A new bank in town: the approval of Revolut’s banking licence
On the 24th July, the global fintech company, with over nine million UK customers, officially received its UK banking licence, years after it first applied. Whilst Revolut securing a licence is a positive step towards the liberalisation of banking and giving the average person greater freedom of choice, this begs the question as to why this has taken so long.
The news about Revolut’s banking licence approval has been met with great support for diversifying the current banking market, however, the addition of a singular bank falls short of neighbouring countries, such as Germany. The German economy benefits from the thousands of licensed banks compared to the five banks that make up Britain's banking and financial services, making the UK’s banking network one of the most homogeneous in the world. The small number of banks available to the general public has somewhat monopolised the arena for which the average consumer in the UK has very limited choice. In fact, the five leading banks—Lloyds Banking Group, RBS, HSBC, Barclays, and Santander—have an 85% share of the personal current account market, illustrating the limitations for the consumer.
Revolut, who has 45 million worldwide customers, already had licences in Lithuania and Mexico. It now hopes that the UK’s approval will help it to expand its activities in key markets like the US and Australia. It had filed a licence application back in early 2021 but had faced substantial setbacks. The reasons stated included trouble with revenue verification, following delays to the 2021 and 2022 accounts being released, as well as the departure of senior executives and the ownership structure. The entry of Francesca Carlesi, former Deutsche Bank executive, into the company’s leadership back in November has helped subdue the technocrats at the Prudential Regulation Authority (PRA). While there is the argument to be made that filing an earlier application, when the company had been much smaller, which may have helped it secure its licence faster, the argument fails to remove the fault resting on the overly stiffened bureaucracy taking so long to approve one of the most trusted Electronic Money Institutions in the UK.
The company differs from more traditional banks in its focus on primarily online banking - a move which has drawn customers through its accessibility and ease of entry. It is in talks to sell $500mn worth of shares in the hopes of boosting its market valuation from $33bn (as valued in 2021) to $45bn - a move which, if successful, might make it a contender for third place among UK banks, replacing Barclays and being only surpassed by HSBC and Lloyds Banking Group. However, there are growing concerns that the current macroeconomic environment, with a drop in interest rates expected soon, might reduce Revolut’s profits. Considering the fact that interest income had accounted for over a quarter of the company’s revenues last year, this may pose worries.
The three year wait for Revolut’s licence exemplifies the red tape delays in the British banking market produces and, despite the longevity of the wait, the licence provided comes with significant restrictions, meaning that new products from Revolut will be unable to be launched, further limiting the choice of individuals. The Bank of England’s suggestion for the movement into the mobilisation stage, provisioning a conditional phase allowing for finalisation of the IT infrastructure, governance, and risk management frameworks. Revolut must attempt to secure further investments but in the meantime this phase allows greater protection of the Financial Service Compensation Scheme (FSCS) for customers. It must be noted, that the provision of the mobilisation phase does not allow for the complete success of the liberalisation of the financial sector, rather further illustrates the struggle that innovative banks face in licensing agreements.
Whilst Revolut’s licensing has the potential to benefit UK customers, protecting their money, the need for greater removal of red tape around regulation on businesses is essential to economic growth, with the overcomplicated nature of the regulation strangling businesses and growth in markets. The need to reassess British financial markets is becoming ever more obvious and therefore necessary to boost the economy through greater competition between a multitude of banks and attract greater investment, something which the government’s slow pace of reform is limiting.
Getting wealth entirely wrong
So a report to come from the Resolution Foundation and, given the source, one that’s going to entirely miss the actual point about wealth:
Rachel Reeves could quickly find around £10bn a year to plug half of the fiscal hole left by the Conservatives if she were to raise taxes on soaring levels of unearned wealth, according to leading economists.
Tax as a portion of GDP is already the highest since WWII. The problem is therefore how much and what it is being spent upon, not the collection of revenue. So, there’s one bit of guidance on closing the black hole - spend less.
But the mistake goes further:
The report finds that levels of wealth have risen from four times the national income when Labour was last in power to six times the national income today, despite the recent rise in interest rates.
