Myners found to be too soft on City commissions

Touch and go; Flaming Ferraris Â

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Government threatens City with 'soft commission' inquiry

UK growth falls to its slowest rate since 1998

City watchdog bans Archer's son for life over share-deal deception

Labour chancellors rarely enjoy a great relationship with the City and although the present incumbent, Gordon Brown, has worked better with the financial markets than most, his modernising zeal was bound to bring him into conflict with the Square Mile's various and powerful vested interest groups at some stage or other.

Now into his second term, Mr Brown is spoiling for a fight, and the flash point looks like being soft commissions. Put your house in order, the Chancellor is telling the City, or you'll get it in the neck. Whether being subjected to a Competition Commission investigation really counts as getting it in the neck is a mute point. The supermarkets inquiry produced no penalty of substance, and the one into small business lending is heading for a similarly anodyne outcome, but then that's a different issue.

As it happens, the Government stumbled across the issue of soft commissions almost by accident. When Paul Myners was asked to conduct his review of the way the big institutions invest our money, Mr Brown's primary area of concern was that not enough of it was going into venture capital.

Then came the dot.com boom and it became harder to argue that the City was failing to provide an adequate capital raising platform for new businesses - indeed, rather the reverse, given the subsequent evidence of a massive mis-allocation of capital into businesses which may never produce a meaningful return.

Buried away in the report, however, was a section on soft commissions, and it has been producing great sport almost ever since. The reality of broking commissions is that despite Big Bang and the huge subsequent influx of foreign competition and capital into the City, the overall cost of dealing has remained little changed for thirty years or more. That the Government contributes to this phenomenon through stamp duty is a not altogether irrelevant point, but let's move on.

There have been lots of new entrants specialising in low cost, transaction only broking, but they've failed to make any significant inroads into the institutional market, where dealing charges remain robust. Why not? The reasons are legion, but primarily it is because fund managers like to deal with the bigger houses, where they get free research, better access to IPOs, and a more professional, Rolls Royce service all round.

This creates both market distortions and conflicts of interest. In return for placing their client's business with a particular broker, the fund manager will often get some soft commission - usually research and dealing screens - yet the benefit to the client is far from obvious.

The Myners report proposed a relatively simple solution - that commissions are bundled into the fund manager's overall fee. This would have the effect of making the fund manager much more careful about how he places his commissions, since if he pays too much, it will come off his own bottom line, not the client's. The Government doesn't think this goes nearly far enough. The City is an ingenious place and it would undoubtedly quickly find a way around the new charging regime, by increasing spreads for instance.

Mr Brown is giving the City two years to come up with its own, market driven solution to the problem. It's quite a pandora's box the Government is opening up, and as always in such cases, not everything that comes out of it is going to be for the good. You can argue about the quality of much of the research produced in the City, but if the effect of reform is greatly to reduce its volume, then the market inevitably becomes a less vibrant and informed place.

Touch and go

Second quarter GDP figures for the UK announced yesterday were in the end not that bad. At 0.3 per cent quarter on quarter and 2.1 per cent year on year, they were certainly much better than the gloomier forecasters were predicting. But whether they lend support to the Chancellor's continued belief in his forecast for the year as a whole of 2.25 per cent to 2.75 per cent is debatable.

It is not the Chancellor's job to talk down the economy, and there is in any case ample opportunity to adjust the growth forecast if things continue to slide. At this stage it may still be just about credible for the Treasury to stick with its original numbers. None the less, it is touch and go, and if the growth forecast busts, then the Chancellor's budget arithmetic all round starts to look shaky.

Lower growth means higher unemployment spending, lower tax revenues and therefore less money for other forms of Government spending. But even if GDP came in, say 1 per cent lower than the bottom of the range, what would that mean for the public finances? Not as much as you might think seems to be the answer. The effect would be to knock £10bn off annual economic output. This would equate to a loss of revenue of about £6bn, or 1.6 per cent of public spending and well within reasonable bounds of error.

The key question is whether this is a short cyclical downturn or a more structurally based, longer term one. The Government's own fiscal rules dictate that over the economic cycle the Government can borrow to invest but not to spend, while public sector debt must be held at no more than 40 per cent of GDP. So long as the downturn is short lived, then the Government can stick to its ambitious spending plans and still not break these rules. Britain has enjoyed nine successive years of growth, seven of them at above trend, so it's stored up quite a horde to see it through what looks like being a tough winter.

But a period of several years at below trend growth is definitely not in the Government's script. The figures are not conclusive and the Chancellor cannot yet be accused of burying his head in the sand. It's just that every time they get published, the picture looks that little bit worse.

Flaming Ferraris

They hired themselves a PR man and gave themselves a silly name – the Flaming Ferraris. They recruited the son of the deputy chairman of the Tory party into the fold. They arranged to be "caught" apparently unawares by the paparazzi coming out of an expensive West End restaurant, and they irritated the hell out of their employers, CSFB, by persuaded journalists to stereotype them as high-earning masters of the universe. Then they got caught with their fingers in the till. Just another every day tale of City folk, it would seem.

Except that it isn't. The naivity of what they did is quite breathtaking, to judge by the Securities and Futures Authority account of it all. It was as if James Archer was trying to act out a chapter in one of his father's own books, only Archer senior would have seen the the plot as incredible and tried to make the scam more sophisticated.

These people never earned any where near what they were reputed to in the Press. James Archer was a relatively junior trader who probably wouldn't have survived long in the cutthroat world of investment banking anyway. They have brought the City's name into disrepute for their arrogance and stupidity alone, never mind the illegality and deceit of what they did. In this case, the SFA could reasonably have been much harsher in its punishment.

j.warner@independent.co.uk