Category: Blog

One of the reasons banks in the UK are so unpopular is poor perceptions of the service they collectively offer.

Small and medium sized enterprise can be frustrated by the apparent lack of interest in them. The branch bank Manager no longer seems to have the power to develop a relationship and make intelligent judgements about credit needs and risks. Regional centres pursue box ticking exercises evaluating credit risk based on numbers in business plans, which may make mistakes both ways. The banks are inclined to lend to the good business plan designer, which may not be the same thing as the successful entrepreneur.

Individuals can be frustrated at the short opening hours of branches, not designed to help those with busy jobs. Counter queues can be irritating. There is not the same personal relationship between branch manager and customer that used to prevail. Despite having access to large amounts of personal financial information, banks are often bad at deciding what additional service to offer a client, and bad at forseeing problems with solutions that might work. People get unhappy about fees and charges.

There should be economies of scale in banking, but there can also be diseconomies. If salary structres reflect the overall size of the bank, individual salaries might be high to run good value individual or small business banking service. If a bank’s business section can make mega fees out of the largest companies, working hard for small fees from small business may seem less worthwhile. Seeking to streamline small business services too much to cut costs can simply remove the necessary personal judgements and relationships which customers want.

There has been a lack of choice in UK retail banking for some time, made worse by allowing mega mergers in the last decade that has cut the number of potential competitors on the High Street. Barriers to entry are large, given the costs of setting up a branch network and accumulating the capital needed to back a sensible bank. The Review should examine the scope for allowing more competitors in the UK market. Most observers agree HBOS and Lloyds should not have merged,. Maybe this should be revisited. New competition guidance could make it clear that future mergers of larger UK High Street banks will not be welcomed. We need to revisit the rules and ease of setting up new banks in the UK, to ensure proper competitive challenge. There is room for improvement of current customer service.

There is also a problem over the availability of lending for small and medium sized enterprises. This is the result of the current regulatory vogue to demand more cash and capital at the wrong point of the cycle. The Regulators have lurched from demanding too little cash and capital during the boom, allowing banks to become too risky and unstable, to demanding too much cash and capital at the trough. This makes banks unwilling to lend money to smaller and riskier customers as they see it. More of their cash and capital is needed to lend to the government, as lending to government counts as a low risk activity, leaving them with a stronger balance sheet in the eyes of the Regulator. The sensible wish to increase cash and capital reserves has led to a dramatic strengthening of bank balance sheets in the last year. The Regulator should now delay demanding further improvements, until the economy has hown decent growth for a a year or more.

Sir John Vickers is a an accomplished senior academic, with Bank of England and Competition authority experience. He comes to the task of reporting on how the banks should be structured and regulated from a perfect background. I know he will approach it seriously with useful knowledge but no opening prejudices.

One of the first questions he needs to ask is Why did we have banking failures and problems in 2008-9? Some will be urging him to the veiw that it was the combination of “casino banking ” with clearing banking which caused the problems.

The evidence does not bear this out. The worst of the crisis was the collapse of Lehmans, a pure investment bank. In the UK the most distressed banks were three relatively small specialist mortgage banks, without Investment banking arms. Forcing Barclays and HSBC in London to divest their investment banking operations would not prevent a future Lehmans or Northern Rock.

It is difficult to avoid the conclusion when looking at Lehmans, Northern Rock, RBS, the Irish banks or the Icelandic banks that it was misjudgement by the banks of how much cash and cpaital they should keep to cover their risks, and bad judgement by Regulators who did not require them to be more cautious. Bankers and Regulators together presided over a massive expansion of leverage throughout the system. Both shared the view that the advent of new financial isntruments and larger banks alllowed more risk to be run . They threw out of the window the old ideas about prudent levels of capital and cash. The Central banks then withdrew liquidity from markets too rapdily and helped bring about the crisis.

My first conclusion is that splitting Investment and clearing banks is not the answer. Banks of all types and sizes got into difficulties, including small and specialist institutions. It is increasingly difficult to seperate investment bank activities from clearing bank activities. A business customer may need foreign exchange futures and commodity derivatives as well as a bank loan and current account. A retail customer may want investmnt management as well as a means of payment. Seeking to stop banks undertaking certain types fo financial business might just drive them offshore.