Even a brief familiarity with the numbers will show us what’s wrong with this insistence. For of course the implication is that there’s some group of Moneybags out there sitting on all that wealth a la Scrooge McDuck. Which isn’t, at all, a useful picture of wealth in Britain.
“Financial assets” is that portion of the population’s wealth which is - potentially at least - owned and sat upon by pince nezed waterfowl. This hasn’t changed much in even nominal terms, let alone real or as a portion of the economy. The two - by far - largest portions of wealth are house prices and pensions funds.
House prices we want to reduce anyway and we’ll do so soon enough once we blow up - kablooie - the planning system. Pensions, well, has anyone noted that we’re an ageing population? That we all now live 15 and 20 years into retirement rather than 3? Therefore we all save more into our pensions as we’ve a couple of decades to finance with them. We even have long and agonising conversations about how to encourage more of this desirable behaviour.
Overall, the Resolution Foundation study finds that wealth inequality is nearly twice as high as income inequality. It notes that on the eve of the pandemic, three in 10 families had less than £1,000 in savings – meaning they lacked any real safety net.
Wealth inequality always is higher than income, that’s just the way things work. And it’s wildly wrong to say that people lack a safety net in a country with a welfare system. What does anyone think we have the welfare state for if it’s not to provide a safety net? Meaning that folk don’t have to have direct savings because the welfare state already does that.
Finally, if pensions are a vast portion of wealth - they are - and we’ve an ageing population - we have - then we’ve got to take lifecycle effects into account when surveying that wealth. For, clearly and obviously, household wealth will peak just before, at and just after retirement date. Which no one does bother to do. That “top 10%” has a very definite age profile to it that is.
The reality here is that the establishment has managed to spend all and more of what can be squeezed out of the population’s incomes and consumption. Therefore there’s a desperate casting around for a - any - other form of taxation that can be imposed and damn logic or even analysis while doing so. The correct answer of spending less of everyone elses’ money isn’t discussed. For who does go into politics other than to spend everyone elses’ money?
Tim Worstall
Time for the Competition and Markets Authority to go perhaps
If you charge a lower price than the other guy then you’re driving them bankrupt - unfair competition. If you charge a higher price then you’re gouging the consumer. And if you charge the same price then of course you’re colluding. This means that any bureaucracy looking at pricing in the economy always has a way to hang you:
Petrol stations have been branded “outrageous” after overcharging motorists by £1.6bn last year.
The Competition and Markets Authority (CMA) found that petrol stations’ fuel margins – the difference between what a retailer pays for its fuel and what price it sells it at – remain significantly above pre-pandemic levels.
The regulator said the price mark-up was particularly stark at supermarkets, whose fuel margins are roughly double what they were in 2019.
Erm, OK. But what was happening in 2019?
Motorists should not expect to see a return of supermarkets using cheap fuel to lure in shoppers, an industry source has told Sky News.
Oh:
Cast your mind back to the bad old days before the pandemic when the supermarkets were always trumpeting their latest cuts in the price of petrol, and thousands of independents hated them for it. The supermarkets claimed their financial muscle meant their costs were lower than the rest of the market – which was true – and they were simply passing on the benefit to their customers. But everyone knew they were also taking a minimal margin in an attempt to draw shoppers into their stores.
Gosh:
Supermarkets have the incentive to sell cheap petrol as a loss leader. Independent retailers make all their profit from petrol (except selling food in small shops). However, supermarkets have an incentive to offer cheap petrol to encourage people to go to Tesco or Sainsbury’s. People often do both petrol buying and a big supermarket shop. Therefore, even if the profit margin on petrol is very low, it doesn’t matter because they will make a profit from selling more groceries. This has been another factor in lowering prices.
Supermarkets and other fuel retailers will soon have to publish live fuel prices. Will food be next? Be honest and get ahead of the transparency curve. Major food retailers should show real leadership by ditching loss leaders.
For car owners, such price cutting seems heaven-sent. For the major oil companies, it is a gamble forced upon them by the supermarkets. Esso and Shell are having to take such drastic measures to arrest the decline in their market share as millions of customers switch to supermarket pumps.
