The leaked report from the Financial Services Authority into Royal Bank of Scotland’s treatment of small businesses is a truly shocking document. Perhaps because it was not designed to be published, there are few of the weasel words that so often blunt the impact of such enquiries, with the result that there is a clear path of responsibility extending right to the top of the bank.

We do not expect our bankers to behave like saints, or even like the vast majority of charity executives, but neither do we expect their maxim, imposed from above, to be “screw the customer”. A big clearing bank is more than merely an enterprise for its shareholders, which is why the taxpayer was forced to rescue the industry. Few argued that there was a realistic alternative at the time, but having taken the money, the executives at RBS appear to have thought that they had no wider obligations in return.

Those put in charge after the rescue have now departed, but only to senior posts elsewhere: chairman Philip Hampton to GlaxoSmithKline, CEO Stephen Hester to insurer RSA, and Nathan Bostock, the man in charge of the ironically-named small business recovery group, to run Santander UK.  Small wonder that Callum McCarthy, formerly of the UK’s financial watchdog and now chairman of the report’s producer, can scarcely contain his fury.

Unlike other enquiries into what went wrong, this report deals with behaviour after the crash. Today, the banks are still blinding their customers with complexity or letting them down. The bankers are still being paid grotesque sums. When the McCarthy report is finally officially published, there must be consequences. The old adage goes: the wheels of justice turn slow, but grind exceeding small. Let us hope so.


Rail’s so exciting, he’s exiting

These are exciting times for Britain’s railways, says Mark Carne, the chief executive of Network Rail, introducing the latest strategic plan to spend £47bn over five years. Too exciting for him, clearly, since he’s leaving. Perhaps to distract attention from the failure of the last plan, he’s terribly excited about prospects for employing more women. Golly, his successor might even be one, he says, which says something about succession planning at Notwork Rail.

Rail expert Roger Ford, writing to the FT last month, spells out the bleak arithmetic of failure. He calculates that each mile of the creeping electrification of the Great Western railway costs six times that of the East Coast line in the 1980s. Even allowing for more health and safety constraints and adjusted for inflation, 30 years of advances in technology have been swamped by deteriorating efficiency compared to old British Rail. The £50m just spent building a modest station at Cambridge North rather makes the point.

However, there’s a welcome note of realism in the new plan. Most of the grandiose projects which have caused so much embarrassment are shelved, in favour of vital but politically dull spending on upgrading signals and maintenance. George Osborne’s fantasy “northern powerhouse railway” is replaced by local improvements, and with luck God’s Wonderful Railway will finally be electrified. Network Rail’s chairman, Peter Hendy, can bring some real rail expertise to the task.

Meanwhile, the Great White Elephant that is HS2 continues to lead a charmed life, eating billions and promising years of misery and disruption for a project which nobody believes is worth its vast cost. Still, never mind this economic illiteracy. Network Rail is going full steam ahead for gender equality, and who could complain about that?

Another unmissable investment

So how is your investment in XIV, the VelocityShares Daily Inverse VIX Short-Term Exchange Traded Note going? Not too well, since it is inversely correlated to the prices of some futures on the CBOE Volatility Index. Oh, do keep up, that’s the VIX, itself a pretty strange measure. After months snoozing, VIX suddenly had a spasm and wiped out its reverse. The XIV (geddit?) fell by around 96 per cent and Credit Suisse, the bank that invented it, is now uninventing it. This story either shows what valuable services banks provide, or that the devil makes work for idle hands.

This is my FT column from Saturday.


Oh Lord, give me chastity, but do not give it yet. For many months now the Monetary Policy Committee has been guided by Saint Augustine’s prayer: we know we need to raise Bank Rate significantly, but we want an excuse to put if off. Now the markets have provided another one, in the shape of roller-coaster share prices, and so the era of financial repression continues a little longer.

That the era is coming to an end is surely not in doubt. At some stage, the relentless need of governments to borrow money will start to weigh on the prices of their bonds. A look at ancient history, those days before 2008, suggests that central banks that are too slow to raise interest rates eventually have to raise them further to choke off inflation.

