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Banking insights:
Are we ambitious enough?

Must Scotland, the UK’s second centre of finance, continue dropping down the international rankings? Not if the sector collaborates on an agenda to unlock its considerable growth potential, argues PwC’s INNES LEDINGHAM.

The environment in which bankers have spent most, if not all, of their careers has changed fundamentally since the global financial crisis. Its impact on the banking sector continues to be examined against a background of weaker economic growth in the West combined with the rise of emerging market powerhouses, in particular in China.

Closer to home, we’ve been analysing what the future holds for banking and the wider financial services (FS) industry in Scotland, combining our experience and insights with views from leaders across a number of FS organisations in our report, Navigating the Next Decade.

What’s clear is that, without urgent action, there’s a risk that Scotland could continue to fall down the international global financial service centre rankings. Edinburgh has fallen from 15th to 31st over the last three years, with Glasgow dropping from 22nd to 46th. Global markets are very competitive and we need to plan effectively, work collaboratively and fight hard to stabilise and grow our position.

To develop a step-change in growth and improve our international rankings, the industry needs to work together to develop a cohesive strategy that builds on areas of strength. These include banking product knowledge and operational capabilities such as client contact centres, technological innovation and our talent pool where we have been – and in some aspects still are – world-class.

In addition the industry must identify and target areas where investment and/or intervention are required.

Regulation is an increasingly expensive burden, opening up the industry, particularly banking, to greater customer, investor and market scrutiny. Banks will not regain shareholder trust without significantly changing the way they operate and market themselves. Adopting new technology and updating old systems will also inevitably weigh on earnings.

Over the last three years, we’ve seen a significant increase in demand for risk analysis and a call for deep modelling and statistical analysis across banking and the wider FS industry. While there’s rarely ‘one right answer’, a greater understanding of the potential impact of risks being run has led to improved management of businesses.

Political interference, credit risk and an uncompetitive tax regime also continue to pose a threat to growth and competitiveness. Only last month, banks were hit by a surprise increase in the bank levy. Tinkering round the rate of the levy will result in four different rates being in force during the next 18 months, which is representative of the complexity of tax rules the sector now faces.

And there are further taxation challenges on the horizon. The Scotland Bill brings the chance for Scotland to vary its income tax rates and introduce its own versions of Stamp Duty Land Tax and Landfill Tax from 2015-16. Uncertainty around the operation of the new regime could have negative implications for financial services. The industry needs to engage fully with government and HMRC as the Bill progresses, to help shape the future Scottish tax regime into one that’s seen as positive and not disadvantageous or complex to administer.

Perhaps one of the more insidious risks is the ongoing reduction in decision-making in Scotland, particularly in banking. Head offices and senior decision-makers foster innovation, help drive future growth and generate markets for ancillary services.

So there is real concern that the continual channelling of decision-making to London by established organisations coupled with an insatiable demand from London for talent will have a longterm impact on the industry. To stem this flow we must carefully manage current and future talent, improve the attractiveness of the corporate culture, invest in skills and nurture future business leaders.

However it’s not all doom and gloom: Scotland has capability today and potential for the future. Although current economic assessments show we’re clearly not out of the woods yet, the latest (Q1 2011) report of the Confederation of British Industry and PwC captures a mood of cautious optimism as the banking sector starts to gear up for future growth.

The larger players in Scotland’s banking sector appear to have stabilised. We have seen the emergence of start-up banks and the relocation of some national and international financial institutions to Glasgow and Edinburgh. This demonstrates our ability to attract high-quality players. We also have strength in areas such as client contact centres and technological innovation.

It needs to be easy for decision-makers around the world to base their operations in Scotland. By showcasing the advantages of investing in a relatively small, but well-connected and specialised pool of resources, Scotland can leverage opportunities through its banking products, and operational capabilities, integrated technology platforms, attractive cost base, risk management, track record in innovation and stable regulatory environment.

Tough lessons have been learned in the past few years but there’s now a mandate and desire for change in the industry. Our report hopefully provides decision-makers with fresh insights to enable them to both seize opportunities and identify the threats they will face in today’s and tomorrow’s changing banking and FS landscape.

We need to create our agenda for change and act on it now.

INNES LEDINGHAM is a Director, Financial Services Consulting, at PwC in Scotland.

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