Unfinished business as shake-out continues

1997: A preview of the year ahead; Finance

There is a much unfinished business waiting for the financial services industry to get its teeth into during 1997. Banking, insurance and securities are at different stages of a shake-out that is breathtaking in its scope and which is far from finished.

Banking will be the highest-profile case, because during the spring and summer four large building societies, of which the largest is the Halifax, are to convert to banks.

This will give them the flexibility to raise new capital whenever their shareholders are willing, and they are likely to use their new resources to intensify competition with the traditional clearing banks.

It has been well over a decade since the big banks started talking about the need for a rationalisation of their branch networks and large reductions in costs, in preparation for increased competition on the high street.

They have weathered the arrival of telephone banking, pioneered by Midland's First Direct and by the Co-op, and copied by just about everyone else. Five years ago, telephone banking was thought by some pundits to be likely to replace traditional banking altogether. That now looks unlikely. What is emerging is an intensely competitive but specialist market that is likely to reach saturation soon, and may well give a bloody nose to late entrants.

Instead, the toughest competition for the traditional banks looks like being in the more traditional areas of branch banking, where the converted building societies will be bringing heavy pressure to bear in 1997.

But it will not be branch banking as it used to be known. Rather, the branches have become marketing centres for a range of financial products, from mortgages to insurance and share-dealing services, most of which are processed in centralised factories, using many fewer staff than before.

Converting building societies have been as anxious as banks to develop their insurance businesses and other financial services. They are likely to continue to snap up life insurance companies, copying the example of the most successful of all the high street groups, Lloyds TSB.

This will increase the incentive for the insurance industry - already due for an overhaul before banks began to trespass on its patch - to rationalise

Until the beginning of the 1990s, the majority of general and life insurers resembled the banks a quarter century ago, when the abolition of a long established lending cartel introduced competition and started a restructuring that is still continuing.

Life and general insurers have managed to remain fragmented and relatively inefficient, ill-prepared for the challenges of modern marketing methods.

The intense competitive pressure and the need to modernise their businesses led to one large merger last year between Royal and Sun Alliance.

The conversion of Norwich Union to a stock market quoted company, raising extra capital to strengthen its business, will make further consolidation in the rest of the industry still more likely.

It would be surprising if 1997 ended without mergers involving other quoted composite insurers, such GRE or Commercial Union. The odds must also be at least even on a takeover of a large British composite insurer from abroad.

Life insurance companies will be under similar pressures. Predictions three years ago of a halving of the number of active companies by the end of the century look as if they will be proved right.

New disclosure rules have only recently given buyers of life insurance access to reliable data showing which companies give best value for money.

In the past, some of the biggest sellers of policies have offered the worst value for money, because of a fog of misinformation surrounding their performance.

As the penny drops and more buyers use league tables to seek the best products, there will be still more pressure on life insurers to improve their efficiency, or be swallowed up.

While the insurance revolution is only now gathering pace, the shake- up in the securities and investment banking industry is nearly complete.

Most securities houses in London are now subsidiaries of large international investment banks.

There is a handful of independents left, including Schroders, Robert Fleming, Hambros, Rothschild and Lazards among the investment banks and Cazenove among the brokers, and none appears willing to be taken over.

In London, the new Stock Exchange trading system will have nothing like the catalytic effect on the industry of Big Bang in 1986, when fixed commissions were abolished.

The modern version of Big Bang is more likely to be found elsewhere in the City, and will be a result of monetary union, which is prompting a rationalisation of foreign exchange dealings rooms.

The final piece of unfinished business is political. The City need not be too worried for the moment about Labour's reforms of financial regulation, if it wins power, because they are likely to be on the back burner during the first year or two of the new administration. But there is a risk that bids and deals will dry up.