So far, the MPC has merely corrected the error it made with the panic cut following the referendum result. The belated rise in Bank Rate to 0.5 per cent last November still leaves it at a crisis level. It is clearly too low when growth has again confounded the Bank of England’s forecasts, and when inflation measured by that other reminder of ancient history, the Retail Prices Index, is bowling along at 4.1 per cent. No wonder governor Mark Carney would like to see it scrapped. It shows up the cost of his committee’s procrastination.

Shiny new motor? No thanks!

The trade body for the British motor industry has struggled to find something positive to say about another disappointing set of sales figures. The best gloss is that they are less disappointing than in recent months and, look, sales of electric cars are booming. As the Society of Motor Manufacturers and Traders points out, the whole market has been damaged by the government’s capitulation to the green lobby on diesel cars, whose buyers are being made to feel like enemies of the people.

New car sales are notoriously cyclical, and after five successive Januaries when sales rose, the cycle is due to turn, especially as the People’s Quantitative Easing, in the shape of payment protection insurance mis-selling payouts, is finally starting to run out. The stimulation from vendor finance packages, that modern version of hire purchase, is also fading.

Yet there are some more disturbing longer-term trends to worry the forecourt salesmen. The SMMT points to low consumer confidence, although many other consumer businesses are faring well enough. Today’s cars are reliable and do not rust, so changing them is seldom really necessary. Indeed, the really worrying possibility is that people may not buy them at all. A rising proportion of twenty-somethings have not even taken a driving test, let alone aspired to a shiny motor. To them, cars are conveyances rather than possessions.

Electric vehicles may galvanise the car industry, but the omens are not good, despite their 24 per cent rise (to just 5.5 per cent of the total UK market) last month. Today’s buyers get a bung from the taxpayer, parking and congestion concessions, and duty-free fuel. None of these bonuses is sustainable, even before considering how to replace the £38bn a year currently reaped from fuel taxes. When subsidies were cut back in Denmark and Hong Kong, sales of EVs collapsed.

In addition, the technology is evolving fast, posing a whole new set of problems for the carmakers. The danger is that tomorrow’s potential buyers may start to wonder whether that state-of-the-art machine will last any longer than their new mobile phone.

The art of the deal

It’s rare indeed to find a transaction where the bankers really earned their fees. So step forward Jonathan Bewes, Eamon Brabazon, Geoff Iles and Luke McMullen. This Merrill Lynch quartet acted for Home Retail in the sale of Homebase to Wesfarmers two years ago. In what must rank alongside Slater & Gordon’s purchase of most of Quindell when it comes to purblind Aussie optimism, the buyers have not only written off the entire £340m purchase price, but another £114m on top. The deal looked ropey at the time, as Lex warned, but somehow those silver-tongued bankers prised the chequebook open. Well done, boys.

This is the uncut version of my FT column from Saturday.

It’s a month since the Mifid triffid landed in the City of London, and some of the consequences of this alien invasion from the European Commission are starting to become apparent. The Markets in Financial Instruments Directive, MkII, was born out of the admirable desire to force the notoriously opaque pooled fund industry into greater transparency of costs and charges.

From this simple goal has come a 16,000 paragraph monster, so complex that it is beyond the capacity of a single mind to comprehend. It has also produced gems like “negative transaction costs”, as FTfm highlighted this week. If the price of a share falls after a fund manager has decided to buy it but before trading, then he can book the difference as a negative transaction cost, and set the “gain” against his published ongoing costs figure.

If, on the other hand, the price rises, then the transaction cost is deemed to have risen too, which is added to the other costs to the investor, making the charges look higher. Say you wanted to buy a share at 100p, but actually had to pay 102p. Your purchase price is higher, but you would not count the 2p as part of the transaction cost.

This methodology could hardly have been better designed to confuse and mislead investors, and this impression is reinforced by Mifid’s little KID brother. The Key Information Document, which all pooled funds are now obliged to produce, sets out what an investor might see back from various formulaic projections.

