The most eye-catching part of the National Audit Office’s report into the mis-selling of financial products is the fact that as much as £5bn of the £22.2bn paid out to compensate people with bad payment protection insurance policies has been pocketed by claims companies. If you ever wondered where the money for all those vexatious calls that plague anyone with a mobile phone comes from, you now have your answer.
If the NAO is even half right, it represents a staggering sum that should be raising serious questions, not least because claims companies ought to be unnecessary. If the system of complaining to one’s bank and then moving to the Financial Ombudsman were simple and effective there should be no need for a middleman.
There are measures now in place to put a cap on their fees. But in addressing one scandal – so many people being ripped off by one lot of spivs – another has been created, with another lot of spivs grabbing truckloads of money by inserting themselves into the clean-up.
Regulators, and the banking industry, need to ask themselves whether they are effectively educating consumers about the complaints process and how it should work. Are they making it easy enough? The NAO’s numbers suggest that there is much work to be done.
However, that is far from the only part of its report that should disturb us. Sir Amyas Morse, head of the NAO, makes clear his belief that “The FCA cannot be confident that its actions are reducing the overall level of mis-selling.” He accepts that the watchdog has taken action to reduce the incentives for financial firms to engage in it, by forcing reforms to the way staff are paid and doling out nearly £300m in fines. But he is concerned that there isn’t much in the way of evidence as to whether these measures are working or not and he questions the effectiveness of the regulator’s interventions as a result.
Given the time, effort, energy and money expended on the PPI review, that is extremely worrying.
However, Sir Amyas introduces a caveat: legislative restrictions limit his access to the information that the FCA holds on firms, “making it impossible to draw definitive conclusions on its approach”. So the FCA might be doing a better job than he thinks it is. But it might also be doing a worse one. Thanks to the Financial Services and Markets Act he doesn’t know. And nor do we.
Given the importance of the FCA’s work, and of the industry it covers, that isn’t a very unhappy situation for us to be in.
Sage advice on executive pay? It’s ignored
Pirc, the shareholder voting adviser, is shaking its fists about pay again. The target of its ire this time is Sage, one of those rare British tech success stories of which you’ve probably never heard. It supplies software to other businesses.
As big companies are wont to do – and Sage is a big company with a market value of about £6bn – it pays its executives a lot of money. In Pirc’s view, an excessive amount.
It’s hard to argue with that assessment. Chief executive Stephen Kelly has incentive schemes equivalent to 425 per cent of his base salary, and while his take home pay last year wasn’t considered excessive, it’s easy to see how it could get that way.
But there’s more. The pay committee has the discretion to make awards outside its stated policy to “meet the individual circumstances of recruitment”. In other words, if the board sees someone it wants to grab, the committee can throw money at them.
For these and other reasons (such as its unhappiness with performance criteria). Pirc thinks shareholders should vote down both the advisory remuneration report and, more seriously, the remuneration policy.
Neither of which will happen. The consultant’s points are well made, but Sage’s shares have been on an upward trend (with a degree of volatility) and all would seem relatively rosy. Institutions will therefore be disinclined to make a fuss. Why rock the boat?
The problem with that stance is that where Sage leads, others will follow. The overall level of awards will keep growing, performance criteria will continue to be inappropriate, remuneration committees will carry on throwing around shareholders’ money. And hands will carry on being wrung as bad bosses get it wrong and ride off into the sunset with millions when their companies go pop.
Biggest business scandals in pictures
Biggest business scandals in pictures
1/9 Mitsubishi admits 'improper' fuel tests dating back to 1991
Mitsubishi has admitted to using false fuel methods dating back to 1991.The scale of the scandal is only just coming to light after it was revealed in April that data was falsified in the testing of four types of cars, including two Nissan cars.Mitsubishi originally said the affected models were limited to the Mitsubishi ek Wagon and ek Space, and the Nissan Dayz and Dayz Roox.The company said the cars were only sold in Japan, but the investigation would cover overseas. Mitsubishi is Japan's largest car maker. It sold more than one million vehicles last year but has less than one per cent of the UK market. This is the first time a Japanese car maker has been implicated in a vehicle testing scandal since the emissions scandal engulfed Volkswagen last year.
2/9 Panama Papers: Millions of leaked documents expose how world’s rich and powerful hid money
Millions of confidential documents have been leaked from one of the world’s most secretive law firms, exposing how the rich and powerful have hidden their money. Dictators and other heads of state have been accused of laundering money, avoiding sanctions and evading tax, according to the unprecedented cache of papers that show the inner workings of the law firm Mossack Fonseca, which is based in Panama. The documents, dubbed "The Panama Papers", reveal links to 72 current or former heads of state and accuse some of them of having vested interests in their own banks and looting their own countries.The ICIJ has listed 140 politicians from more than 50 countries who are linked to offshore companies in 21 tax havens, including countries such as Argentina, Georgia, Iraq, Jordan, Qatar and Ukraine. Mossack Fonseca said it has operated “beyond reproach” for 40 years and has never been acused or charged with criminal wrong-doing.
