City & Business: Germans show how to handle a scandal

City & Business
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The Independent Online
Although Morgan Grenfell Asset Management may not see life in these terms, it has actually done both the City and the unit trust industry a big favour by getting into such a pickle with three of its European funds. The problems that MGAM has encountered both with unit trust regulations and the enforcement of those rules will have sent every house in the City scurrying to check its own procedures.

In the wake of the Barings collapse last year, there was a rush of activity in board rooms and compliance departments to ensure that there could be no repeat of that grand merchant bank's unseemly demise. So it is with MGAM. Most fund management executives will realise that it could just as easily have been them facing the embarrassment and anguish that has engulfed MGAM and its Deutsche Bank parent.

The Germans have been refreshingly swift to accept their responsibilities for the failings that allowed fund manager Peter Young to breach rules designed to safeguard investors. They acted quickly to ring-fence the rogue invest- ments and restore the integrity of the funds. It was also made plain from the start that they would meet in full legitimate claims of investors.

At times likes this, the City has an objectionable history of self preservation. Scapegoats are readily identified and hung out to dry. Junior members of staff often carry the can while the more senior - and sometimes more culpable - are allowed to swan around with impunity.

Deutsche Bank is not prepared to indulge in such a charade. It is clear that Keith Percy, the well respected MGAM chief executive, is already in the firing line. Mr Percy is a man of great integrity and diligence. An outstanding fund manager in his own right, he is a credit to the industry. He found himself, however, in a position that was impossible to deal with - it was not management controls that were breached, it was trust.

Indeed Mr Percy had ordered Mr Young to scale down his controversial investments back in April. That instruction was given to a man whom Mr Percy trusted. No effective system of management control ever devised can legislate for those who disregard orders and who are prepared to weave a complex web of deception to cover their tracks. What we are dealing with here is a misjudgement of character, not mismanagement.

As Deutsche Bank has recognised, however, the reasons why things went wrong will not help much in its battle to restore the bank's good name. That it is why it is embarking on such an aggressive programme of affirmative action.

In the wake of the MGAM affair, the regulators must also share some responsibility for sanctioning a rule book that is clearly defective. Imro must be prepared to press for changes in the rules governing unit trusts. Procedures for valuing unquoted securities are too lax. Independent assessment using established and conservative techniques are required. So too is tighter definition of unapproved securities. The promise that a company will secure a listing within a year is a feeble reason for a stock to be classified as approved. A simple and absolute 10 per cent limit on the proportion of unquoted stocks held in a portfolio will provide much greater clarity and make effective oversight more readily achievable.

This is indeed a case of "Small Earthquake at MGAM; Not Many Dead". There is no systemic risk. The damage to investors is loss of confidence rather than loss of money. But there are still lessons to be learned. Deutsche Bank is not prepared to shirk its responsibilities. Neither should the rest of the industry or the regulators.

Brewing up for a fight

Having acquired Carlsberg Tetley from Allied Domecq, Bass now has the more difficult task of securing regulatory approval. One of the questions the Office of Fair Trading must consider is Bass's ability to use its enlarged market share to force up prices. It is a natural concern, but an overstated one that stems from a confusion between the retail price of your pint and the brewing element of that price over which Bass can actually exert influence.

The average price is around pounds 1.60. Bass, however, sells its beer to the retailer at just 50p a pint, of which half is accounted for by duty. In other words, Bass has only 25p worth of beer to manipulate. Over the last four years, the wholesale price of beer has fallen by 8 per cent in real terms. The price at the pump has risen by 6 per cent in real terms. That is no fault of the brewer.

Competition is keeping the lid on wholesale prices. The extent of that competition is demonstrated by the paucity of the returns that the major brewers are making on their brewing operations. The average post-tax return of around 6 per cent suggests this is not an industry where there are rich and easy pickings.

On the question of market share, estimates suggest that Bass would have 35 per cent of the market. However, that would not be so far ahead of Scottish & Newcastle with around 31 per cent. In many European countries, it is not uncommon to have a dominant brewer with market shares of up to 76 per cent.

Not only will there be competitive pressure from other brewers but perhaps more signifcantly Bass would face great pressure on prices from the increasingly powerful retailers. More and more beer is being bought centrally by powerful pub retailing groups. Around 60 per cent of the take-home trade is controlled by big retail chains and almost 50 per cent of the on trade is controlled by pub companies. They are strong and sophisticated buyers .

These are positive reasons to allow the deal through. There are also negative ones relating to the ineffectiveness of the conditions that could be imposed. Bass could be forced to shed capacity. The problem is there would be no buyers. A forced disposal of brands would be inefficient. A demand to sell off pubs would be ineffective.

The competition authorities must also be mindful of the consequences for the British brewing industry if Bass had not bought Carlsberg Tetley. It was a struggling business with limited prospects. More jobs would be lost if it had stayed with Allied Domecq.

As it stands, Bass now has the opportunity to inject efficiency and enthusiasm into a flagging operation.