Introduction
Throughout this assignment I will address why consumer trust in the financial services industry both in Ireland and the UK is at a nadir. I will explore the market crash in 2008, bad loans dealt during the housing bubble, and insider trading by investment managers. I will then outline some methods as to how the government and the financial services industry may look to implement to try and rebuild their broken relationship with the people of Ireland and the UK.
General Analysis
One of the main reasons as to why we lost our trust in the financial services industry is because of the 2008 market crash. One of the key factors that caused this market crash was a U.S.-style, easy-money real estate bubble, in which banks provided cheap credit to almost anyone who wanted to buy or build houses, dramatically increasing prices of houses. The boom lasted for more than a decade, but when the global recession hit in 2008, home prices collapsed and people could not pay back their loans, endangering the banks holding the debt. In recent years, the government borrowed more and more money to fund budget deficits in a weak economy.
Institutions lending money to the Irish government (such as the British banks) charged higher and higher rates because of worries over a possible default. For many years our low tax environment lured companies to start up business in Ireland, however once the economy went sour many of the companies left Ireland. This led to people all over the country losing their jobs, leading to a high level of emigration in search of employment. This had a negative impact on the economic growth in Ireland. Lenders then applied pressure on the government to raise taxes so they can pay back the borrowed money. It evidently became clear that the Irish banks were in trouble and the Irish government were overextending themselves to bail them out.
Another reason as to why the banks lost our trust is because of bad loans. During the time leading to the credit crunch banks were taking much more risks while lending. They loosened their criteria for giving mortgages. People were landed with large mortgages without the banks screening their new homeowners. Thus leaving people with default mortgages once the downturn occurred. These loans had been bought buy countries around the world leaving them also susceptible to any potential loses in the Irish housing market. Once the value of the houses began to drop banks soon realised they were losing a tremendous amount of money due to these mortgage defaults. The size of bank losses started to increase and it became more difficult for banks to borrow money.
This caused banks to reduce loans and mortgages, because banks were losing money, it became very difficult to get credit and liquidity. Some banks lost so much, they were running out of money. In several countries, such as UK, Ireland and US, major banks had to be bailed out by the government. But, the realisation banks were short of liquidity harmed consumer and Investor confidence.
The fall in consumer confidence led to lower spending and investment. This had a negative impact on economic growth as people were looking to save their money, taking money out of economy. During the downturn investors lost a substantial amount of money because of their investments dropped in value. Investment managers were reluctant to investing in hedge funds as they were performing poorly over the past few years. This reduced investment tremendously as people were not willing to risk losing their investment.
In the UK there has been evidence of investment manager fraud. As all of the shareholders money is pooled together the investment manager is tasked to find an honest profitable investment for the shareholders to invest in. Considering many investment managers have been found to be involved in insider trading, this has greatly reduced investments into hedge funds and reduced consumer confidents in the financial services industry both in Ireland and the UK. Mark Lyttleton, a former portfolio manager at ‘BlackRock’ is an example a guilty insider trading in the UK. He has admitted to dealing in 2011 on the basis of insider information.
The FCA said: “Mr Lyttleton was able to discover and act on inside information either by working on the deals concerning the stocks or being party to conversations conducted by colleagues. The two stocks concerned are EnCore Oil (between 1 October 2011 and 13 October 2011) and Cairn Energy (between 4 November 2011 and 17 December 2011).”
It added: “Mr Lyttleton was able to use the inside information to inform his purchase of shares a short time before any public announcement was made about the stocks concerned. The trading was conducted by Mr Lyttleton through an overseas asset manager trading on behalf of a Panamanian registered company.”
Even though there was no impact to any of BlackRock’s clients as a result of Lyttleton’s actions, the clients will have lost their trust in the industry after being shown that these kind of dealings are taking place with their money without their consent. If the financial services industry has any chance of winning the Irish and UK’s trust again they will have to make adjustments to how they misused their consumer’s confidents in the past. They will have to implement a stricter criteria when giving out loans. They will have to carry out a screening and make sure the people who are applying for loans are in a good position to pay off the borrowed sum (good credit rating, secured job). They will have to stop giving people full mortgages to limit their risk of default. They will also have to lower the interest rate on loans if they wish to have more money flowing through the economy to improve economic growth. There will also have to be a more transparent way of investment managers to carry out their work to assure their clients they’re not breaking the law with their investment.
http://www.efinancialnews.com/story/2016-11-02/mark-lyttleton-blackrock-guilty-insider-dealing
Conclusion
To conclude, the financial services industry has lost their consumer’s confidence due to the events that occurred up to, and during the market crash of 2008, the banks need to ensure they do not over extend themselves once more. They need to have a stricter criteria in terms of giving loans to limit their risk of having default loans. They must ensure that a person has a good credit rating to maximise their likelihood of receiving the borrowed sum.
This kind of caution was exactly what was needed during the 2008 crash but unfortunately the government and financial industry was caught in the ‘housing bubble’ and were focused on the past’s economic growth figures instead of predicting the futures. There will have to be action taking to see to that insider trading is now a thing of the past, as fraud is not acceptable. This could be achieved by having a supervisor to track deals made by investment managers or raising the consequences of breaking the law. They must also realise that to fix a problem, one needs to understand what caused it. They must learn from their mistakes to ensure this downturn will not occur once again. These are some small steps the government and financial services industry could take on the long road back to regaining the trust of the residents of Ireland and the UK.