Yesterday I asked Mr Clegg to confirm that current public spending will rise 15% in cash terms this Parliament according to government budget plans. I asked him to confirm that this being so the puloic sector need not cut any important public service. It would be incompetence or perversity if it did make cuts in important public services, given the cash increase in spending.

Mr Clegg did not disagree with this view. The view, of course, was not picked up by the BBC. Clearly the increase in cash current spending by governemnt is an inconvenient truth amidst their narrative of deep and damaging cuts. Their journalists should weave this inconvenient truth into their analysis. I expect government Ministers to start explaining what they are doing on public spending a little more accurately, as the government itself has allowed the myth to grow that there will be deep and immediate cuts in current spending which are just not reflected in the budget figures.

The government challenge to those many well paid public sector managers should be a simple one. We can manage modest increases in cash spending – less growth than you are used to. Can you manage things so we do not need cuts in anything that matters? Private sector companies would avoid service cuts if they were sure of 15% more revenue over the next five years, with cash increases each year.

As we learn that many tax calculations under the Pay as you earn scheme have been wrong for years, the Treasury is busy consulting on taking over the task of running the payroll for every employer in the country.

I jest not. That is the bottom line of their consultation. Apparently, because so many PAYE accounts have been charged the wrong amounts for years, the answer is for the Revenue to play a much bigger role in sorting out your pay.

The Consultation paper suggest a three stage approach. In the first stage employers will have to supply the Revenue with weekly or monthly details of all pay and tax charged, so the Revenue can see if a new code number or basis for the calculation is needed. Smaller companies that do not have the necessary computer programmes will be able to seek assistance of an unspecified amount to change their systems so they can talk directly to the Revenue to comply.

In the second phase, the Revenue will take on the task of working out the tax for every employee, harnessing the now assured mutual working between the Revenue’s computer and each employer’s computer.

The final denouement comes with the Revenue effectively running the payroll for each firm, charity and state institution.

I am sure the Treasury would like to hear from you if you think this is a good idea, and you might like to tell them if you think it a bad idea. I have already sent in my comments. I am not sure I should reproduce them here.

You might like to ask amongst other things how this would ensure accurate tax, as the employer does not know the details of an individual’s savings or casual income, and how much risk there would be in having such a huge national computer system to handle so much money each week and month.

This week Westminster has been preoccupied by possible changes in the voting system.

The bill to give the people a referendum vote on whether to move to the Alternative Vote system or not was granted a second reading on Monday.

The history of this measure is complex. It failed to get a Parliamentary majority in the 1920s when a previous Coalition looked at it. In the 2010 General Election the Conservatives opposed AV strenuously, Labour proposed it, and the Lib Dems said they would prefer a more proportional voting system.

After the election the Lib Dems said they wanted it as part of their price to join a Coalition, Labour said they now opposed it because it is linked to other changes to constituencies in the Bill, and Conservative Ministers said they now support a referendum on it, but will urge people to vote “No”.

It is in a way surprising that Lib Dems are now enthusiastic about this measure. They should study two different and interesting General Election results. In Brighton a Green emerged as the outright winner, leaving the Lib Dem struggling in fourth place. In a future election under AV more Lib Dem members and voters might decide the Greens were a purer version of what they believe in, and give them their first preference votes. Telling themselves they will vote Lib dem second preference, they could just get a Brighton effect. We know Greens can draw enough votes from across the party spectrum to win in an individual seat with a leading Green candidate.

Buckingham shows us something different. Labour and Lib Dem withdrew from this contest, giving UKIP the best possible conditions for their best known candidate to win. He struggled in well behind not just the former Conservative Speaker, but also behind a pro EU integration independent. This implies AV is less of threat to Conservatives, than it is to Lib Dems.

Under an AV system we should expect to see more splinter group or single issue type parties, as people can vote for them on first preference and still express a view on between the better supported candidates, where their preferred candidate is a minority cause candidate. This may not work well for the Lib Dems.

A leading newspaper on Sunday had a most interesting Appointments Section. Out have gone all the additional public sector roles we became used to under Gordon Brown’s Labour government. Out have gone most of the eye catching public sector salaries higher than the Prime Minister’s.

Practically all the jobs in the Section were either public sector replacement jobs or “third sector”. Presumably the private sector has other ways of finding the talent it needs. It was a slim supplement.

