Scottish finance in fine fettle

DELEGATES at the first ever Scottish financial services summit, which began in Edinburgh today, have been hearing that the sector is in rude health and is expected to create more jobs, despite the problems seen on the stock markets over recent years.

The Centre for Economics and Business Research may have predicted some 15,000 job cuts in the City of London this year, but event organiser Eamonn Rice, head of financial services for Scotland at accounting giant Ernst & Young, says the Scottish sector should be able to ride out the storm.

"One key difference is the retail market here hasn’t been hit as hard as investment banking in London, which is driven by large-scale transactions," he says. "If those deals aren’t there, there’s nothing for people to do."

Mr Rice adds: "Secondly, the Scottish finance sector has always taken a medium-term view. It’s isolated a little bit from the swings and roundabouts you see in London.

"Thirdly, Scotland has done pretty well through these difficult times. Profits are up at the banks, and insurers, despite problems facing the whole industry, are recording good sales levels."

Up to 100 delegates are expected to attend the Ernst & Young Financial Services Summit, and they will hear from speakers such as Jeremy Peat, group chief economist at the Royal Bank of Scotland, former Lloyds TSB chairman Sir Brian Pitman and Nicola Horlick, chief executive of SG Asset Management.

Another of the speakers at the two-day summit, being held in the Sheraton Hotel, is Amanda Harvie, who is making her first official appearance as the new chief executive of Scottish Financial Enterprise.

She says: "Virtually one in ten jobs in Scotland relates to the financial services sector - it employs some 100,000 direct jobs and the same again indirectly. Figures suggest we are going to see significant growth in employment over the years ahead."

Ms Harvie adds: "From 1995, financial services in Scotland have grown by 57 per cent, whereas the Scottish economy has grown by only 13.3 per cent. For the UK as a whole, the finance sector only grew by 28 per cent."

Edinburgh is home to finance giants such as the Royal Bank of Scotland and HBoS, which saw their annual pre-tax profits rise by 12 and 22 per cent respectively last year.

But Mr Rice says the large banks are becoming "victims of their own success" because the market expects even more with each set of strong results.

He says: "If you have to increase your profits there are only two ways to do it - you either increase your revenues or decrease your costs. Because of the competitive nature of the market, it’s difficult to increase revenues." Nevertheless, large-scale job cuts are not on the cards, Mr Rice says. Instead, more firms may go down the outsourcing route in a bid to cut costs.

"It’s all about processes where there is no contact with the customer," he says. "Consolidating those might see jobs move to India or South Africa, but I take some comfort from the fact some major outsourcing operations have been built in Scotland over the last few years."

He adds: "Despite all the available technology, there is always an advantage to being physically close to the people who buy your services."

Another area in which finance firms can make their money work harder is bancassurance, whereby banks sell either their own life assurance and pensions products, or those of other companies.

Ray Milne, deputy managing director of Halifax Financial Services, says bancassurance is a "massive business" for the HBoS group, which last year sold £500 million worth of life and pensions on an annual premium equivalent (APE) basis.

Bancassurance originated in Continental Europe - where it dominates the market - but has been around in the UK for around 20 years.

Mr Milne says: "It’s a wolf in sheep’s clothing. In the past, bancassurance didn’t work out very well because the banks built a life operation and kept it separate from the bank.

"But our personal financial advisers are part of the branch team, so if you go into a BoS branch the adviser is very much part of the overall customer offering." Through bancassurance, Mr Milne says banks can help narrow the UK’s £27 billion savings gap, but Mike Ross, chief executive of Edinburgh-based Scottish Widows, says more must be done to ensure a comfortable retirement for the Scottish population.

The Government is attempting to encourage more people to save, and the recent Sandler report, which called for more lower-cost savings products, may be a step in the right direction. But Mr Ross believes Sandler’s proposed one per cent price cap is too stringent.

He adds: "Price caps always have some impact on margins and can make it less economic for companies to provide products in certain sectors.

"The lower end of the market is simply not being served, but this is the end that needs serving most."

However, Mr Ross says Scotland’s finance sector is holding up well, and there is "enormous growth" left in the industry.

He continues: "I’m confident the sector will perform well over the coming year, because in tough times there is usually a flight to quality, and we have a large number of high quality firms in Scotland."

People may be more reluctant to save because the terrible performance on the stock market over the past few years slashed investment returns, but Mr Ross says: "We’ve managed to weather huge falls in the stock market, and that’s a measure of how resilient we are up here."

Ernst & Young’s Mr Rice agrees: "We’re in good shape and have weathered some difficult times. But as I look forward, I can’t see anything but further difficulties ahead in the UK, and most of that will be driven by regulatory change."

He adds: "Waves of new regulations are coming over the next two years, and organisations need to prepare for that."

Forthcoming red tape in the form of the new Basel Accord - which is set to be introduced in 2006 - intends to tie banks’ capital more closely to the risk they hold, but Sir George Mathewson, chairman of the Royal Bank of Scotland, is already on record as saying he believes the changes are a waste of time.

Another wave of new rules, introduced following the collapse of WorldCom, has been brought in under the Sarbanes-Oxley Act in the United States, which calls for auditing and consulting activities to be separated in a bid to prevent conflicts of interest.

Mr Rice says: "The Sarbanes-Oxley Act will raise the bar on financial control and what I think will happen is that we will see companies, without listing in the US, having to comply with these regulations to keep in line."

Despite the challenges posed by Basel, Sandler and Sarbanes-Oxley, Ms Harvie - who took over from Ray Perman as SFE chief executive this week - believes Scotland can only grow in importance as one of Europe’s leading finance centres.

"If you look at Scotland’s position within the top ten fund management centres, we rank at number six," she says.

"We have efficiently run companies, who are benefiting from the many assets Scotland offers - quality of people, quality of information and quality of support infrastructure."

She adds: "It’s a very strong part of the economy and it has considerable potential for further growth."

Time for Scots to do summit for themselves

EAMONN RICE says he felt the time was right to organise a financial services summit in Edinburgh because most events of this type tend to be held in London.

"The other conferences tend to be focused on one sub-sector, but for us in Scotland, it is predominantly a retail business," he says.

"There are so many issues around now that I thought it would be worthwhile to gather people together to hear from some of the world’s leading authorities on the ways ahead."

While the sector has undergone radical consolidation over recent years, with the takeover of NatWest by the Royal Bank of Scotland and the merger between Bank of Scotland and the Halifax, Mr Rice believes there are few major changes waiting to happen.

"We’re in a lucky position because we have two of the UK’s big six banks headquartered in Edinburgh, along with Scottish Widows Bank, Standard Life Bank and Intelligent Finance," he says.

"I wouldn’t expect that kind of landscape to change as we go forward."

He adds: "In terms of the insurers, the big question is whether Standard Life will continue as a mutual. Despite the year they’ve just had, and all the focus on them, they are still large enough to withstand just about anything that happens to them."