Although Labour, a left-leaning party, has courted bankers in a bid to achieve power, several of its policies are still anticipated to negatively impact the industry’s earnings should it win next month’s election. Labour was once perceived as being antagonistic to banks.

With promises of stability and a more equitable approach to taxing the financial and professional services sector, which accounted for more than 110 billion pounds ($139 billion), or 12.3% of all UK tax receipts in 2023, Leader Keir Starmer has won the praise of financiers and business owners.

However, the party is still anticipated to rely on business to strengthen the financial stability of consumers and households, a large number of whom have been disproportionately impacted by the crisis in the cost of living and the instability of the mortgage market for more than two years.

In the last two years, a number of British lenders, such as HSBC, Barclays, Lloyds Bank, and NatWest, have announced record profits. Strong lending margins, a low number of loan defaults, and moderate interest rates given to depositors have all supported these.

The Labour Party has stated that, among the topics it has emphasised in the lead-up to the July 4 election, it would examine and create a new tab on the advantages of longer-term fixed rate mortgages to protect homeowners from abrupt fluctuations in interest rates and increase accessibility to property ownership.

Because of that promise, some analysts, lenders, and brokers are speculating that a Labour administration may look to make further changes to mortgages and other financial services and products in an effort to shift the scales back in favour of consumers.

“Traditional mortgage products place all the interest rate risk with borrowers,” said Arjan Verbeek, the chief executive of challenger bank Perenna.

Banks in Britain tend to provide fewer long-term fixed rate mortgage programmes than in the US, Germany, Denmark, and the Netherlands. Lenders have ascribed this to low demand from borrowers who are concerned about “missing out” on lower payback costs when base rates decrease.

The CEO and co-founder of ASK Partners, a specialised lender to the real estate industry, Daniel Austin, stated that longer term mortgages with fixed rates would offer first-time buyers more certainty but would come at a cost to providers.

“A 10-year fixed rate (mortgage) is always a lot more expensive, so the idea will not work if the cost of a 25-year fixed rate becomes prohibitive,” he stated.In the United States, banks can lower their expenses and risks by reselling longer-term mortgages; however, British lenders typically insulate themselves from such dangers by taking out interest rate swaps, which are protection contracts with a length equal to the house loans, according to mortgage bankers.

This entails extra expenses, and due to political unrest and growing inflation over the past two years, the cost of these exchanges has skyrocketed.

According to statistics from Moneyfacts, just 3% of UK residential mortgage arrangements that were available as of June 19 had a set starting term of ten years or longer.

“A 10-year fixed rate (mortgage) is always a lot more expensive, so the idea will not work if the cost of a 25-year fixed rate becomes prohibitive,” he stated.In the United States, banks can lower their expenses and risks by reselling longer-term mortgages; however, British lenders typically insulate themselves from such dangers by taking out interest rate swaps, which are protection contracts with a length equal to the house loans, according to mortgage bankers.

This entails extra expenses, and due to political unrest and growing inflation over the past two years, the cost of these exchanges has skyrocketed.

According to statistics from Moneyfacts, just 3% of UK residential mortgage arrangements that were available as of June 19 had a set starting term of ten years or longer.

“After years of low rates and sub cost-of-equity returns, banks are currently making normalised, rather than supernormal, profits,” RBC Capital Markets analyst Benjamin Toms said.

“Labour looks to be taking a pro-growth stance which will be helpful for UK banks.”

Over time, further Labour Party measures might reduce bank earnings potential, according to industry insiders and bank experts.

The party said this week that it will “bring face-to-face banking back to the high street” by creating up to 350 “banking hubs” over the course of the next five years. This ambition, however, is at odds with the cost-cutting strategies of the majority of lenders.

With almost 6,000 locations closed since 2015, these hubs—funded by the banks—will assist localities left as “ghost towns” as a result of branch closures, according to opposition finance minister Rachel Reeves.

It is also doubtful that the party’s flagship initiative, the Freedom to Buy plan, which aims to assist more Britons in getting onto the property ladder, would signal a new age of bank profits.

“It’s expected to help 80,000 first time buyers over five years, which is not game-changing for banks in the context of mortgage volumes greater than one million per annum,” Toms said.

The sector, regardless of the political party in power, should demonstrate to consumers how they may improve their financial situation by moving to a different savings or mortgage product, according to Chris Irwin, Director of Savings at Yorkshire Building Society, and Moneyfacts expert Rachel Springall.

According to YBS statistics, more than 366 billion pounds of savings are trapped in low-interest accounts, costing investors more than 1,000 pounds in lost yearly income. The Financial Conduct Authority requires financial institutions to prioritise the requirements of their consumers.

“The main reason bank profits will fall is that rates will come down. But I also think bank profits will come under pressure in the credit card and current account markets once the fair value spotlight swings over to those sectors,” James Daley, managing director of Fairer Finance said.

(Adapted from Investing.com)

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