Local financial services sector ahead of the change

Local financial services sector ahead of the change

Philip Grant, Chairperson of Scottish Executive Committee, Lloyds Banking Group, discusses Scotland’s appetite for digitization and sustainability and the importance of teamwork in the financial services sector to promote investment and growth.


What is Scotland’s current economic situation given challenges caused by the COVID-19 pandemic and Brexit?

The current economic story is all about the COVID-19 recovery. The question is if we will have a settling point or if we need to plan for an annual health and economic cycle for the foreseeable future.  To date, we have been pleasantly surprised by the speed of recovery and lack of evidence of broad lasting impact. Each new variant of the virus brings uncertainty, but we seem to be managing without complete lockdowns. However, the risk remains. We had anticipated to have a more evident labor market impact arising from the lockdowns and period of economic inactivity. However, the economy has proven to be exceptionally resilient. We are coming back stronger and faster than expected from out of the furlough scheme in the U.K., which applies in Scotland.

When you look at the economic data, Scotland’s gross domestic product tends to lag slightly in the overall U.K. trends. It is likely to be the same in terms of recovery from the COVID-19 period. Some sectors are having more difficulty than others. There are strong tourism and hospitality sectors in Scotland, which both had a difficult 18 months. These sectors are still being impacted by the combination of Brexit and COVID-19 in terms of supply of skilled labor. Scotland is watching these sectors closely in terms of impact. Most sectors—particularly services—remain strong and have been resilient despite the COVID-19 pandemic. The financial services sector was consistently stable throughout this period, and engineering, manufacturing, information technology and wider technology sectors have all come back surprisingly quickly. However, there is still some uncertainty about how the situation is developing. In the next 12 months we will continue to navigate and study the evolution of the COVID-19 period, even more so than Brexit.

The impact of Brexit on the wider economy is not yet fully evident. Obviously, there were some complexities around distribution chains, particularly in areas like food, fisheries and logistics. Disrupted supply chains was an early outcome. However, it will take at least 6-12 months to process this data and get a better idea of the situation. Certain sectors such as financial services and banking will take more time as there was a considerable amount of COVID-19 support debt taken on by small and medium-sized enterprises. These entities represent the vast bulk of the Scottish economy by number and employment. There was some concern six months ago about what burden the government loan schemes delivered by banks might have. Currently, there is little sign of distress, but time will tell. We are moving into the repayment phase of these loan schemes. We are commencing and structuring repayments and managing the additional debt. Every month that goes by we are getting more confident. While I am optimistic about the general economy, we are focused on certain sectors that are going to require closer support and patience over the next 12 months to recover from the COVID-19 crisis and potentially Brexit.


How has the COVID-19 pandemic pushed the rate of digitization forward in the financial services sector?

From a business strategy standpoint, the COVID-19 period has been ironically liberating. The financial services industry has adapted quickly to both the immediate impact of the lockdowns and the evolution of hybrid working. Technology has allowed us to reshape our workplace relationship. Additionally, there was a renewed clarity about the need to help customers and tend to their requirements faster and more directly. If customers were unable to come to us, the entire digital environment had to be expanded in their direction. The crisis has taken five years off the acceleration of our thinking and delivery of how we engage with customers more effectively in a digital environment. This has also required the greater financial services sector to reflect on how slow we have been in the past to innovate and deliver change. Within Lloyds Banking Group (LBG), we effectively boiled away much of the process around getting things done and started from first fundamentals; we made sound decisions a lot faster with a smaller number of people. The pandemic has done more to enhance agility than any other waves of consultancy in the last 20 years. It has been a forcing mechanism for simpler and cleaner ways of working and thinking. Our recent Embark acquisition was an opportunity to accelerate this simplification and broadening of our proposition. In previous years, we may have taken three or four years to build this capability.



What impact has new fintech companies had on Scotland’s greater financial services sector?

Scotland has grown its fintech sector at an ambitious rate of development. LBG is establishing an ecosystem in Scotland that allows for mutual benefits arising from small, fast-growing innovative fintech companies developing alongside large established brands and financial services businesses with large customer bases, data and opportunities. Despite the pandemic there has continued to be strong investment and innovation in fintech. There are real opportunities for larger financial services businesses to productively integrate smaller fintech companies and technologies into our business models. Five years ago, the risk was that a highly innovative business would be acquired by a large bank or insurer and its culture and value would be eroded. We have learned a lot of lessons as an industry. In recent years, LBG has understood how to enhance our proposition while benefiting from the value the fintech sector represents. This goes everywhere from holding innovation labs to encouraging small fintech companies to showcase their propositions and compete for investment and support all the way through to corporate acquisition. This area is growing exponentially in Scotland.

