19/02/2010 by Steve Barclay.

January is usually a month when the government receives bumper tax receipts, as many people settle their income and capital tax bills.  The Government has been in profit every year in January since records began.  Today we discover that instead of the expected £2.6 million surplus, Labour borrowed another £4.3 billion last month. 

Debt interest is now over £1,000,000,000 a week. This is money wasted.  It would pay for a lot of doctors and teachers.

Total government debt is now £848,000,000,000.  The figures are so big it is difficult for any of us to fully get our heads around the sheer enormity of Gordon Brown’s reckless spending. 60% of our borrowing is to pay for every day spending, not to pay for the cost of the financial crisis.  Gordon Brown’s political benefit today is on the back of young people who will have to pay the bills for years to come.

We are currently viewed by the financial markets as a worse prospect than Spain or Italy.  City experts predict our debt this year as a proportion of our country’s income will be worse than Greece.  Already the ratings agencies are warning the UK that our triple A rating is under threat. 

We are fast reaching a tipping point.  The budget next month must tackle this ticking tomebomb before the markets refuse to take any more of our debt and plunge the country into a financial crisis.  Whoever wins the election, none of us should doubt that tough times lie ahead.

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10/07/2009 by Steve Barclay.

The revelations this week of money laundering in football by the UK Financial Action Task Force pose questions beyond the opaque sources of wealth of top football club owners.  It shines a light on payments to third parties used more widely in the corporate world.

The report highlighted money paid for non existent services and sums hidden within fees paid to third parties.  Such transactions are difficult for the authorities to spot.  With the Ministry of Justice estimating the cost of bribery and corruption globally at $1 trillion a year, the lack of corporate convictions tells its own story just as much as the silence which followed the Lord Steven’s enquiry.

Behaviours in the cut throat world of the football players transfer market may not be as far removed as some think from that of their sponsors in the corporate boxes.  Competition for the next Brazilian megastar is fierce.    Football managers either pay the bung and disguise it, or refuse and risk losing the player.  The same dilemma can be faced by business managers when competing for contracts with the Chinese in Africa, or with the French and Russians in the Middle East.

Football managers do not get long with a club, and their club is rarely the only one chasing a particularly player.  Experience may have taught them that winning requires sometimes cutting a few corners.  The ambitious executive fighting to beat their rivals for scarce business in a recession will want to keep their client happy.  Training and written safeguards do not stop bribes being disguised and paid at the sharp end.

Varying interpretations of what is an acceptable payment in different jurisdictions and cultures adds ambiguity. It is not just in the UK that the old school football culture turned a blind eye to side payments.  The recent prosecutions of top Italian football clubs shows attitudes have not changed elsewhere. Concern at similar types of third party payments in the business world was reflected in the Wolfburg Statement in 2007 which sought to try and restrict their use amongst financial organisations.

Successful deals tend to receive less scrutiny.  It is a brave junior club official who questions the football manager closely on their hot new signing as the excited fans cheers outside.  Likewise few in business want to put at risk the surge in share price which follows a major new order.  It can be tempting to take assurances at face value, and difficult to penetrate the true nature of personal relationships at arms length.

In football as in the corporate boardroom, both parties to the bung have an incentive to keep it hidden.  Those paying get their player or their bonus, and those asking receive tax free extra cash.  The authorities need to tackle this pact of silence. 

Without change, it will remain difficult to prove a payment was corrupt to the standard required in a court of law. Was it a legitimate service, valuable research, or just a bung?  It is not just in the UK that former Government ministers are hired by companies seeking work from their old departments. 

The Bribery Bill currently going through Parliament will do little to help detect corruption.  Yet the Proceeds of Crime Act provides an example of what could be done.  It allows an avenue through which firms can disclose potential money laundering without fear of prosecution.  A similar enabling provision should be included in the Bribery Bill, but going further to allow the payment of the bribe to go ahead subject to disclosure.

Such an indemnity would allow the manager to secure their player or deal, releasing them from their current dilemma.  It would also shatter the pack of silence, allowing the authorities to target those asking for bribes.  Investigators would receive real time information regarding exactly what money had been paid and where.  Assets could then be frozen.  Tax could be reclaimed.  There may even be scope to allow those making the disclosure to reclaim the bribe anonymously from funds seized after prosecution.