Thus, funds which are obliged to slap warnings all over the place that past performance is no guide to the future must now publish fantasy projections based on that past performance.

All these new rules reflect the European Union’s willful failure to understand how markets work, coupled with resentment towards the prosperity created by the City of London. Only this week have the EU’s Brexit negotiators finally admitted that they believe a smaller City would benefit the other members. It is another acknowledgement of their innate suspicion of free markets and their desire for more control. It is also why so many in the City believe that the sooner we leave, the better.

Cheers, then a nasty hangover

Perhaps it was the Bargain Booze, or the agreeable Bibendum wines, but the analysts covering the company that owns them could hardly curb their enthusiasm following the half-time results last week. Here is Investec: “We view Conviviality as a multi-year growth story.” N+1 Singer concurred: “[There was] good momentum across all three divisions as the new MDs begin to have a positive impact”.

WH Ireland gushed: “Trading since the end of the period has also been positive with sales in the first 9 weeks ahead by 8.4 per cent.” Fellow brokers Shore Capital joined in the booze-up: “The focus in the interim results for us is profitability and bridging it to full year expectations.” So plenty of coverage for a mid-cap company. Conviviality’s CEO, Diana (the) Hunter, had earlier described the results from “the UK’s leading drinks wholesaler,” as “strong”.

Yet far from being cheered, Conviviality shares plunged 11 per cent on the results, and at 314p are down by a quarter in two months. Shore’s long analysis had struck just one slightly cautious note, calling for “more detail around the reshaping of the leadership team that has resulted in the departures of some seemingly key personnel.”

Perhaps the shares really are worth 470p, as WH Ireland claims. Or perhaps the market senses trouble ahead that the experts can’t see. We’re surely not giving up drinking, are we?

Sorry, I don’t recognise you

Revenue recognition: we’re going to make so much money from this contract that we might as well book some of it now. Reality turns out to be more complicated, as Capita finally admitted last week. Little Utilitywise runs energy management contracts, and is having terrible trouble making the numbers add up. After two postponements of its final results and a rapidly-falling share price, it has pulled the plug and suspended its AIM listing. Its bankers are being more sympathetic than the new accounting standard. The shareholders should brace themselves.

The difficulty with attacking Melrose Industries is that the boys at the top make doing business look easy. Compare the simplicity of “buy, improve, sell” with the “two year programme to improve cash and profit that will incorporate all areas of the business operating system including culture” that their latest victim, GKN, has dressed up as “Project Boost.”

GKN’s advisers, Gleacher Shacklock, have done their best to argue that Melrose is offering a bid premium of only 11 per cent, and that glad, confident morning is about to break under the hastily-executived replacement CEO. Unfortunately, the share price reaction, jumping by a quarter and adding £1.7bn to GKN’s market value, rather undermines the bankers’ arithmetic. The lack of any corresponding weakness in the Melrose price, despite the prospect of more than doubling the shares in issue, is an ominous indicator for the defence.

It’s on shaky ground, too, arguing about management competence. GKN is bigger than anything Melrose has previously attempted, but its individual components look just the sort of businesses which have been successfully put through the Melrose mincer in the past. The formula of clearing out the top layer (or three) of management and letting those actually running things have their heads has created extraordinary value.

Contested takeovers take time, not least because the big shareholders enjoy being schmoozed and waiting until the last minute to reveal their decision, but GKN can never be the same, and probably about time too, given the patchy, if lengthy, record. Its management will have to decide between trying to negotiate a bigger slice of the equity pie or finding a white knight. Well, best of luck with that.


Your home as a cash machine

Those fertile financial minds in the City have found another wizard wheeze. Unlike most of these wheezes, this one might actually be in the customer’s interest rather than merely the banker’s. Hard to believe, but the lifetime mortgage may be as useful to the baby boomer generation as, say, the cash machine.