LBG recently announced the decision to acquire a business called Embark Group, which is a sizable, fast-growing fintech business with a large site in Dundee. The Embark acquisition is relatively straightforward in rationale. We have a strong business and brand in Scottish Widows and our banking brands, but we lacked capability and proposition in an investment platform. Embark has a leading investment platform. The application of their technology and innovation in our business will mean we can transform many of our propositions, such as retirement. We can transform these areas to give customers more flexibility and choice in how they invest their money and digitize these propositions. We have a large online share-dealing platform company called Halifax Share Dealing that we will be able to re-platform onto a new fit-for-purpose proposition with more capability. Additionally, Embark allows us to create a direct-to-consumer investment proposition using the strength of our group brands. The acquisition also introduces a new innovation culture into LBG. We are ambitious to grow our insurance and wealth business going forward. Our focus in the last 18 months has been supporting our customers and the economic recovery. We are also now starting to see businesses that share our ambition. We will continue to look for opportunities in Scotland and beyond.


What has LBG done to promote sustainability in its internal workings and for its customers?

Lloyds Banking Group can impact the green transition in many ways. For example, at Scottish Widows we recognize our responsibility to make sustainable investments as stewards of our customers’ life and pension monies. We have recently developed many initiatives around tilting our default pension funds toward a sustainable balance of investments. We have launched a new tool for our customers to allow them to understand the impact their investment choices can have on sustainability. We have been supporting BlackRock’s innovation in new environmental, social and corporate governance funds. From investment and pension points of view, we have a critical role in giving our customers confidence that we are investing sustainably and are eager to build up our capabilities to make these choices.

There is a new discipline evolving within the financial services sector in Scotland around sustainability and sustainable investment. Traditionally, it has largely been fund managers looking for guidance from the scientific community to make the right investments. We need to develop a new discipline within finance that combines finance and environmental science to ensure we can make principle-based decisions and apply sound judgment rather than solely relying on the direction and information of others. Many businesses in Scotland find it difficult to identify where they are required to make a transition. Our relationship managers have all undergone extensive training by the Cambridge Institute for Sustainability Leadership to ensure that they can credibly advise and direct our customers.

Our banking business directly funds and incentivizes companies to make the green transition. We are targeting businesses who are transitioning to a low-carbon economy with another £5 billion of additional transaction funding across the U.K., outside of the £8.6 billion we have already distributed in green finance since 2016. We also have a new clean growth finance initiative that incentivizes the carbon transition through a margin of discount; the cost of finance is lower across traditional banking finance instruments if the funding is being applied in this area. We also have sustainability linked loans where we incentivize businesses to benefit from measurable environmental improvement outcomes. We have already delivered £1.3 billion of these facilities in 2021 in which there will either be a discount applied to the margin of the lending or a penalty applied to it, depending on if the business is exceeding or not hitting predetermined environmental outcomes. We have also provided about £2 billion to housing associations who are providing rented properties in the U.K. About £1.4 billion of that is directly linked to environmental, social and corporate governance outcomes and enhancing home quality, particularly heating. Agriculture is another area we are supporting. We are heavily subsidizing tree planting through The Woodland Trust; our customers can benefit from discounts up to 75 percent on tree planting. Through our subsidiary Lex Autolease, we are the largest funder of electric vehicles in the U.K. Finally, we have propositions such as green bonds where we are going to the market with an investment proposition and applying funding throughout the aforementioned initiatives.

We are also a major lender in renewables project finance. We acknowledge the EU’s Just Transition challenge, and we want to find ways to ensure that in whatever economic circumstances a community finds itself, it has access to financial support to participate in the transition. We are working on what mechanisms delivers the highest scale of impact and is well balanced across the entire range of our customer base. In time, we want all our propositions to make some contribution toward the carbon transition. We have 2030 and 2050 targets for our own footprint and that of our customers. We have joined regulators around reporting carbon emissions and have accelerated our customers’ consolidations to report the carbon impact of all our lending activities. In five years, green finance has accelerated and is now a huge part of almost every proposition within LBG. From a skills and capabilities point of view, Scotland has an opportunity to accelerate our sustainability proposition in the U.K. and farther afield.


How important is Scotland to LBG’s larger portfolio?