It is easy to think that football clubs play to different rules from their corporate sponsors.  Yet even the UK Government which helps make the rules was not immune from flexing them to win business.  When selling new warplanes to Saudi Arabia, the need to secure jobs at home trumped any reservations about payments to third parties to facilitate the deal.  To some a legitimate fee and accepted business practice in a different jurisdiction, to others a bribe (including the Serious Fraud Office before they were warned off).

Without change to break the pact of silence around bribery the authorities will continue to chase shadows.  There is little incentive for those involved to blow the whistle.  It is now time for not just football managers, but also their business counterparts, to break ranks.  Agents should be made to fear what they ask for. They may get it - followed by a knock at the door.  Switching the floodlights on to such payments will allow the authorities to finally penetrate these murky business deals.  It may even mean we see some top footballers starting to pay tax on all their earnings.

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08/07/2009 by Steve Barclay.

The Chancellor’s White Paper yesterday on reforming financial markets was correct to note that no single institutional model will insulate us against a crisis. But his remedies will not ensure banks atone for their past mistakes until they address the individual behaviour of executives at the heart of the banking collapse.

The slow pace of reform is illustrated on the key issue of senior executive remuneration. Some banks have already returned to using guaranteed bonuses to poach staff from rivals, and yesterday’s announcement did nothing to put a stop to this. The Chancellor noted that banks will need to follow an FSA Code of Practice on remuneration, yet the FSA has not even issued this code yet. So guaranteed bonuses and large remuneration deals are being now offered which risk driving high risk strategies as before. It will be embarrassing if the FSA Code of Practice subsequently decides that remuneration for the RBS chief Stephen Hester is unreasonable, given that the Chancellor’s own officials have already signed it off.

At senior executive level, the cosy consensus is unchanged. Non executives sit on each other’s boards and, it is not just the trade union leader Brendan Barber who sees the conflict of interest in voting for ever increasing remuneration. Sir David Walker who will shortly produce the latest in a long line of corporate governance reports is another insider - the former Chairman of Morgan Stanley and still retained as a senior adviser to the bank. It is telling that the Bank of England’s detailed report last month said that bank executive’s remuneration over recent decades had not reflected performance.

Instead of our banks focusing on customer value, even taxpayer owned banks continue to focus almost exclusively on shareholder value. Stephen Hester’s remuneration strategy is geared around increasing share price - creating an incentive not to lend to the small business customers the Government claims it wants to help. Such traits were also evident in the way Northern Rock ran down its mortgage book. Supporting value creation, and providing a service to customers through the tough times, is not high up the list of priorities when set against shareholder value.

During the selection in Parliament for a new Speaker, MPs were asked by one contender whether they really got it. The answer to this question from some corporate boardrooms appears to be that they don’t. Within the privilege of the City few executives have yet been subject to enforcement for actions which lost their customers millions. Their bonuses made during the good times have been kept. After a one year pause, banks are now returning to the feeding frenzy with multi million pound bonus schemes. The only change appears to be that these will be paid over a couple of extra years, and that undisclosed performance criteria will apply.

Guaranteed bonuses re-enforce the concern that executives are being given a one way bet. When the going is good they keep the profit, and when big loses occur the public picks up the tab - either directly following bank rescues or indirectly as shareholders through their pension funds. Where big bonuses have been stopped, too often salaries have been quietly raised to offset this.

The gulf now between the City and the rest of the country is dangerously wide. The sense of fury in the pubs and clubs in the rural constituency of North East Cambridgeshire where I live is heartfelt. What is perhaps most worrying is that whilst for some in the City there is a lack of awareness at the level of hostility out there, for others they are aware but simply treat it with disdain.

If City executives continue with their narrow focus on shareholders at the expense of their customers, and a level of remuneration which their customers see as being on another planet, there is a serious risk of a backlash of thoughtless regulation. The EU has already demonstrated its desire to step in. Political pressure in the UK will only grow.

Against this backdrop, the next Government needs to try and restore a savings culture amongst hard up taxpayers. The announcement yesterday by the Chancellor of a money guidance scheme is a start, but it is a second order issue. It is the expansion of means testing that has caused so much damage to our savings culture, exacerbated by the tax on pensions, the shoddy behaviour of some financial institutions, and more recently low interest rates. As the Government is now printing money, inflation in the future risks wiping out what few savings people have left, which is hardly an incentive for new savers.

What rubs further salt in the wounds of many savers is the continued focus of firms on winning new customers at the expense of those they already have. Existing customers often still receive worse rates than new customers. Banks squeezed after the loss of PPI and bank charges, and faced with enhanced capital requirements, are searching for new revenue streams. Short term pressures have not gone away.