Superstores such as Tesco, Sainsbury’s and Safeway are effectively operating as oil companies, buying cheap petrol supplies in huge volume on the open market, and retailing through their on-site filling stations.
So, before pandemic lockdowns and so on the supermarkets were selling petrol at low or no margins as loss leaders. The CMA observed and thought this was bad. Petrol retailers have to provide their pricing now in a transparent manner and this has - given the crackdown on loss leaders - led to prices and margins rising. The CMA observes this and thinks that it’s bad. The supermarkets are ripping off consumers by not selling petrol as a loss leader, instead charging a more normal margin.
The CMA is complaining about the effects of its last complaint. This is the sort of self-regarding behaviour that will turn even a bureaucracy blind.
The thing is we’ll never change the behaviour of a price monitoring bureaucracy. They will always do this - it’s either too aggressive, gouging or collusion. It’s never, ever, market participants simply competing. As we’ll never change the behaviour of the bureaucracy better to do without the bureaucracy. And the taxpayer thereby saves the cost of it which they could apply, as they wish or not, to petrol.
Tim Worstall
Elinor Ostrom did not solve the Tragedy of the Commons
Elinor Ostrom did gain her Nobel for asking that very interesting question - if the Tragedy of the Commons is inevitable then how come we have commons that have survived? In the absence of Hardin’s only two solutions, capitalist ownership or socialist regulation that is?
The answer being that sometimes - time and place dependent - social pressure and mutual agreement can do the job.
Every Thursday at noon, outside the west door of Valencia’s cathedral, nine black-cloaked figures – one wearing a banded cap and with a ceremonial harpoon by their side – gather for their weekly meeting, as they have done for hundreds of years. This is the Tribunal de les Aigües (Tribunal of Waters) – a water court that may be the oldest institution of justice in Europe.
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The tribunal was of special interest to Elinor Ostrom, winner of the Nobel prize for economics in 2009, who considered it an ideal example of “the commons”, where communities around the world have devised rules for sustainably sharing and managing their scarce resources, from waterways to fisheries to forests. It is a direct counter to the mistaken idea of the “tragedy of the commons”: the belief that, left to our own devices, self-interest will necessarily drive us towards overusing shared resources. Examples like Valencia, as well as the water boards (waterschappen) in the Netherlands that manage canals and Bali’s subak system that has functioned to share water among rice farmers for the last millennium, reveal this to be a myth.
Ostrom’s question - the difficult part always being asking the interesting question - shows that this answer will work. Sometimes. 11 old farmers sitting outside a cathedral will work on a small and tightly knit community of farmers. Who’s cleared their section of irrigation canal, who is taking more than their fair share of water etc. But, time and place dependent:
Valencia’s water court may even hold lessons for the parched countries of the Middle East. More than a decade ago, leading Palestinian hydrologist Abdelrahman Al Tamimi suggested they should “import and adapt the model of the Tribunal of Waters … not only to resolve conflicts between farmers, but to reduce tensions between Israelis, Palestinians and Jordanians”. Without such mechanisms, he believed, there was little chance of developing the grassroots trust and dialogue to manage water scarcity effectively. “We can fight for water or cooperate for it – it depends on us,” said Tamimi. “The first step is to trust each other.” The current conflict has only heightened the need for long-term water collaboration.
The entire Jordan watershed is not, quite famously, the sort of tight knit community which can be ruled and judged by 11 old farmers. The social pressure simply isn’t there. Thus we are back to Hardin’s two possible solutions.
The very absence of the necessary community tells us that the community solution will not work. QED.
Of course, it’s possible to wonder why anyone bothers reading social science research if they’re not willing to understand the answers given in social science research.
Tim Worstall
To point out that this is a very, very, silly idea
Of course, given that it’s Robert Reich talking about economics and taxation is proof enough of that headline. But we’ve heard little whispers that some would like to think of doing this in Britain too. It’s an extremely silly idea:
If a wealth tax is not politically feasible, an alternative would be to end the “stepped-up basis” inherent tax rule that allows heirs to great fortunes to avoid paying a dime of capital gains taxes.
