Jeremy Warner's Outlook: Split caps fiasco puts FSA's reputation on line

<preform>Big Brother/M&S; A place in history</preform>

Another deadline came and went this week in the interminable saga of the Financial Service Authority's attempt to pressgang 21 firms into paying £350m of compensation for the split caps investment trust scandal. The 21 had been given a final, final deadline of Thursday to accept mediation or be tried individually. This is about the tenth time such a deadline has been set - I exaggerate only a little - but again the FSA's threat to move forward with disciplinary action against each of the 21 in turn has proved entirely hollow. Instead the alleged miscreants have been given a further two week extension to agree their punishment or move directly to enforcement.

Another deadline came and went this week in the interminable saga of the Financial Service Authority's attempt to pressgang 21 firms into paying £350m of compensation for the split caps investment trust scandal. The 21 had been given a final, final deadline of Thursday to accept mediation or be tried individually. This is about the tenth time such a deadline has been set - I exaggerate only a little - but again the FSA's threat to move forward with disciplinary action against each of the 21 in turn has proved entirely hollow. Instead the alleged miscreants have been given a further two week extension to agree their punishment or move directly to enforcement.

The FSA's chief executive, John Tiner, is fast losing all credibility, and with the industry now in almost open revolt, there are those who scent blood. So far only three firms have agreed to mediation. As for the rest, the two sides are still worlds apart both on price - the FSA wants £350m, the industry's best offer so far is only £120m - and principle, where the FSA wants a general admission of guilt but the industry will only agree a without prejudice settlement.

In my view, it was always going to be virtually impossible to get 21 firms of such diversity to agree a voluntary settlement. Among the 21, there are wildly different levels of culpability and financial standing. One of the most obviously culpable has no money at all. There's also a huge divergence of view on the merits of a voluntary settlement. At one extreme is HSBC, which refuses to accept it has done anything wrong at all. Indeed, it claims the FSA actually approved the very transactions it now wants HSBC to pay compensation for. At the other, there are those who are so punch drunk over the whole affair that they would pay almost anything that didn't bankrupt their companies to get shot of it.

Somewhere in between, there are those like Terry Smith of Collins Stewart who just like to have a fight. From what I've heard, the FSA has managed to accumulate some damning evidence, but it won't declare its hand to firms individually, which makes it impossible for them to accept that they should pay over compensation voluntarily. It's all a complete mess.

Mr Tiner is desperate to secure a voluntary deal, both to save face over an initiative he's personally taken charge of, and to avoid years of lengthy disciplinary proceedings, for which there is no certain outcome. Some firms sense they've got the FSA on the run - that it will end up accepting a much smaller sum than the £350m originally demanded. The FSA is equally determined not to let the split caps industry off the hook.

All regulation has in the end to be consensual. If it becomes too oppressive or overbearing, the regulated will just pack their bags and shut up shop. Eventually there will be no one left to regulate. As things stand, there's a growing stand-off between the FSA and the City, not just on split caps, where the savings industry again disgraced itself, but across a whole range of issues. It is hard to exaggerate the degree of ill feeling that has developed. The FSA is in danger of throwing the baby out with the bathwater.

Big Brother/M&S

Word reaches me of a Big Brother style outbreak of fisticuffs among the star studded array of financiers in the Philip Green household. Not literally, of course, although nothing would altogether surprise me about Mr Green, but metaphorically. Mr Green's proud boast that he's putting up £1.1bn of his own money to help finance the M&S bid disguises the fact that most of it is borrowed - from HBOS as I've heard it. The effect is to "super-gear" Mr Green's interest in the bid's financing. If the bid succeeds, Mr Green would be getting control of the company for the price of probably no more than £200m to £300m of his own hard cash.

This is in marked contrast to the other equity financiers - Goldman Sachs, Barclays Capital and HBOS. The most at risk is Goldman Sachs and its clients, who get just 32 per cent of the equity for £800m of unprotected capital. According to my mole at Goldman, this is regarded by some as an extraordinarily unfair division of risk and has been a real "issue" in recent talks over how to structure the bid finances. Mind you, it shouldn't have come as a surprise to anyone, for this is how Mr Green operates. He did exactly the same thing with his Bhs and Arcadia bids, borrowing most of the money he needed for his own equity participation.

All this seems to make it even harder for Mr Green to bid much higher. Indeed, he has already told this newspaper for one that he's put his best foot forward. If there is grumbling in the ranks about an unfair division of spoils even at this level, it may prove impossible for him to meet the City's reserve price of £4 a share without significantly diluting his own stake in the enterprise. The bankers won't want to gear the company any further than they already have. I gather that one of them is already distinctly nervous about it all.

Still, where there's a will there's a way and I'd be surprised if this week's 370p a share salvo was Mr Green's final shot. Mr Green is well advised, and I suspect he's known all along that he'll need to bid north of £4 to succeed. What we've seen so far may be no more than a softening-up exercise, so as to make it seem that Mr Green is overpaying when the end game finally arrives.

Besides, Mr Green has still got a few things going for him yet. One of these is M&S's interim chairman, Paul Myners, a former City fund manager and current chairman of the Guardian Media Group. Mr Myners' slip of the tongue the other day when he seemed to suggest M&S wasn't for sale at any price wouldn't have gone down well among the City's money men. Mr Myners is also quite widely resented in the City élite, where many regard him as a traitor and a hypocrite, taking the City shilling with one hand while publicly caning it for soft commission and for other questionable practices with the other.

Mr Myners will count against M&S in the final reckoning, for these things are decided as much by personal prejudice as a reasoned assessment of the arguments. Against that, M&S has an extraordinarily high number of small, private shareholders on the register, the great bulk of whom will do whatever the board recommends. Then there's the Americans. They've been big sellers of the stock in recent days, suggesting they might be prepared to support Mr Green even at the present level. There's a way to go yet before predictions can safely be made.

A place in history

I have to admit to finding the present fêting of Mr Green in the British press a little bit depressing. He's made a lot of money for himself, he's an amusing and engaging character, if also a bit of a bully, and as his bid for M&S demonstrates, he certainly commands a big City following. I doubt there's any other British based financier who could have raised the £12bn in cash he's tabled for M&S.

Yet in the final analysis, Mr Green is not really an entrepreneur at all; he's a buyer of undervalued assets, which he runs for cash and makes sweat as nobody else can. He's also highly effective in his supply chain, which enables him to take huge chunks out of working capital in the companies he buys.

Yet compared to the giants of the American business scene, from Larry Ellison to Bill Gates, and from Warren Buffett to Ted Turner, he barely registers. These are the entrepreneurs, wealth creators and financiers Britain and Europe really need. All of them have created businesses out of nothing that have transformed the world. The billions they've made out of them is almost by the by. Their position in business history is assured. I'm not sure the refinancing and downsizing of existing companies, from Bhs to M&S - the impolite term for which is asset stripping - falls into the same league.

jeremy.warner@independent.co.uk