Outlook: Are the banks still ripping people off with PPI? Don’t ask the NAO

Outlook

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.

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?

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