The step up rule is not about absolving people of capital gains taxes. It’s to make them subject to inheritance taxes.
To take a slightly stylised real world example. Jeff Bezos is, dependent upon the day and the hour, worth some $200 billion. Assume that’s all Amazon shares - it isn’t but just assume for a moment. We forget the actual number but upon incorporation of Amazon Bezos paid some $5,000 or $10,000 for his shares as his part of capitalising the company.
We can say whatever we like about the glory of capitalism in the returns available to those who enrich the rest of us or, obviously, as some do the rapine of the body economic by such concentrations of wealth.
But the step up basis. At the point of the death of Mr Bezos - long may he prosper, long in the future may that unhappy day be etc - what is the value of those Amazon shares? $5,000, the original purchase price? Or $200 billion, the current market value?
The step up basis is that death of the owner crystalises valuations to current market value. Values are stepped up from purchase to market value as the basis of evaluating the estate for inheritance tax.
Whether there should be inheritance tax or not is another matter. What the rate of such a tax should be equally so. But if there’s going to be an inheritance tax we’ve got to agree upon how we value what for the purpose of said tax. The step up basis is exactly that, market value at time of death.
Eliminating the step up means that the Bezos estate gets charged the estate tax on the $5,000. This is not a logically sound basis for such a tax.
That the inheritors don’t get charged capital gains tax upon what they inherit is a logical consequence of this. They’ve just paid 40% so the value at death is the starting point for any future tax liability.
It is, of course, possible to change this system. Perhaps no inheritance tax but CGT on assets inherited. Or the current IHT and no CGT.
Reich - and others who purport to support the abolition of the step up basis - never do seem to grasp that the point is to enable the taxation of the estate. And doing both - CGT and IHT - would have nominal rates at up around 80, 85% (they call for capital gains and income taxation to be equalised as well, so 40 to 45% plus the estate taxation of 40%) which isn’t a system that’s going to work.
”Those b’astards never pay CGT because muh step up basis” is good political rabble rousing but lousy, ignorant commentary upon either tax or economics. But, you know, Professor Reich……..
Tim Worstall
Whatever the pension taxation changes they must apply to everyone - yes, everyone
There’s much chatter about how the taxation of pensions contributions is going to changed and so on.
Rachel Reeves will be urged to raid the pension savings of up to 6m middle-class workers in plans presented by Treasury officials ahead of her first Budget.
The Chancellor is expected to consider a proposal for a flat 30pc rate of pension tax relief – meaning that higher rate payers will pay an effective 10pc tax charge on their retirement contributions for the first time.
The plan would affect up to 6m higher and additional rate taxpayers, costing the wealthiest savers around £2,600.
Well, maybe, etc. We’d remind that it’s not actually pension tax relief it’s pension tax deferral. The pensions are taxed as income on their way out of the pot in those future golden years. So taxing money that goes in and also that that comes out is pretty obviously double taxation.
However, our real insistence here would be that whatever the rules then they’ve got to apply to everyone, equally. To civil service pensions for example. To NHS doctors’ pensions - to MPs’ pensions, obviously. And do so at reasonable calculations of the pension valuation too. None of this use of varying discount rates to prove that, acshully, that £80k a year civil service pension is only worth 2 pence as a capital sum. Similarly, if teacher pensions’ employer contributions are equivalent to 23% of salary (a figure we’ve seen somewhere or other) then that 23% gets taxed just like any other pension contribution. So too those of the higher levels of the civil service - obviously.
By analogy think of the rule of law. The definition of which is that it applies to all equally. Even Cabinet Ministers (even if ex-) can get 7 years’ pokey for lying about a hotel bill. The Permanent Secretary gets his pension and his pension contributions taxed in exactly the same way as the hotel receptionist.
Quite apart from anything else we tend to think this will improvethe advice Ministers receive on the subject.
