people want to see it tested. And the only way that you can prove your resilience is that is to pass those tests. And I feel the businesses and the leading present industry are actually very well positioned for the credit outlook. Partly because they are very open and transparent about expectations. One of the advantages of funding loans with investment capital, which is what peer to peer lending does, as opposed to with deposits is that you are funding it with money that understands a variable return. And understands risk can return. Whereas with bank funding funded with deposits, it's quite a binary outcome and it means that they're perhaps less flexible. So you know everyone recognises that peer to peer lending needs to go through a series of challenges to show its resilience. And I think that we're well-placed to do that.
Well those challenges probably are looming at some point on the horizon in the next year or so. We'll see how peer to peer and Goldman Sachs and the established players all fair. My thanks to Rhydian for joining us.
Let's move on to our second topic now and a look at what the MiFID II regulations, which are upcoming in a few months, will mean for the research landscape. I'm joined by Laura who's just arrived I think in Dubai. Thanks very much for joining us Laura. You wrote a big piece about this the other day with some colleagues. How things are shaping up. Because it is going to revolutionise the way in which the research world deals with their clients on the buy side.
Yeah, so we've been following MiFIT II and how it affects research for a long time. So the overall gist of MiFID II is that instead of having clients pay implied fees for research, so you pay for the-- so you pay the commission or you pay a bank generally to trade. Instead and then you don't actually pay explicitly for research. What the regulars want banks to do is they want banks to explicitly charge for research and the investment managers to explicitly pay for it. Now we have traditionally written about how this going to impact equity research. Equity research tends to be a bigger area, and it's one that we spend the most attention on. But actually recently, a number of issues have come up in terms of how it will affect fixed income research. Now fixed income research covers everything on research about bonds and to some of the more macro research. So [INAUDIBLE] economic growth, those kind of big picture issues can also feed into this fixed income research space, and that actually is proving a much trickier space for banks to get a handle on then actually having to go handle it on the equity research side. And buying from [INAUDIBLE] quite devalued in terms of both their understanding of what they are allowed to do and then their approach to what they actually want to do.
Yeah, because we've seen some banks talk about actually pricing the research in some kind of macro areas at zero.
Yes, so that's one of the things that's caught people's attention. So the overall objective of this piece of legislation, MiFID II was found investment managers would pay explicitly. However back in April, ESMA, which is the register overseeing this, they then clarified that in the case of some parts of fixed income research, you could make the research available to everybody and then on that basis, you wouldn't have to charge for it. There's also a separate offset which says that if the research doesn't have any value and doesn't add and doesn't make any investment recommendations, then you can also provide it for free. Now some banks have been quite foolish like this. They think it actually enables them to give a lot of research for free. Some of the more aggressive in that area would be ING, [INAUDIBLE] also. Other banks, mainly the US banks are taking a much more conservative space and they argue that even if you were in theory allowed to provide all your fixed income research for free under MiFID II to everybody, you would then come up against the other rules around how you are allowed to distribute research and how you're allowed to engage with clients. So they say that when it comes to certain kinds of research and recommendations, they have to establish their clients as suitable. So they're not allowed to give to give recommendations on sophisticated products to retail investors. They're also required to know a certain amount about their clients. So they say that it will be very difficult, if not completely-- They say it would be very difficult, if not totally impossible for them to make something available to everyone, but if they couldn't possibly prove everyone [INAUDIBLE] and they can't possibly prove that they knew all of their clients when all of their clients is the general public at large.
One thing is for sure. Regardless of all the different models that people are considering now. The current landscape is going to be thrown up in the air when these new rules come in in Europe in the new year. Laura, thanks very much for your thoughts on that. And let's move on for a quick final look on a third item at Citigroup, which we had very interesting change in expectations from Citi and I suspect you'll think it has ramifications across Wall Street because the bank warned at a conference the other day that trading revenues for the third quarter were going to be sharply down.
Yeah, so Citi's chief financial officer John Gerspach was speaking at a big conference Barclays hosted in New York this week. He used his appearance at that to basically warn that Citi's trading revenues will be 15% lower for the third quarter of this year than they were a year earlier. And if we do flash back to the third quarter of 2016, it was a time when banks did make very high trading revenues because we were all obviously heading into the US general elections. We also had a lot of volatility in the aftermath of the UK Brexit vote. So it is going to be down 15%. But then 15% against a pretty high base. However for the industry, this is an exacerbation of what we have already seen in the quarter. So we saw poor trading revenues in the first half of the year as well, so it makes it a little hard to argue that it's simply going to be a year [INAUDIBLE] If anyone who was following it-- who was following banking results for 2016 so there was a very poor start to the year for the first half of the week, and there was a big bounce back in the second half. That now appears to be not on the cards for this year. It looks as if it's going to continue to be for the third quarter and no one really expects banks to make up much in the fourth quarter. So it looks like it's going to be down overall for the year. And I think we can generally expect that if Citi, which is one of the world's-- one of the top two investment banks by size in the world. If they're seeing a fall in revenue of 15% on their trading benefits, expect that pretty much everyone in the industry is going to be down somewhere between 5% to 20% within that range.
Well in the coming weeks we'll find out for sure. Thank you very much Laura and we'll see you back in the studio next week.
That's it for this week. All that's left for me to do is thank Emma here in the studio, Laura in Dubai, and our guest on the line Rhydian Lewis from RateSetter. Remember you can keep up to date with all of the latest banking stories at ft.com/banking. Banking Weekly was produced by Alex [? Wisniewski. ?] Until next week, goodbye.