The BBC is seeking non-executive directors (no pay level advertised) , the FSA Consumer Panel members (no pay level advertised).

Ipswich’s new Chief Executive will be offered a salary below £100,000 a year. The Chief Executive of Ofqual will be paid circa £100,000 unless “exceptional” (worth another £20,000). The Principal of Preston College will receive £130,000 if “outstanding” whilst the Managing director of the Newcastle College Group will paid a rather coy “attractive six figure package”. The Chief Executive of the Welsh Ambulance Service will be paid around £120,000.

Liverpool City Council comes in with a Prime Minister busting £197,500 for a replacement Chief Executive.

The times are gradually changing.

The original script for the new government was radical reform of education and steady as you go for the NHS. Mr Gove spoke with racy and fervent language of the new schools he wished to allow. Mr Lansley spoke more quietly about the need to have real increases in spending for the good old NHS, year in, year out.

This started to change before the General Election. Suddenly we heard of radical plans afoot to change the NHS after all. Out would go a lot of the national and regional bureaucracy. In would come much more local and GP control. Out would go the Primary care trusts, in would come GPs buying the hospital services their patients needed.

Since the Election the balance has shifted again. Mr Gove knows that the powers of his office are limited to change behaviour. The pace of change of types of school does rightly depend on the pace at which individuals, charities and others wish to set up new schools, and the pace at which existing schools wish to change to Academy status. A long journey begins with one step. Mr Gove never intended to have for profit companies owning or running schools,and never wished to introduce academic selection to more schools. There were always strict limits to the radicalism.

Meanwhile over at Health it looks as if the plans for change are far more wide ranging. All the English NHS will be converted to the GP purchaser model. All over the country PCTs and other Health Boards will be swept away.

Radical is one of those words that is often used as praise. I think myself radical is neutral. Radicalism may be excellent, because it produces a better tomorrow. It may be bad, because it messes up something that was not too bad. My point today is not that one of these Ministers is right and one is wrong, or that radicalism is either good or bad in itself.

The important point is the spin is not the same as reality. It looks, so far, as if the Health policy will be more radical. There is likely to be more fundamental change to the roots of the system, than with the Education policy. When we come to assess how it all works, we need in each case to see if the varying degrees of change were the correct ones for the task in hand, to produce better public service. What does it take to raise standards in all state schools? What will ensure good quality prompt care for all who need NHS treatment? I invite your views.

Apparently those wicked speculators have been at it again. Not content with bringing the banking system down by sellling shares in banks that were just going through a slightly dificult time, they are now driving the price of wheat up so the poor starve. Cue Frau Merkel – time for the EU to regulate the grain dealers.

Most speculators are not immoral. They are amoral. They are making a living, providing a service. Farmers need wheat futures so they can speculate on when to sell their crop. They like rising prices as it helps them invest and develop their businesses and grow more grain in the future, as well as giving them a better income. Many of you will have shares in your pension funds and unit trusts that include shares in commodity companies that use wheat futures and other commodity derivatives to help them manage their businesses. You may even have investments that include commodity funds, savings schemes that are seeking to make money out of rising prices of food, energy, and metals. These are not immoral.

The grain price has been going up recently because Russia is having a poor harvest. It has gone up because Mr Putin has banned Russian exports. It has gone up because there are many more mouths to feed and the system allows little for harvest failure in the main grain baskets of the world.

These same amoral speculators who are currently being attacked for buying wheat have not yet had the praise surely they deserve for driving the price of oil down in recent months. As a result so the world’s poor can afford more energy. If they are to blame for things critics don’t like, shouldn’t they get credit for things that help?

A market is a mass of buyers and sellers. Each tries to make the right judgement for themselves or their organisation. Individual speculators do not seek to make the poor starve or go without heating. They seek to make money, and they may be working for you. Grain prices can only be carried upwards by speculators if the underlying market position between users and producers warrants it. If it doesn’t the market will soon adjust and the speculators will lose money. If there is a shortage of wheat then prices will rise. If they rise enough that will induce more supply, the ultimate answer to a food shortage anywhere in the world.

The reasons why some are facing dire conditons over food supply are many. That requires better government in their country, and more assistance in the meantime from outside sources. We should nto stand by and watch people starve, but we should not think we can solve their problem by regulating the speculators.

