Financial services round-up: China tensions spook banks and Saudi fintech on rise

Tue 24 Oct 2023
Posted by: Benjamin Roche
Trade News

City of London

Financial services exports, like other exports, are being shaken by geopolitical tumult, with fears that tension between China and the West could bubble over into sanctions. Elsewhere in the Daily Update’s roundup of news from the industry, nations like Saudi Arabia are making strides in expanding their financial services sector and building relationships with those of other countries.

Bonus round

The FT reports today (24 October) that the UK government is to confirm its decision to scrap all caps on bonuses earned by bankers.

It is argued that a removal of the ban, implemented under EU law before the UK’s exit from the bloc, could improve the competitiveness of the City of London banking district.

Regulators, including the Prudential Regulation Authority (PRA), are said to have been sceptical of the cap and have welcomed its removal. The PRA’s chief executive, Sam Woods, argued that it made firms less flexible during downturns as it demanded bonuses be no more than double base pay. This usually resulted in higher base pay to attract talent.

The cap was introduced to limit undue risk-taking from banking executives. It's argued that this was incentivised prior to the 2008 financial crisis through variable pay.

Chinese whispers

Reuters had an exclusive story last week suggesting that the UK’s largest banks are weighing up the dangers of their involvement in the Chinese market.

It comes in light of the heightening tensions between China and the West, as well as the introduction of sanctions related to Russia in the wake of its invasion of Ukraine. These sanctions went further than expected in limiting banks’ abilities to provide services in Russia.

A host of British banks have commissioned work by UK Finance to look at how assets in China are controlled and assess the traceability of products in the Chinese market.

‘Naivety’ no more

One anonymous security expert speaking to Reuters said:

"The biggest financial institutions are determining whether the exposure they have [to China] is tolerable given a pessimistic direction of travel for geopolitics.”

There was a “naivety” among businesses that has dissipated in the wake of sanctions on Russia, another anonymous source stated.

HSBC and Standard Chartered, among the UK’s largest banks, make the majority of their profit in Asia, but they and other banks face growing concerns about exposure as fears grow that a Chinese invasion of Taiwan, and subsequent western sanctions, could be on the cards.

Fintech flourishes

Saudi Arabia is enjoying a less troubled outlook in financial services as a host of financial technology, or ‘fintech’ firms, have entered its market. This follows last year’s reveal of the country’s new strategy for developing its financial markets, according to Arab News.

One fintech start-up based in the country, Takadao, recently brought in US$1.6m for its service providing “Shariah-compliant blockchain-based services” focusing on savings, loans and “cooperative life insurance solutions”.

Investor Tim Draper was involved in the funding round and voiced a vision for the company that went beyond Saudi borders, arguing that the firm could make “a big difference in the world”.

Desert discussion

Saudi Arabia has also today hosted the Future Investment Initiative conference, a meeting of major financiers including the heads of Goldman Sachs and JPMorgan.

The conference, dubbed ‘Davos in the Desert’ by some, provides a chance for financial services firms to forge connections with Saudi companies and access the country’s sovereign wealth fund.

Finance forum

Saudi’s event isn’t the only one in finance this week, as EU and UK regulators took part in the inaugural post-Brexit cooperation forum.

Themes at the event included geopolitical issues and their implications for global finance, as well as the vulnerabilities of financial firms operating outside of the banking system.

The focus of the event is to allow regulators to share information on their work, particularly where regulations differ. While the group taking part has no remit to change regulations, it’s hoped by some that it could pave the way for future improved access between the markets.

Windfall tax blowback

Elsewhere in EU financial news, a windfall tax levied on banks by the Italian government is being dodged by UniCredit SpA, which has allocated €1.1bn as non-available reserves for next year, according to a report by Bloomberg today.

Georgia Meloni’s government promised to raise a total €3bn from the tax, which is being implemented in response to an apparent boost in bank revenues as a result of high EU interest rates.

UniCredit is Italy’s second-largest lender, and the loophole may provide a model for other banks to avoid the measure. It also paves the way for the bank to meet its target of returning €6.5bn to its investors.