Lloyds Banking Group revealed a bold three-year strategic plan last week, placing financial advice and pensions at the front of what it calls a “transformation for future success”.
Shifts in the group’s focus have been high on the news radar of late, with its pensions arm Scottish Widows also set to review its asset management arrangements after it terminated mandates with Standard Life Aberdeen last month. On 23 February, Standard Life then in turn announced it would sell its insurance arm to Phoenix in a £3bn deal to focus on asset management.
However, many questions remain over Lloyds’ plans for Scottish Widows to develop an advice platform with £3bn allocated toward boosting planning offerings just 10 months after returning to full private ownership, and in the wake of conflicts with Standard Life Aberdeen.
Lloyds has intentions to hit £50bn in financial planning and retirement assets for its insurance and wealth business in just three years, perhaps a lofty target for the group which has yet to recover its cross-selling potential from the reputational hit of the payment protection insurance scandal in 2005.
An uncomfortable spotlight has also been shone on other parts of its business, for example the lack of inclusion of the defence and arms industry in its corporate social responsibility policy, the largest ever recorded fine from the Financial Services Authority over bonus schemes for sales staff, and ongoing court proceedings against former chief executive Eric Daniels over unpaid shares.
Profits are up, however. Lloyds announced a pre-tax profit of £53bn for 2017, 24 per cent higher than 2016 and its highest profit in 12 years. It was six years ago that it exited the financial planning space.
Money Marketing asks whether a return is on the cards and what else the next three years could have in store for the bank’s relationship with advisers and asset managers.
With Lloyds planning to buy back around £1bn of its own shares, brushing off concerns about the rising capital requirements identified in last year’s annual banking stress tests, and revelling in how pension freedoms could aid a return to advice, it could be said the time is right for building internal capabilities in the investment and planning spaces. On this front, chief executive António Horta-Osório confirmed the group will be increasing staff training by 50 per cent to 4.4 million hours a year during the next three years.
The withdrawal of £109bn of Lloyds’ funds from Standard Life Aberdeen represented a hefty blow for the newly-merged entity, with the sum representing around 17 per cent of Standard Life Aberdeen’s assets under management and five per cent of its revenues. This also gives Lloyds more space to manage its investments as it sees fit.
Money Marketing had previously reported that Lloyds would likely focus on rebuilding its own investment management capabilities after terminating the Standard Life Aberdeen deal, over fears of its status as a competitor.
This week things took another turn however, with Scottish Widows announcing it will continue to employ Aberdeen Standard Investments temporarily on a new range of retirement funds it is launching.
When it comes to interpreting the many directions Standard Life Aberdeen and Lloyds are taking Quilter Cheviot bank analyst William Howlett says there are still concerns for Lloyds around PPI, but that investors should look positively on its share buyback scheme.
Howlett says: “Lloyds’ results were slightly below expectations due to a miss on other income and a further PPI charge is also disappointing. However, Lloyds’ strong capital generation supports a 20 per cent rise in the dividend to 3.05p, and the announcement of a £1bn buyback is equivalent to a further 1.4p per share (total yield of 6.5 per cent).”
GlobalData principal retail banking analyst Saoud Fakhri was also confident of the group’s financial position and says updating offerings, models and services will now be a key focus. He says: “After many difficult years, it is back on a strong financial footing, and can refocus its efforts on modernisation. The group is reverting to full public ownership, so drawing a line under the financial crisis.”
For Standard Life, it is perhaps the best of both worlds now, having cashed in on the sale of its insurance arm but continuing to control the proposition side as closed-book provider Phoenix takes over formal ownership.
Zero Support managing director Phil Young says: “Potentially the corporate book could have gone to Scottish Widows, and the insurance or part of the bond business could have gone to Phoenix, but from their point of view, it’s good having one buyer who will buy the lot – except the two businesses are like chalk and cheese and that’s what advisers are going to be thinking too.”
Lloyds could leverage its new technology spending to help steal a march on advice, however. It is investing £3bn in new technology and specialist staff as part of its digital services expansion strategy. Fakhri says the group is stepping up the game by placing a much-needed focus on streamlining and upgrading services.
He says: “Lloyds is one of only three banks to have met the deadline for launching its open banking interface. The interface allows third party providers to access a customer’s bank account data in real time. They are also ahead of the competition in adapting to the new open banking landscape, and that means the bank will gain a competitive edge over its rivals.”
Tim Page, financial planner, Page Russell
Advisers with six-year memories will probably be wary of Lloyds based on how they dropped their sales force in the run up to RDR and ruined a lot of careers. The question is whether you want to hitch your wagon to somewhere with a history of not sticking around when the going gets tough.
The second point is the key determinate of whether some form of return to advice would succeed is the governance and how they incentivise their advisers. The reason banks got out of advice was because incentives were all wrong and it was driving poor advice for clients, and that was the fault of managers who then kept their jobs. The bottom line is that if the proposition is wrong, they are going to repeat all of their past mistakes and go through the same cycle all over again. However, it is six years since they pulled out of advice and hopefully they have learnt their lessons and used their time to develop propositions which are going to add value, and that could be really good for the profession.
While Lloyds was also one of the 24 firms accepted into the FCA’s regulatory sandbox in 2016, a source close to Lloyds does not believe the group will move very fast, criticising the lack of clarity so far in its direction.