The interest on a lifetime mortgage is not paid, but compounds until the borrower dies or sells the home. The interest rate is fixed for the life of the mortgage at the outset, and compounds year by year. Compound interest can be murderous, and at 7 per cent the liability doubles in a decade. Nobody should contemplate this sort of fixed rate for long-term borrowing.

However, yields on government bonds, suffering from the financial repression of quantitative easing, are pitiful. Lending to the UK government for 20 years earns the investor just 1.8 per cent compound, so banks are desperate for alternative high-quality borrowers. and ageing freeholders with no debt are as solid as they get.

Sadly, 1.8 per cent is not available to even the most credit-worthy home-owner, but something like 3.8 per cent is, and interest compounds much more slowly at these levels. It takes a decade for £1,000 to turn into £1,452. Even after 30 years, by which time our boomer will be past caring, the liability is only £3,150. Not even Eeyore would expect a 30-year bear market in housing.

It’s hard to see the 3.8 per cent rate falling much further, and easy to see why rates and bond yields should rise, perhaps a long way, over the coming years. A lifetime mortgage is not for every boomer, but this is an opportunity which seems unlikely to last. And do remember: always travel first class, or your children will.

Forecasting: always difficult for the future

Ah Davos, home of snow, networking and fancy forecasts. Few are fancier than those from the International Monetary Fund. Immediately after the “spanner in the works” of the Brexit vote it said the outlook for the UK was terrible. Its view was even gloomier that October. In January last year it decided that the outlook wasn’t so bad after all, and in April, struggling to catch up with the reality of a decent year’s growth, it was even quite cheerful. Now it sees a sunny outlook almost everywhere, but not in Britain, thanks to our old friend “Brexit uncertainty”. Listen to what the IMF says and bet on the opposite happening.









It’s hard to avoid a grudging respect for Jeff Fairburn, as the CEO of Persimmon defends his £100m bonus payment (it boils down to a Shylock-like: “I will have my bond”) rather than hiding until the press pack has picked another target. He’s worked jolly hard building houses, and the shareholders have their own windfall, after all.

Yet it’s not just the grotesque size of the payout that is off the scale. Persimmon, like all other housebuilders, has made profits beyond the dreams of avarice from George Osborne’s economically illiterate “Help to Buy” policy in 2013. Savaged here at the time as a demand side measure for a supply side problem, it has turned into “Help to Buy Yachts” for housebuilding executives. Not only was the construction risk greatly diminished but buyers using HtB are paying a premium. Essentially, these sales have doubled profit margins for housebuilders. Half of Persimmon’s houses are sold this way.

Now imagine that a similarly unforeseen policy change had had the opposite effect, causing margins, profits and capital gains from the shares to disappear. The remuneration consultants would be called in. The incentives would be “reset” to reflect the harsh new conditions and ensure that the executives once again found it worth while getting out of bed.

This is the essential hypocrisy of the bonus system. In this egregious case, it’s worth noting that of the largest Persimmon shareholders, only one (Axa) actually voted against the 2012 long-term incentive plan which is now worth hundreds of millions of pounds to the executives and managers. The likes of Allianz and Blackrock acquiesced, despite protests from the UK Shareholders Association.

Perhaps they were too busy to struggle through the detail (the 2016 annual report devotes 16 pages to remuneration). Alternatively, only too well aware of the complexity and generosity of their own rewards package, they feared to do anything which might put them in the spotlight. After all, they want their yachts alongside Mr Fairburn’s.

Actuary, we’re heading for the rocks

There is something slightly chilling in the drab prose from the government actuary. Rather than suggesting that we’re all doomed, Martin Lunnon reckons that a 5 per cent rise in the rate of National Insurance contributions would tackle the “lack of long-term sustainability” of the fund.

Five per cent! Not even the most militant Momentumist is proposing to stick 5p on income tax, and no politician would dare advocate it. Of course NI is not strictly a second income tax, since the elderly don’t pay it, but it is much more like a tax than its insurance policy label.

In fact, it never was insurance as generally understood. It might better be described as a national Ponzi scheme, since payments for today’s “insurance” go straight out in benefits to yesterday’s contributors. This worked fine when people dropped dead conveniently quickly after retiring, but increasing life expectancy threatens to overwhelm it.