Scotland is important to LBG and vice versa. We are the largest U.K. banking and insurance business with around 25 million customers across the country. We bank and support about 2.5 million of these customers in Scotland. About 20 percent of our 75,000 colleagues are based in Scotland, and we deliver strong local brands, such as Scottish Widows and Bank of Scotland. We serve brands and customers of LBG across the U.K. and Scotland, particularly in areas like telephony service and support. About 150,000 businesses in Scotland bank with Bank of Scotland alone; we recognize the responsibility and importance of LBG to Scottish businesses and the economy. The financial services sector accounts for about 9 percent of Scotland’s gross domestic product, with 160,000 direct and indirect employees concentrated in Edinburgh and Glasgow. The latter city is a growing location, highlighted recently by Barclays Bank opening their financial campus on the banks of the River Clyde.


What has LBG done to support small and medium-sized businesses in the U.K.?

We have provided direct support of about £13 billion for the U.K. government’s lending schemes. However, we recognize that soft support of businesses is equally of value. Our relationship managers have worked closely with our customers during the COVID-19 period to ensure they understand impacts made evident in their business, both currently and at the end of government support periods. We also worked hard to help customers understand the impact of Brexit as it was happening at the same time. We increased resources to our teams around the period where businesses were recommencing or accelerating trading and worked closely with them to make sure that their working capital cycles were well understood and supported. Through the pandemic we recognized that providing information and support in a readily accessible way is equally as important as funding businesses. We coordinated with the other banks through Scottish Financial Enterprise and the Scottish government to ensure that any concerns about the way they were being supported could be rapidly accelerated, reviewed and addressed by individual banks. We are conscious that there is currently a huge amount of uncertainty and insecurity at this time.


As chairman of Scottish Financial Enterprise, you are dedicated to improving innovation and ultimately economic pathways in the country. What is the organization’s current strategy?

The first big step in our strategy was the creation of Fintech Scotland, which was established four years ago as a focal point for innovation in Scotland. It has been successful in internationalizing fintech capabilities and opportunities in Scotland. It acts as a center for the industry, attracts investment and promotes opportunities that Scotland represents. Scottish Financial Enterprise represents most large financial institutions operating in Scotland along with fintech companies and professional services businesses. In support of the economic recovery, Scottish Financial Enterprise members are committed to developing Scotland as a center for green financing and transitioning the country to having net-zero carbon emissions. We believe in aligning innovation, skills, academia and industry. As a small country with a close business community, it is possible here to drive these types of initiatives within a relatively small pool of responsible individuals. We are aligned with academia and business schools in the development of skills and provision of career pathways into our industry. We currently have strong universities producing graduates who are leaving to go to places like London or New York to develop their careers. We believe we can provide strong starts to career pathways in Scotland, be it through internships or other programs within businesses. We want to ensure Scotland can develop skills at an academic level and channel them into the local financial services sector.


How attractive is Scotland as a destination for foreign direct investment?

The Scottish financial services industry is active in supporting inward investment applications. Scottish Financial Enterprise and its members see the value of having more financial services firms in Scotland. The scale helps us all develop both the sector and Scotland. I actively meet with firms that are considering investing in Scotland to talk to them about the interconnectivity of business elements in Scotland and the financial services sector. While it may seem unusual for someone from LBG to speak to a competitor and encourage them to invest in Scotland, it is in our mutual interest to have a thriving sector, provide skills and attract talent. In recent months there has been a healthy level of interest in investment into Scotland. It is an attractive location from a financial services point of view and has a strong global reputation. There are many solid global names operating in Scotland in conjunction with a robust domestic market. The whole fintech story is gaining traction and visibility and adding to the identity of financial services in Scotland.

The Scottish economy is an excellent place to do business from, with its size as its best asset. The connectivity between skills, existing businesses, government and professional services is such that one can get things done quickly. There is an alignment in ambition between the financial services sector, academia and the government in both Scotland and the U.K. to ensure an environment that aligns innovative ideas with the goal of achieving significant impact. Innovation extends from Edinburgh across Scotland. We are starting to see the benefits of investments in terms of location and collocation across Scotland. There is also momentum in aligning the existing financial services sector with the fintech sector. Scotland benefits from a financial services sector that is focused on the recovery of the local economy. This local focus provides fertile ground for global names operating on a global scale, particularly in areas such as asset management. The ecosystem will be a productive place to develop businesses over the next two to three years, particularly in the financial services sector.