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Creating negotiating interest with the big banks

Against the backdrop of the large disparity between interest rates and mortgage rates, how does the UK government negotiate with the UK banks when their respective objectives are in conflict? The government wants to dampen inflation - encouraging the public to save, not spend. This is however in conflict with the relatively low interest rates the banks are offering against comparatively high mortgage rates – the difference is where they make their profits.

With difficulty, is the short answer – but as with most things, it’s a bit more complex than that.

Firstly, the government or their proxy, the Financial Conduct Authority (FCA), needs to plan well. When our objectives clash – don’t make negotiating your first port of call – there is always a cost involved.

Clearly define the outcome you want to achieve from the meeting. This of course can range from, being seen to do the right thing by applying some social pressure in the glare of publicity – right through to wanting some specific commitments from the banks which the FCA can announce to the public (there is a general election not too far away after all). If it’s the latter, clear, specific and realistic proposals are the order of the day.

It may be that the FCA can seek to influence the banks – using authority in the form of historical data and events to suggest positive outcomes for the banks if they agree to said proposals.

Alternatively, problem solving could also work. Agreeing to change timescales over which rates are increased (or decreased later), payment holidays and extensions may all help to some extent.

Negotiating however is somewhat more difficult. In order to get a counter party to trade, there has to be sufficient ‘motivation’ i.e., potential incentives and/or threats in order to get the other side to be prepared to move from their current position.

Without being party to the all the details, it’s only possible to speculate as to what this might look like:

  • Deregulation and flexibility

In the past this has been a key driver for the growth and success of the UK banking sector. With Brexit now fully in place, are there further initiatives in this area which might encourage the banks to move on their interest rate position?

  • FSCS Compensation Scheme

Currently the government underwrites the first £85,000 of savings for customer accounts for all of the big banks. Possible withdrawal of this cover could see customers flocking to perceived safer alternatives.

  • Premium Bonds

Talking of safer alternatives, disproportionately raising the returns that can be expected on premium bonds could be another strategy which achieves the same objectives.

These incentives and sanctions need to be carefully reviewed before any specific proposals are made.

It will be interesting to see what happens, negotiating is often facilitated by change – a lot of people and businesses are banking on it.

Sam Macbeth, 6th July 2023

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