Outlook: FSA faces its moment of truth on split caps

Cable consolidation; On hold - for now; Perilous pensions
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The Independent Online

If the Easter bunny could bring John Tiner one thing, it not hard to guess what he would wish for: a voluntary settlement with those firms involved in the split-cap investment trust scandal.

This has been one of the biggest, most expensive and, in terms of manpower, exhaustive inquiries undertaken by the Financial Services Authority and yet to the outside world it looks as though progress has stalled.

A week ago, a majority of the 21 firms involved in the so-called magic circle whom the FSA suspects of colluding to shore up the price of each other's trusts, decided they could do without a further meeting with Mr Tiner. Now there are suggestions that Lord Alexander, the former NatWest chairman chosen by the FSA to broker a settlement, might be ditched.

What is going on? One school of thought is that some within the FSA are so confident of their ground that they want to bring the full force of the organisation's market abuse powers to bear, up to and including criminal prosecution of individuals.

Mr Tiner, however, almost certainly views a negotiated settlement as the best way to get compensation paid quickly to thousands of investors who have lost out. Resorting to the law could delay the process by anything up to five years.

The FSA's consensual approach has made it look weak. Yet it is not in the interests of the fund managers and brokers who sold the trusts to derail the negotiations completely, since they are likely to face a string of lawsuits from boards of collapsed splits and from shareholders. The FSA has also made clear that co-operation will be rewarded with reduced financial penalties.

Estimates of how much the FSA could recoup for investors range widely from about £250m to as much as £700m. In the meantime, only the lawyers, as usual, are making any money.

Cable consolidation

Telewest, the cable television and telephone company, took another step towards completing its financial restructuring yesterday, a process that will result in the banks cancelling £3.5bn of debt in return for shares in a reconstituted company. NTL, its cable cousin, has similarly had its sins forgiven thanks to America's Chapter 11 bankruptcy protection arrangements. These act as a sort of commercial confessional box. After promising to say the business equivalent of a few Hail Marys and an Our Father, hey presto, the cable companies are back in business.

Although now under new management, both companies are still sorry excuses for what should be by now vibrant, confident businesses that consumers admire. The enormous success of BSkyB's digital satellite business is testament to the fact that UK cable has failed. That failure is made all the more startling when you consider these companies enjoy local monopolies for cable across most of the country.

Telewest and NTL began by over-promising and then failing to deliver. Their land grab to hoover up the dozens of smaller cable operators resulted in enormous debt piles that eventually crippled them.

BSkyB has got 7 million subscribers, give or take a few, a number that the cable companies can only dream of. The one great advantage both cable companies should have over BSkyB, and BT Group for that matter, is that they can sell internet, telephone and TV services, the famous "triple play" we have heard so much about.

But Telewest and NTL have failed to sell even this proposition effectively, and consumers still see their products as expensive. Meanwhile, as BT and its rivals grab the headlines for engaging in a price war, the cable companies are left watching limply from the sidelines.

Of course trying to grapple with solutions for all that debt is hardly conducive to management teams being focused on winning the hearts and minds of consumers.

Probably the only useful thing that Telewest and NTL have done is to consolidate the UK cable industry. There is now just one deal left to do. The sooner the two companies get round to merging the better. Both are taking steps to do that. NTL, for instance, is moving its customers on to a single billing system instead of having them spread across 14 different ones. Such crucial back office rationalisation has to be completed before a deal can proceed. Nevertheless, Telewest and NTL need to hurry and combine before we all switch off from cable for good.

On hold - for now

What preoccupies the Bank of England more, inflation or house prices? The answer appears to be the former, based on yesterday's decision to keep interest rates on hold. After an outbreak of spring fever among City economists, the Monetary Policy Committee applied the cold compress by sticking to a rigid and narrow interpretation of its remit.

Not that the decision was wrong. The economic evidence on balance pointed towards keeping rates on hold. Inflation is below target and has in fact fallen since the Bank's last economic forecasts were published in February.

Manufacturing employment has taken a battering, and looks perilously close to embarking on a renewed downturn - yesterday's job losses at BAE are just one more pointer.

One reason for this - and an argument in itself for keeping rates on hold - has been the strength of the pound. Sterling's trade-weighted index has risen more than 4 per cent since the UK became the first major industrialised country to start raising rates in November. The other reason is that the Bank has decided to explain its strategy in a series of speeches. The message, which has been of a consistent tone, at least among a majority of the MPC, is that, all things being equal, it intends to raise rates in a "cautious" and "gradual" fashion.

It went on to define these terms, saying gradual rises meant moving rates as evidence came in of a tightening economy. Caution, on the other hand, was code for raising rates by less than would otherwise be optimal because of doubts of the impact on highly indebted households.

Various members have also stressed that they are targeting inflation rather than house prices and are no hurry to use "shock therapy" to jolt the consumer. Raising rates would undo all the work put in over the past four weeks.

In the absence of sudden economic shocks, all this points to a careful strategy of raising rates by a quarter-point every three months ahead of the publication of the Bank's quarterly inflation report, where it can explain its thinking in detail. That suggests interest rates are almost certain to go up next month and again in August.

Perilous pensions

If it's all the rage then in financial terms it must be bad for you. That is the glib response to the news that Stagecoach Group, the UK's third- largest rail and bus operator, has put $46m (£25m) of pension assets into hedge funds.

In the past month, BT, Royal Mail and Railpen Investments, the fund for the rail network operator RT Group, have espoused hedge funds. Even Clwyd, the Welsh local authority, is getting in on the act.

It is only six years since hedge funds were seen as the most toxic of gambling counters. Hedge fund techniques brought down Long Term Capital Management of the US, despite the firm employing a batch of mathematics Nobel Prize winners.

Now, though, the Railpen chief investment officer, Chris Hitchen, is able to say that he is moving to hedge funds from shares and bonds in the search for more stable returns. "We want to have protection against downward movements," he said.

That, however, depends heavily on the skill of the hedge fund manager. The beauty of this beast is that the manager can go short and is not forced to sit on securities whose value is sinking. But that is also the danger: if the manager goes short and the price goes up, the hedge fund loses. This is a risky way to invest pension money.