Tim Worstall
And so they prove that The Spirit Level is a crock
The originators of The Spirit Level, Wilkinson and Pickett, take to The Guardian to reveal that they were right all along:
Our landmark book revealed the cost of inequality. Fifteen years later, things have only got worse
Richard Wilkinson and Kate Pickett
We have long thought that the claim was something of a crock. Imagine our joy at the crockness being proven by Wilkinson and Pickett.
When economic inequality gets worse, so does our health and wellbeing. Inequality can affect a society’s death rates, its levels of chronic disease, and the amount of violence (including murders) it experiences. What we weren’t prepared for when we first wrote the book was how much worse things could get.
That’s the theory. The hypothesis if we are to be more accurate about it.
And our data show that even small differences in inequality matter: marginally reducing inequality can have a big impact on people’s health and wellbeing.
That’s a prediction derived from the hypothesis. Which is excellent, it’s now possible to do science. We see whether the prediction accords with reality as a test of the hypothesis. Remember, it only needs one of those ugly facts to disprove an hypothesis.
Things have got worse - that claim from the first quote. If inequality reduces from what it was in those dying days - 2009/10 - of the Brown Terror then things should get better. So, what has happened to inequality in that time period?
The Gini, the usual measure of inequality in a society, has declined from 36.6 (all individuals) in that origin year to 35.7 (2022, last year currently calculated).
We’ve had that marginal decline in inequality and yet things are still getting worse. The hypothesis is a crock, isn’t it?
Sure, sure, we all knew that anyway but it’s nice to have the proof from the horses’ mouth. No?
Tim Worstall
Add Solow to Baumol and you’ve really got something
An interesting line from Andrew Sissons about Baumol’s Cost Disease. Maybe it’s not entirely cost? One interesting part of it being this:
Baumol’s version of his “disease” actually combines two effects. The first is the famous finding, outlined above, that productivity gains in one sector lift wages in all sectors. The second, less positive part is that productivity growth will necessarily be slow or stagnant in some parts of the economy — typically the service sector. The combination of these effects, according to Baumol, is that the stagnant sector takes up a larger share of the economy over time, and that it gradually drags down overall productivity growth. Because services get more expensive, we have to spend more on them. Because they then make up a larger share of the economy, the economy gets less productive over time. Sounds bad.
And Baumol’s pessimistic theory matches the empirical data since 1967 (when he first published) pretty well. The rate of productivity growth has slowed down in advanced economies, and the service sector has grown as a share of the economy. The prices of many services have risen, while prices of many manufactures have fallen.
If you’re looking for an explanation as to why growth has slowed down in advanced economies, Baumol provides a simple, almost mechanical explanation, which presents the slowdown as inevitable. Maybe it’s Baumol’s world and we’re just living in it?
As so often we’d not insist that this is everything but we would insist that it’s some part of that everything. If productivity is more difficult to improve in services and we’ve a more service oriented economy then obviously, growth - dependent as it is upon increasing productivity - becomes slower.
We would though go on to point out one more thing. We should add Solow to Baumol:
It is a tautology that economic expansion represents the sum of two sources of growth. On one side are increases in "inputs": growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge.
The basic idea of growth accounting is to give life to this formula by calculating explicit measures of both.
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While the growth of communist economies was the subject of innumerable alarmist books and polemical articles in the 1950s, some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising--or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.
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How, then, have today's advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have led to a continual increase in total factor productivity a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.
Baumol does not tell us that increasing services productivity is impossible, he just says it’s more difficult. We also have that historical evidence, via Solow, that planned economic systems do not increase productivity but market based ones do.
Ah, so therefore we need to have more - and more more - markets in services in order to be able to increase productivity in services. As Sissons points out:
The Baumol effect is like a tide that lifts all boats. It brings higher wages to everyone, sharing the benefits of productivity growth across the economy.
Improving productivity anywhere in the economy increases wages for everyone. Therefore the reason to have markets in healthcare, in trains, in education, the reason to have markets everywhere they can possibly be crammed in, is to make everyone richer by improving labour productivity.
QED.
