Why London isn't calling the shots any more

COMMENT

What's going to happen to Kleinwort Benson now? With its chairman, Simon Robertson, storming off in a huff because his new German masters would not allow Kleinwort to carry on doing its own thing, the outlook could hardly look more uncertain.

With the benefit of hindsight, it was naive of KB ever to believe it would be left to its own devices after being taken over by Dresdner Bank of Germany. There are few companies these days prepared to dole out the thick end of pounds 1bn just to sit back and gaze in detached admiration at its new acquisition, rather in the manner of an old master.

But it was perhaps reasonable for Mr Robertson and his colleagues to believe Dresdner would want to use KB as the centre of its international investment banking and securities operation. That, after all, is what Deutsche was doing with Morgan Grenfell until the Peter Young fiasco so severely shook its confidence in the City. And that's roughly what Dresdner said it would do with KB.

The watershed for Dresdner may also have been the Peter Young fiasco. Certainly it is hard to imagine the Germans trusting such a vital group function as Treasury to its investment banking offshoot in London after this spectacular example of crookery compounded by negligence at the heart of Morgan Grenfell Asset Management. But there's probably a bit more to it than that. Things have changed quite a bit since Dresdner took over KB. Post the Peter Young affair it has become politically that much more difficult within these German banks to leave it all to London "because they are so much better at it than us".

Britain's progressive drift away from Europe has compounded the view in Frankfurt that these businesses are too important to be left to the Brits. The thinking behind Dresdner's falling out with Mr Robertson seems to be that London will become just part of a larger, global investment banking operation, reporting into Frankfurt like everybody else.

That's the backdrop. Overriding it was a very visible personality and culture clash. Not to put too fine a point on it, Mr Robertson, German speaker though he is, didn't take kindly to being bossed around by the Germans. Like many in Britain, he's highly suspicious of monetary union, believing it to be in part a disguised form of German imperialism. This was hardly a man likely to work happily with German masters.

Unlike many of its peers, KB has actually had a very good year. Dresdner's bid to consolidate its position does not coincide with disastrous losses or some kind of grand show of British incompetence. But it really makes no difference. This is what happens to companies when they sell their independence to the highest bidder. In differing ways, all the British investment banks to have sold out are being emasculated by their new foreign owners, their noble ambitions now just part of a wider purpose determined not here in London but in Frankfurt or elsewhere.

Did anyone really believe it would be any different? Why yes. Those that ran our merchant banks thought they were clever enough still to call the shots, despite the fact that they no longer controlled the businesses. In the real world it doesn't work that way. As for Kleinwort, in a few years' time it will probably be known as Dresdner Kleinwort Benson. Ten years down the line, as likely as not, the KB name will have disappeared entirely. By then clients will be dealing with just another German bank with interests in the City. As usual, Britain will have been the loser.

Was NatWest unlucky or just sloppy?

Meanwhile, we've had another ringing reminder of quite how dangerous this business is for those who don't know what they are playing at. For NatWest, the discovery of a rogue trader dealing in interest-rate options could scarcely have come at a more embarrassing time. Big bucks are being invested in NatWest Markets, the group's investment banking arm. Projecting it into the big league is a cornerstone of group strategy. Worse, news of the pounds 50m provision came just days after the bank's top brass had assured investors that all possible precautions were being taken to guard against another Nick Leeson.

Are these affairs, then, essentially random in the way they hit, just part of the territory, or do they owe more to a particular way of operating which is sloppy, old-fashioned and unprofessional? Out of the cases which have so far come to light in the City, the evidence points strongly to the latter. Both Barings and Morgan Grenfell showed up severe weaknesses in management and control, compounded by the City's bonus-driven system of remuneration. We have yet to discover whether the NatWest case is far different.

What is certain is that the flight to size and quality among clients can only accelerate - size because it provides the capital to weather the storm without harming the interests of clients, and quality because those with wider reputations to protect across a range of businesses are going to be doubly careful about excessive risk taking and doubly vigilant in compensating clients when things do go wrong.

Ofgas must guard against discrimination

Beware of gasmen bearing low bills. Today, provided its regulator does not object, British Gas's renamed trading and supply arm, Centrica, will start offering households in the South-west of England gas that is at least 10 per cent cheaper than it was yesterday. For the average domestic customer that is a saving of pounds 30-pounds 40 a year.

There is, however, something not quite right here. The South-west is the area of the country that is furthest away from where gas is landed on the east coast so, by rights, it should cost more, not less, in Devon, Cornwall and Somerset to reflect the extra cost of transporting it longer distances. The reason Centrica wants to charge less is because it is facing competition in the South-west. It is beginning to hurt and will get worse when competition takes hold in the South as well. Rival suppliers see Centrica's tactics as an attempt by a still-dominant supplier to snuff out the competition before it is properly established.

It will fall to Clare Spottiswoode of Ofgas, whose relations with British Gas have not always been silky smooth, to arbitrate. She will need some compelling arguments as to why Centrica should be allowed to tear up the principle of uniform tariffs. BT has tried the same thing on in the past, arguing that some customers are more expensive to service than others only to be repelled, rightly, on the grounds that this is the price a dominant supplier must pay for the advantages that a nationwide network confers. The same arguments do not apply to Centrica which gains little advantage from supplying homes in John O'Groats as well as Land's End.

Instead, what the regulator must guard against is allowing Centrica to price differentially in a way that discriminates unduly against customers in different regions and income brackets. Today's price cuts will not last for ever if the competition is nobbled.