Today, more than 90 per cent of the £90bn a year expenditure goes on paying the state pension, with its “triple lock” guaranteeing that pensioners get richer than those actually doing the work. You don’t need to be the government actuary to see that this is both unsustainable and unfair, but pensioners have votes and use them.

Mr Lunnon is only making long-term projections for one of the few areas of the economy where they have any value. Perhaps next time he might borrow Private Frazer’s phrase to get his message across.

U don’t need UNIDO

Peter Sutherland couldn’t find space in his last, lengthy Who’s Who entry to record his role as “goodwill ambassador” for the United Nations Industrial Development Organisation. He may have forgotten the hundreds of employees industrially developing away at their agreeable HQ in Vienna, but they remembered him, with a touching tribute on the website.

Once upon a time in The Spectator Christopher Fildes offered an Austrian schilling to anyone who could identify an industry which this taxpayer-funded boondoggle had developed. The money remains unclaimed. The US, Canada and Australia all decided years ago that they didn’t need UNIDO, and stopped paying the subs. Perhaps Mr Sutherland secretly agreed with them.

This is the original version of my FT column from last Saturday. Can you spot the difference?


January is the cruellest month in retailing. With tills full from Christmas sales and stocks low, it is the classic moment for disgruntled lenders to strike. The internet earthquake is shaking the whole structure of shopping, and nowhere is the damage more obvious than at Debenhams.

This grand old dame has been financially abused once too often, usually by private equity, and her decline looks inexorable. With the shares at 38p before Christmas, this column noted that the business increasingly looked like another victim of the shrivelling high street. So it has proved, with a profit warning sending the shares down to 30p.

More seasonal casualties are inevitable, as it becomes painfully clear that there are simply too many shops for the age of Amazon and Asos. High street housing, anyone?

A barrage of criticism

Of the long list of vanity projects just asking for the government to pull the plug, none is quite such a money sink as the Swansea Bay barrage. Described as “eye-wateringly expensive” by one anonymous cabinet minister, its advocates are now reduced to claiming that if the scheme is scrapped, hundreds of jobs will go at the plants which would otherwise be making the turbines. This could be called the Blazing Saddles defence.

Greg Clark, the business secretary (still there, last week) has not exactly set commerce alight, but he has stood firm against this £1.3bn financial boondoggle. As with Hinkley Point, whose French builders are now suggesting that they build a second plant to exploit the ruinous lessons from the first, the barrage backers are reduced to ever more ingenious arguments to justify the cost. They claim they would learn so much at Swansea that the Welsh coastline could one day be ringed with cheap barrages.

It would be hard to make up an energy policy as far removed from logic as the UK’s, from subsidies that encourage waste and the rules which prevent the construction of cheap, flexible gas-fired stations at a time of world glut, to the ridiculous advertising campaign buying mostly blank pages in newspapers for so-called smart meters.

Both Hinkley Point and Swansea barrage would take the UK further away from the achievable long-term goal of cheap, reliable energy. Both are products of the mindset that the grid must supply whatever users demand, whenever they want it. With advancing battery technology and demand management which can immediately react to current pricing, the concept of the “base load” is already outdated. Both projects are eye-wateringly expensive ways to solve yesterday’s problem.

What would we do without them?

British non-execs are the finest in the world. This, roughly, is the view of Peter Breen, UK boss of Heidrick & Struggles, the business whose prosperity depends on putting them on boards. This is a great comfort to the worriers about corporate governance, but it was unfortunate that Mr Breen’s letter to the FT co-incided with “fat-cat Thursday“.

Research from the snappily-named Pensions and Lifetime Savings Association showed that it takes only three days (until Thursday this week) for the average FTSE 100 CEO to earn as much as a typical full-time employee does in a whole year. This might be less of a national concern were many of the CEOs not so, well, average. The non-execs seem to be as incapable of picking good leaders as they are at restraining the rewards of the rest.

