Britain's labour party woos banks but risks profit squeeze

As the UK's Labour Party aims for power in the upcoming July election, its historically adversarial stance towards banks has softened.

Under the leadership of Keir Starmer, the party has garnered support from business owners and financiers by promising stability and a balanced approach to taxing the financial sector, which contributed over $139 billion in tax receipts in 2023.

However, despite this rapprochement, some of Labour’s proposed policies could still impact the sector's profitability.

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Starmer’s Labour has promised to improve the financial stability of households, many of which have been struggling due to more than two years of mortgage market instability and a cost-of-living crisis.

This includes a review of the advantages of longer-term fixed-rate mortgages, intending to protect homeowners from sudden interest rate changes and make homeownership more attainable.

Analysts, lenders, and brokers believe that this could result in broader changes in mortgage and financial products, potentially shifting the balance in favour of consumers.

In the UK, traditional mortgage products differ from those in the US, Germany, Denmark, and the Netherlands as they put all the interest rate risks on borrowers. Unlike in these countries, long-term fixed-rate mortgages are more common.

According to Reuters, Daniel Austin, CEO of ASK Partners, pointed out that a 10-year fixed-rate mortgage is always more expensive, which creates a potential cost barrier for such products in the UK.

British lenders manage risk differently, often through interest rate swaps, which have become more expensive due to recent political and economic turmoil.

While Labour has ambitious policies, it is not anticipated to implement a bank windfall tax or make significant changes to the Bank of England's interest payments to banks, both of which were previously under consideration.

This aligns with Starmer's overall pro-growth position, which is widely believed to be advantageous for UK banks.

However, some Labour policies may reduce bank profits in the long run. The party's commitment to establishing up to 350 'banking hubs' over the next five years contradicts the cost-cutting strategies of many banks. Shadow finance minister Rachel Reeves characterised this plan as a means to rejuvenate communities affected by widespread branch closures.

The 'Freedom to Buy' scheme by Labour is designed to help 80,000 first-time buyers over five years. However, it's unlikely to have a significant impact on banks' mortgage volumes, which total over one million annually.

To improve the situation, the industry needs to educate customers about how they can optimise their finances by switching their savings or mortgage products to achieve better returns.

Furthermore, the overall context of declining interest rates is expected to put pressure on bank profits. James Daley, the managing director of Fairer Finance, highlighted that banks' profits will face additional scrutiny in the credit card and current account markets as consumer value becomes a focus of regulatory attention.

(With inputs from Reuters)