Tim Worstall
The glory of politics and the water companies
You may have noted that we’re not wholly keen on politics as a method of running things. Here’s a good example of why:
In his first interview since taking up office, he told The Telegraph: “Every single river in England today is polluted... The public quite rightly are furious that they have to worry about letting their kids splash about in the river, for fear of what they might catch, because it’s polluted.”
Mr Reed said he will introduce a new system monitoring sewage spills, which involves independent scrutiny of the data, to stop water companies from “massaging the figures”.
Oversight of pollution doesn’t strike us as a bad idea at all.
Sewage was spilt 464,056 times last year, totalling more than 3.6 million hours, a record high since monitoring began, according to the latest data published by the Environment Agency.
Water companies are permitted to release sewage into rivers and seas during exceptional circumstances, such as extreme wet weather, to stop it backing up into people’s homes.
That’s because monitoring has hugely expanded in recent years - added to the vagaries of weather which has led to a run of those extreme circumstances. But the thing we think should be noted. As far as anyone knows the situation in Scotland is worse, far worse. But the monitoring is far - far - less intense. And as far as it is possible to see the state owned and run Scottish Water is not to be subject to this greater oversight of pollution issues.
The Bill, which will be brought to Parliament in September with a view to getting it on the statute books by Christmas, will also require water companies to install “real-time monitors” at every sewage outlet, with data that can be independently scrutinised by water regulators.
England is close to this anyway. Scotland is nowhere near it. As far as it is possible to see this bill will apply only to England.
Mr Reed said he will introduce further laws aimed at “fundamentally transforming” the water industry.
This will include setting up a “partnership” between the Government and water sector aimed at raising billions of pounds of private sector investment and encouraging water companies to make long-term plans for investment in their infrastructure.
We already have this. OfWat already determines allowable investment levels in the water companies. One of the reasons they don’t invest more is because OfWat won’t let them.
Finally:
“When I was younger, we’d go to the beach and I’d go in the sea and no one worried about it,” Steve Reed recalls. “We’d go to a lake somewhere and I’d go swimming. No one had to think about it twice – you just assumed the water was clean enough to go in and it was.”
He went on to describe how this care-free approach is a far cry from the attitude of families in modern-day Britain.
“Today parents worry about letting their kids in the water for fear of what they might catch. I want to get back to a position where you don’t have to think about that, you just know that the water is clean,” he told The Telegraph.
The water is hugely, vastly, cleaner than it used to be.
As we say, we’re not great fans of politics as a way of running things. For all of the proposals make perfect sense in that political sense. They’re all also close to or over the nonsense line in a real sense. The lack of investment is because the regulator won’t allow it, the water is cleaner than it’s been since the 18th century - and probably the 16th - and the biggest polluter is the state owned company that isn’t subject to either the bill or the increased monitoring.
Lots of action and little to nothing useful being done - you know, politics?
Tim Worstall
We really don’t think this works as a plan
Colin Hines tells The Guardian how it all should work:
Labour could achieve this by redefining growth as the increase in economic activity directed towards rebuilding public services and turbo-charging a green transition in every constituency. This must include retention and recruitment in these sectors through adequate pay levels, and in the process also boosting the businesses connected with them.
We’ll all get rich by building each others’ windmills. At good union rates too.
We think that lacks a certain something as a plan. Quite apart from that little redefinition of growth as being whatever it is that Colin Hines wants rather than what everyone else wants. That little redefinition being a significant logical problem.
There’s a reason we use “at market prices” in our calculations - definition even - of GDP and therefore economic wealth and or growth. For market prices are the best guide we’ve got to how people value the output, the production, from our economic engine. The entire aim is, after all, to increase the self-perceived well being of the populace. We thus have to measure how well we’re doing by using some measure of how well off the populace think they’re being made. The value of production, of their consumption, that is.
Change that valuation to whatever it is that Colin Hines thinks is worthwhile and we end up with an economy that makes Colin Hines rich - he’s getting what he wants - but that might not quite coincide with what the other 66,999,999 people in the country thinks makes them richer. That being, obviously, why we use market prices as our best attempt at an objective valuation of what the populace desires.
Tim Worstall