Nor is it just in the guaranteed bonuses in the wholesale markets where bad habits remain. Customers with credit card debt appear on a bank balance sheet as an asset. It is attractive to banks therefore to encourage the minimum monthly payment of such debt - which is then rolled over at a high interest rate out of all proportion to what is now offered to savers. How many executives would encourage their children to keep debt on these credit cards? Yet this is the message being given to many of the poorest in our community - the same factory workers, cleaners, and farm labourers who face extra tax to pay for the rescue of the banks and to keep funding the multi million pound pensions in the public sector.

The City of London needs to win back public trust. Its leadership is tasked with showing that they do get it. Like those who go on a crash diet before returning to eating junk food, the danger remains that some executives have not changed their habits and are looking to binge again. Either they change, or they risk undermining the industry they lead.

Steve Barclay is the Conservative Parliamentary Candidate for North East Cambridgeshire

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01/02/2009 by Steve Barclay.

Financial Regulation - enforcement not new policy should be the way forward.

Many commentators and politicians have recently called for more regulation of the financial services industry.  Often these have been the same voices who previously said light touch regulation was essential for the competitiveness of the City of London.

The call for more regulation ignores just how many rules we already have. The FSA Handbook runs to over 6,000 pages.  Adding an extra 500 pages after the horse has bolted is not the answer. Nor is yet another corporate governance report, which will do little to shift the culture of firms away from their focus on the short term.

Instead we should enforce existing rules to drive good behaviour.  It is striking that so many of those who broke rules in recent years still remain in their job, or in similar roles with other firms.

Without individual enforcement, it will always be tempting for executives to play lip service to rules rather than put their bonus at risk.  Most senior executives know plenty of colleagues who have been fired for failing to meet their target.  Few know colleagues who have been subject to regulatory enforcement action.  None I suspect have colleagues who have personally paid a fine to the regulator greater than a single year’s bonus.  Missing the target set by their Chief Executive or institutional shareholders is still a greater threat to a career or bonus than the threat posed by the regulator.

The Financial Service Authority has plenty of scope to hold reckless executives to account, not least its highest level rules, the 11 Principles. These are a bit like the 10 Commandments, and include requiring firms and their senior executives to act with integrity, to understand and manage their risks, and to be open with the regulator.  Executives in past years often understood the risks they were running, but they were not willing to be open with the regulator about them. 

Those seeking new rules, both in the UK and globally, often ignore the cost of trying to mitigate against events which happen once in a lifetime. Hindsight has led some to suggest unused equity capital should have been put aside to protect against recent events.  This would have burdened business with massive extra cost and made them less attractive to investors.

Instead it is the behaviour within firms which needs to be addressed.  This is not just an issue for regulators.  Fund managers did little to ensure long term strategies were followed.  Auditors failed to identify key risks when signing off accounts.  Non executive directors agreed large remuneration deals based on short term performance.  All took their fees for doing so.

The behaviour of the regulator also needs to change.  It should look much more closely at firms conducting banking activity which are not banks, and these may need to fall directly within their remit.  Liquidity can no longer be assessed on the basis that a firm will be able to turn to others should their credit line dry up.  The gap between senior executive rhetoric and the reality on the ground needs closer scrutiny - not least the practice of internal reports being sanitised.  They also should address why so few of their own heads of department have ever worked in the industries they regulate, and why many leave interviewing firms to junior colleagues who provide little challenge.

As for the wider regulatory framework, a reversal of Gordon Brown’s tripartite system with a shift of regulatory oversight back to the Bank of England has its supporters, but the downside would be more regulatory upheaval.  The Bank of England does need to take financial stability into account when setting interest rates, and it should have a clearer mandate to speak up on macro economic risks. However it seems optimistic to think any change of supervision will solve future mistakes, not least given the regulatory failures before 1997 under the Bank’s stewardship.

Regulation should focus on the future not the past.  For example, a more radical option might be to make auditors report directly to the regulator with a dotted line to the board.  This would provide better scrutiny on the ground, and remove a potential conflict of interest with those paying their fees.  Appointments would be made for fixed terms. 

Simply adding more rules may look like action is being taken, but it would increase costs and deter investment in the UK.  It would also fail to deliver successful outcomes in firms.  Enforcement against individual executives who behaved recklessly is more likely to change the culture of firms and with it to deliver a transparent and efficient market.

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