The source says: “Every single big business out there, at some point in time, is going to say they are launching a robo-solution or some sort of digital offering, but it just sounds good, whereas ‘we are going out and buying lots of financial advisers’ doesn’t sound great for the share price because it’s expensive, and it’s difficult to do, and it feels a bit short.
“As an organisation Lloyds are the biggest, slowest moving business – a bureaucratic slow moving nightmare – the worst of the lot out there. I wonder if £3bn isn’t just papering over the cracks of their existing stuff as oppose to being interesting or exciting.”
Customer trends at Lloyds would suggest it remains strongly positioned for digital growth however, after it recently announced its intention to close a further 49 of its branches due to low activity and heavier reliance on mobile channels.
In its results, Lloyds says it will: “Simplify and modernise our IT architecture, scaling up end-to-end customer journey transformation to cover more than 70 per cent of our cost base and we will therefore significantly increase our investment in developing in-house capabilities.”
Lee Robertson, financial planner, Investment Quorum
There is a perception of an advice gap and a huge demand for advice and not enough capacity to fill it at the moment, so anything or anyone that comes back in is to be welcomed. The question then is will they do it well, because banks don’t have a good record, and they dodge in and out. In terms of delivering good financial advice to the public, I want people to come in and do it ethically and well.
Banks seem to have quite sticky customer bases and everyone has quite sticky memories, so there’s a bit of a trust hill for them to climb. However they have been putting a lot of money into glossy ads showing how long they have been around and how well they look after people.
Horta-Osório says the plan for the branch network is “refocusing” to meet “complex and value-added banking needs, such as mortgages to first time buyers, financial planning and retirement, and business banking,” perhaps a suggestion that would see former branches turned into advice spaces, but still lacking any concrete detail about what will happen in the end.
Money Marketing approached Lloyds on Wednesday 21 February for an interview to further explain what putting financial advice as a priority in its strategy would mean in practice. The bank was unable to provide an interview, but provided a statement from Scottish Widows distribution director Jackie Leiper.
She says: “We expect the £50bn target announced last week will nearly all be met by growth in workplace and retirement account assets which come to us through intermediaries and employee benefits consultants. We expect workplace business to see the largest growth…. Workplace also sees significant growth as contributions step up over 2018/2019 again driving top line growth of assets under management. Workplace is expected to be 80 per cent of our growth between now and 2020.
“We are also investing heavily in our retirement account proposition. We’ve just launched the new retirement portfolio funds, providing a low-cost but innovative solution for customers drawing income. These funds aim to combine the security of reducing capital exposure by managing volatility with the flexibility of drawdown but avoids the expense or complexity of a hybrid solution – this proposition is aimed at IFAs, our primary channel.”
“The D2C proposition will be aimed at Lloyds Banking Group’s existing retail banking customers looking for financial guidance. The products and services here will be low-cost and simple, aimed at meeting essential needs such as family protection needs or basic retirement planning. We have customers visiting branch or going online wanting help in this area, but these are customers with assets below the thresholds set by IFAs who are, therefore, unable to access IFA support.
“In short, we have a flexible business model that allows us to wrap around our adviser propositions for those customers who do not want, or cannot afford, to pay for advice – this is complimentary and not competing with advisers.”
A source close to the bank says the consistent confusion around Lloyds’ multiple brands means specifics often flew under the radar.
He says: “They are very unclear internally because they talk about Lloyds, but don’t tend to talk much about Scottish Widows.”
December 1995 – Lloyds TSB created
March 2003 – Lloyds TSB purchases Scottish Widows
January 2009 – Lloyds Banking Group created
March 2013 – Lloyds sells its stake in SJP
September 2013 – Lloyds TSB becomes two separate banks
October 2014 – Lloyds announces intention to cut 9,000 jobs in three years
June 2015- Lloyds hit with £117 fine over PPI issues
December 2015 – Govt extends Lloyds share sale
July 2016 – Low rates results in a further 3,000 job cuts
July 2017 – Compensation of £283m paid by Lloyds over mortgage arrears errors
August 2017 – Sale of Lloyds London headquarters planned
November 2017 – Lloyds closes 49 bank branches
February 2018 – Lloyds pulls £109 from Standard Life Aberdeen
Advisers won’t be impressed by banks’ client reach
More than 12 months ago, Scottish Widows were looking at getting back into advice in some kind of way. They probably want to keep the name out of it and say it is Lloyds however, because advisers strongly dislike banks, whereas Scottish Widows gets a lot of business from advisers. As a result, they will try and sidestep the issue by saying Scottish Widows and Lloyds are two separate things, but really they will be providing Lloyds advisers with Scottish Widows products, so in reality it’s more of a Scottish Widows-driven thing.
It all started from when Facebook was buying up companies like Instagram and WhatsApp and everyone started talking about how many customers they had, and what potential they had. If you are a financial services institution, the shortest payback I have ever seen on a new product launch is eight years, and that will be longer tomorrow; you can launch something and you’re never going to make money on it, all you are selling is a bit of a dream. All the banks out there are just talking about the number of customers they’ve got, it’s the same thing that people play with corporate schemes. All they do is sell to people and say they have the potential because they have ‘X’ amount of customers, but at some point further down the line, they will also buy other things from us.
Phil Young is managing director of Zero Support