Category Archives: Society

Banking, Britain, Economic, Financial Markets, Government, Society

Statements by RBS are clear on two points…

ROYAL BANK OF SCOTLAND

A series of rash statements issued yesterday by the Royal Bank of Scotland is clear on two points. Firstly, the decision taken to create an internal ‘bad bank’ with toxic loans amounting to £38 billion will hardly provide an instant cure. It will take a further three years of write-downs and bank disposals before the institution will even be considered to have recovered from its 2008 financial collapse and taxpayer funded rescue.

The second relates to serious deficiencies in the day-to-day management of RBS – from its chronic failure to meet targets on lending to small and medium sized firms, through shortcomings in service to personal customers, and to the provision of £250 million made by the bank for mis-selling payment protection insurance.

It is extremely unlikely there will be any start to the sale of the bank back to the private sector until well after the General Election.

RBS has announced a bottom-line loss of £634m for the three months to September. Far from the internal ‘bad bank’ resolution being hailed as a panacea, it is little wonder that shares in RBS have slumped. Even in its darkest hour of 2008, few would have believed that the recovery of what was then the UK’s largest bank would have taken eight years and a massive restructuring and shrinkage of its business. RBS has suffered a major curtailment in much of its global business and activities, not just the unwinding of the vainglorious acquisitions of the Fred Goodwin era but is also shorn of the overseas expansion delivered by his predecessor, Sir George Mathewson.

The protracted period of indecision on whether the bank’s bad loans – much of them incurred in Ireland by Ulster Bank – should have been left with the government or treated as a separate entity, is a nettle that should have been grasped in 2009 rather than allowed to have festered for the length of time it has. Chancellor George Osborne had had to recognise that RBS’ problems – structural and cultural – will take far longer to resolve than the government first anticipated before a share sale can be undertaken.

The traumatic legacy of its near-collapse remains problematic today. This induced a deep reluctance within the bank to lend, in particular to small and medium-sized businesses. A highly critical report by Sir Andrew Large found RBS was performing so erroneously it was not even in a position to meet its own targets. In the meantime, a review by RBS into how it serves its personal customers is scheduled to report next year.

The bank still has a mountainous task ahead under its new chief executive, Ross McEwan. There is much to do to overhaul the bank’s lending practices; by moving away, for instance, from the sales target-driven excesses of the previous era and by making major improvements to its overall service to customers.

RBS will eventually revert to being a domestically focused retail bank, stripped down to those core banking competencies it should never have deserted in the first place. The biggest challenge ahead will be to rebuild customer and investor trust. The bank’s widespread loss of confidence makes that a daunting and difficult task.

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Britain, Consumer Affairs, Economic, Energy, Government, Politics, Society

Addressing the massive public concern over rising energy bills…

ENERGY SUPPLY FIRMS

The Government has made known its intention to make it a lot easier for energy consumers to switch their supplier. Ed Davey, the Energy and climate change secretary, wants consumers to be able to do it within a day instead of the present arrangements which can take up to five weeks. Mr Davey’s suggestion certainly sounds like a positive move and one which will be embraced by all energy customers seeking better deals elsewhere in the market.

But is the real issue not more to do with consumer inertia and one that is caused by the belief that banal paperwork is tedious and that some cost may be involved, rather than the time taken to complete such a move? If so, then the additional competition which the Government is craving for – which should drive down prices – may not occur at all.

Of more significance, though, is Mr Davey’s plan to make the probing of the accounts of the ‘Big Six’ energy supply firms a lot easier. They have been accused and arraigned of utilising networks of subsidiary companies to purchase and sell fuel and services – effectively from and to themselves. This has allowed them to inflate prices and to boost profits while claiming that they are faced with soaring costs.

Whilst more transparent accounting practices could put a stop to this, a cautionary note would also be required to be issued. Based on recent experience of other big corporates’ activities, however clever state legislators and the tax authorities think they are, big company lawyers and accountants will always be one step ahead of them. That is pretty much a given.

But in a politically astute move, Mr Davey is also considering increasing the size and weight of the political baton he can wave at energy companies. This could lead to their executives being liable to face criminal prosecution if the evidence proves that they have been engaged in unfair and illegal price-fixing, as well as bill-inflating practices.

Most of the action that can be taken against companies to punish such activities is currently undertaken by regulators. This is done for the very good reason that regulators have a sophisticated understanding of the very complex methods that companies use. Because of that, the financial penalties and fines that OFGEM and other public regulators impose are rarely challenged.

Some commentators may argue that putting that material in front of a lay jury and expecting them to understand it, and following it through a trial which may last for several months, might be a sanction too far. Complex fraud trials are few and far between because of this very problem. However, if executives know that some underhand and deceitful practice might lead to such a trial with all the public ramifications and consequences that could follow – including imprisonment – it could also be a powerful deterrent.

In a game of fast moving politics, politicians are attempting to outbid each other in seeking to address the energy crisis problem. But action which brings results in the form of lower bills for consumers as opposed to instant popularity and votes should be the guiding principle.

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Britain, Business, Energy, Government, Politics, Society

Energy firms and the responsibilities they have…

UK ENERGY FIRMS

The decision by Britain’s biggest energy firms to send junior executives to face a grilling by MPs at this week’s select committee inquiry into soaring utility bills beggars belief.

The distinct absence of energy bosses, who are paid mega-buck salaries, goes to the heart of important issues of power, responsibility and accountability in this country. The nonappearance of chief executives also suggests that energy firms have learned little from recent history about the relationship between large consumer businesses and the customers they profess to serve.

It is not inconceivable to think that the absent bosses had in mind the cross-examinations endured by bank chiefs (including Fred Goodwin of RBS) by MPs in the wake of the government bailout of two of Britain’s major banks. Mr Goodwin – formerly Sir Fred, who has since been stripped of his knighthood – and his colleagues had to make humbling apologies for their actions as MPs held them to account.

If energy bosses had hoped to body-swerve a similar scenario as they are being held to account for inflation-busting price hikes, then they have fundamentally misunderstood their privileged position in British society, and their responsibilities in relation to regulations set out by Parliament.

Energy firms cannot take the view that their business is a private matter between them, their shareholders and their consumers. If that ever was the case – and the apparent powerlessness of the OFGEM regulator has often made it seem so – it is certainly not the case now.

Energy bills and the way they are being calculated now stand at the nexus between industry, politics and austerity. The ‘cost of living’ factor is a key voter concern and has become a major political issue in the run-up to the 2015 General Election. The main topic of political discourse was thrown open ever since Ed Miliband threw down the gauntlet at the Labour party conference, promising a price freeze and cutting electricity and gas bills if he made it into Downing Street. For the Conservatives, former prime minister Sir John Major floated the notion of a windfall tax on the energy firms, should a particularly harsh winter produce bumper profits. In Scotland, the Scottish Nationalist Party produced its own riposte, with a pledge that energy bills would be reduced by 5 per cent in an independent Scotland. The political battle over energy is heating up.

With the cost of living set to continue to be the most pressing political concern, Britain’s energy bosses need to accept they can run, but they cannot hide. They need to engage with this process – by listening, explaining and being open to market reform – or they will end up on the receiving end of both political and public indignation.

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