3/9 Google's tax avoidance
Google reached a deal with the HM Revenue and Customs to pay back £130 million in so-called “back-taxes” that have been due since 2005. George Osborne championed the deal as a “major success”. But European MEPs have since called for the Chancellor to appear in front of the committee on tax rulings to explain the tax deal. For Google's tax arrangements to be disclosed, there would need to be a common agreement on taxation across Europe and a removal of the secrecy used to calculate taxes. It is currently illegal for Governments to reveals details about what companies pay in taxes.
4/9 Turing Pharmaceuticals and Martin Shkreli
Martin Shkreli became known as the “most hate man in the world” after his drug company, Turing, increased the price of a 62-year-old drug that treated HIV patients by 5,000% to $750 a pill. He was charged with illegally taking stock from Retrophin, a biotechnology firm he started in 2011, and using it pay off debts from unrelated business dealings. Shkreli, who maintains he is innocent, says there is little evidence of fraud because his investors didn't lose money.
5/9 Volkswagen emissions scandal
VW admitted to rigging its US emission tests so that diesel-powered cars would looks like they were emitting less nitrous oxide, which can damage the ozone layer and contribute to respiratory diseases. Around 11 million cars worldwide were affected. “Our company was dishonest with the EPA and the California air resources board, and with all of you, and in my German words, we have totally screwed up,” said Michael Horn, former US chief executive of Volkswagen.
6/9 Quindell, the scandal-ridden insurance firmnow which faced its own sink
Quindell was once a darling of AIM but its share price fell in April 2014 when its accounting practices were attacked in a stinging research note by US short seller Gotham City. In August the group was forced to disclose that the £107 million pre-tax profit it had reported for 2013 was incorrect, and it had in fact suffered a £64million loss. The investigation has prompted legal proceedings to be launched against the firm by a group of 342 retail investors who claim they were misled. Quindell’s shares fell more than 85 percent. In November the troubled company said it would change its name to Watchstone Groupas part of its efforts to draw a line under months of turmoil involving founder Robert Terry.
7/9 Toshiba Accounting Scandal
The boss of Toshiba, the Japanese technology giant, resigned in disgrace in the wake of one of the country’s biggest ever accounting scandals. His exit came two months after the company revealed that it was investigating accounting irregularities. An independent investigatory panel said that Toshiba’s management had inflated its reported profits by up to 152 billion yen (£780m) between 2008 and 2014. Mr Tanaka said the company had suffered “what could be the biggest erosion of our brand image in our 140-year history”.
8/9 FIFA Corruption Scandal
Fifa, football's world governing body, has been engulfed by claims of widespread corruption since summer 2015, when the US Department of Justice indicted several top executives. It has now claimed the careers of two of the most powerful men in football, Fifa President Sepp Blatter (picture) and Uefa President Michel Platini, after they were banned for eight years from all football-related activities by Fifa's ethics committee. A Swiss criminal investigation into the pair is also continuing.
9/9 Libor fraudster
City trader Tom Hayes, 35, has become the first person to be convicted of rigging Libor rates following a trial at London's Southwark Crown Court. Hayes worked as a trader in yen derivatives at UBS before joining the American bank Citigroup in Tokyo. He was fired from Citigroup following an investigation into his trading methods. He returned to the UK in December 2012 and was arrested following a two-and-a-half year criminal investigation by the SFO. He was alleged to have manipulated Libor, the London Interbank Offered Rate, which is used to set the interest rate banks use to lend to each other for $450 trillion-worth of financial contracts and loans. Hayes was found guilty of conspiracy to defraud and faces up to 10 years in jail for each count of conspiracy over the manipulation of Libor.
Barratt: building a nice profit on taxpayers’ money
House-builder Barratt is burning rubber with a superduper set of first half results. Revenues up by a fifth, profits by twice that, and just look at those margins.
No wonder the latter are looking good. Barratt managed to increase average selling prices by 10.9 per cent in the period to £254,200. There is a housing shortage in Britain, and prices naturally rise if there are more people wanting to buy than there are houses available.
At least some of the rapid increase in Barratt’s prices can be explained by the fact that it’s selling posher homes.
Still, it’s doing very nicely out of the Government’s help to buy scheme, with about a third of completions receiving this particular type of state support. But should taxpayer’s cash really be pouring into the pockets of shareholders in a private house builder? Isn’t that what we ought to be asking?