Yesterday I was talking to a former Labour Minister. He reminded me of the strength of the Blairite view that politics was changed fundamentally by the advent of “the 7 x 24 news cycle”. It was change in the media, they argued, that meant Ministers had to spend so much more time on media matters. It was the new news cycle which led to the demand for Ministers to spend so much more of our money and their time on spin, media handling, research and interviews.

I have always thought they overdid all this. The main purpose of a Minister is not to generate amusement and stories for the media, but the run departments, settle policies and spend public money wisely. Yeserday also led me to think that the premise that we now live in such different media times was not quite true either.

Prior to 1997, in the dark ages of Labiur mythology, we had Saturday and Sunday newspapers and TV and radio news bulletins. For decades prior to New Labour one set of newspapers went to print overnight and went through several edtions with changes to stories and even whole pages. We also had a series of afternoon and evening papers around the country going through several editions. Post 1945 TV news extended their hours of operation, giving us early morning and late evening news and comment. Radio had long since given regular bulletins spread over much more than the working day.

In recent years there have been two changes that affected the media substantailly. The one is the arrival in the UK of much more choice of programme, so there is more competition, and smaller audiences for each programme. The second is the advent of the internet, producing more news and comment from outside the professional world of the media. Neither of these developments need, however, fundamentally change the way a Minister does his or her job.

The truth is the last government thought they could manage the media better by spending much more time and money on that process. They discovered that whilst it worked for bit, whilst the public mood towards them was good anyway, when bad news or poor decisions came along their media handling skills bought them no refuge from barbed comment or revelations they wanted to avoid.

One of the popular views in news handling is that giving information out in a privileged way to selected outlets will bring better coverage. For every more favourable story it may produce, it builds up more resentments amongst the many news outlets who did not get the favour. There is a lot to be said for the news conference or the statement to Parliament as the main way for Ministers to set out their case or present their decisions. That way all media have equal opportunities, the costs of handling special information are reduced, and the Minister only has to perform once rather than saying more or less the same thing in interview after interview. The day job is running the country, not filling the papers.

There are plenty of footballers, cricketers, actors and actresses and C list celebrities to follow round to provide the endless diet of stories about follies and lifestyles to fill the papers on days when the government has nothing new to say.

Both the USA and the EU need to create more private sector jobs. In both the American and European continents unemployment is too high. Tax revenues are depressed and social expenditures large as a result.

Both the EU and the US authorities are taking actions which make private sector job creation more difficult and dearer. In the USA there are many corporate worries about President Obama’s Health care plans. Most agree on at least one thing – companies on average will have to pay more for the health insurance for their staff. Many company pension funds are languishing with deficits. The poor performance of US shares over the last decade has hit them, as many of these plans are substantially invested in domestic equity. Companies have to put more money into them. This background makes employers cautious about hiring more people.

In the EU the lawmakers are moving towards a big new raft of financial services regulation with new supervisory authorities. Taxes generally are rising in Europe, including taxes on employment and earnings. The USA too is busily putting in more Wall Street and banking regulation.

The creators of jobs and success in Shanghai, Singapore, Hong Kong, Mumbai and other dynamic centres must be rubbing their hands with glee as they see all these moves. Of course the west needs to learn from the big regulatory and management mistakes made during the Credit Crunch. That does not mean we need new regulators and more box ticking. It means we need Central bankers and lead banking regulators with better judgement. The old regulators and central bankers did not lack numbers of staff or powers. They simply got the judgement wrong, allowing too easy credit up to 2007 and then tightening too much too quickly to correct it.

The problem today is very different from the problems in 2006-7. Then the issue was excessive lending and credit. Today it is slow recovery held back by banks that cannot lend enough under the new rules and by companies that are happy to hoard the cash they generate for fear of more problems like 2008-9. The more western governemnts make it dearer and more complex to do business, the more the brake will drag on the recovery.

In the USA employees naturally value their healthcare plans, given the US health system. They also value their jobs, as the US incentives to work are more sharply defined than in some European countries. The President was doubtless well intentioned in his bid to raise healthcare insurance standards, but it raises the costs of US labour relative to other competitors. It will be good for productivty, and bad for the rate of job growth. The general fashion to much tighter bank regulation in the west will mean a slow recovery.