In some instances, it’s hard to see what the non-execs actually do. At Carillion, for example, the embarrassing (in hindsight) 2016 annual report boasts a politically-correct “right balance” of gender and executives, but it was clearly a long way from the annual meeting in May to July,  between “largely unchanged” trading conditions and warning of looming catastrophe. Showing rather more agility than usual, the Financial Conduct Authority wants to know what happened inside Carillion in that short space between “everything’s fine” and “we’re close to bust”.

The answers should make interesting reading, but by the time we get them, the non-execs are likely to have gone, to help other executives with governance and remuneration. Perhaps they should retain Heidrick & Struggles.

This is my FT column from Saturday


I failed to publish this before Christmas. It appeared in the FT on Saturday 23 December.

A very happy Christmas and a thoroughly miserable New Year, from the European Commission. Its first present for 2018 is the Markets In Financial Instruments Directive II, and when unwrapped on January 3, it promises extra costs with an added helping of confusion all round. If proof were needed that the road to hell is paved with good intentions, Mifid II surely provides it.

The good intention here is in the sacred name of consumer protection. More of the myriad of hidden charges that financial services generate must be disclosed; providers must know what’s appropriate for their customers; and there must be a proper audit trail should things go wrong.

These fine principles have generated a monster running to thousands of pages, which has effectively destroyed any basis of trust an investor might have in an adviser. Rathbones, for example, is requesting its clients to fill in a six-page psychometric risk profile to be able to trade after next week, while the costs of compliance pushed stockbroker WH Ireland into a profits warning.

This is the one thing all can agree upon. The costs are going to be burdensome, and will outweigh any savings to the customers of Mifid’s other big change, the separation of dealing costs from research. In practice, it is proving so difficult to determine where research ends and dealing begins that almost all the big banks and investment houses are absorbing the research costs internally.

This is not altruism, and the consequence will surely be to end the long-run fall in share dealing costs. Still, do not be so sad and glum, there’s bound to be far worse to come. Next month yet more regulation kicks in alongside Mifid, with the Packaged Retail & Insurance-based Investment Products regulation, and its offspring, the Key Information Document.

Neither of these measures will make a material difference to investors’ understanding, and are as likely to confuse as to enlighten. They are the products of a Brussels machine which has no interest in understanding how markets work, and a mindset which is instinctively hostile to London as Europe’s supreme financial centre. The unholy trinity of Mifid, PRIIP and KID is a seasonal reminder of why so many of us voted to leave the European Union.

Oh goody, another income tax

The UK government has cleverly spun the changes to auto-enrolment which were announced this week. How marvellous that teenagers can now “get into the savings habit”! See how even the smallest pay packets can participate with a deduction from the employee! And look how the magic of compound interest will turn small sums into capital for a comfortable old age!

Auto-enrolment is the mechanism whereby every employee in the land goes into a pension scheme unless she specifically opts out at the start of her employment. Only pensioners and the self-employed escape. To avoid others jumping out, like the frog in the cooking pot, the heat is applied slowly. You may not miss 1 per cent of your take-home pay, but by April 2019 it will reach 5 per cent. Given the sluggish rate of wage growth, this implies a cut in take-home pay for millions.

By 2020, with the additional 3 per cent from the employer, these deductions will send £20bn a year boost into the investment industry. Much will find its way into “risk-free” government bonds, where at current rates, the “magic of compound interest” over 35 years turns today’s pound into just £1.80.

We now have three income taxes: the first, where the money is definitely gone; National Insurance, where something may come back eventually; and now auto-enrolment, where there will definitely be something back, however disappointing.

Lessons from the Governor

Mark Carney is having a rather good festive season. His unexpected intervention in the pantomine at the London Stock Exchange sealed the fate of its CEO (Is he coming back? Oh no he isn’t) and this week he signalled a post-Brexit welcome to European banks. He did rather spoil the effect by saying that if it was not reciprocated “there will be consequences.” Since the EU needs the City more than the other way round, he hardly needed to say it.