Some business news at Sunday 16th August 2009
Dubai collapse sparks £3bn in legal claims
Sunday Times 16-08-09
The collapse of Dubai’s once-booming construction industry has created a backlog of legal claims totalling almost £3 billion.
Disputes over unfinished contracts and outstanding payments are stacking up in the emirate’s arbitration court, according to Building magazine.
This year, more than 180 claims have been filed, mostly by international contractors. British firms are estimated to be owed at least £400m on contracts in the United Arab Emirates, many of which relate to work for state-backed investment and development firms.
Atkins, the £700m support-services giant, is among the firms to have publicly admitted being owed money in Dubai. Forensic accountants and legal experts are starting to flood in. Price Waterhouse Coopers has moved a team of 20 investigators to the emirate in recent months.
Banks charge extra as their profits soar
Geraint Jones and Geoff Ho - Sunday Express - August 16,2009
Banks charge customers hundreds of pounds a year extra for services even though their profits are soaring.
As executives prepare for a return of the high-bonus culture, ordinary customers who funded last year’s £37billion bail-out feel the pinch.
City watchdogs stand accused of caving in to bankers after watering down plans to curb huge bonuses as a number of high street banks announced big profits. Barclays made £2.98billion in the first half of 2009 and HSBC £2.94billion.
Although these took no Government hand-outs, RBS, one of a number who went cap in hand to the taxpayer last year, enjoyed a profit of £15million.
The rising cost of doing business with high street banks comes at a time when the Government is anxious that mortgages become more affordable.
Banks are keeping a tight rein on mortgages and can do so because the money they make from each one has risen to unprecedented levels. This huge profit margin allows them to restrict the supply of mortgages to those regarded as the safest risks.
An average family with a modest credit card debt, bank loan and savings has paid £150 a year more for banking in the past 12 months and faces an extra £200 over the next year.
When the rising cost of mortgages is factored in, many families could pay the banks about £1,400 more a year for financial services than before the credit crunch.
They are being hit on all sides: savings, credit cards, bank loans and mortgages. Overdraft rates have hit an all-time high of nearly 19 per cent, while personal loans are at a record level. A five-year £5,000 unsecured loan now carries an average interest rate of 13.09 per cent. Two years ago, it was below nine per cent.
Credit card rates have increased from an average of 15.22 per cent to 15.87 per cent, a 15.37 per cent margin over base rates.
Meanwhile, savings rates have taken a battering. The average instant-access account paid 0.15 per cent in July, down from 2.52 per cent in 2007.
Home owners have also been hit, with profit margins made by lenders on mortgages now the biggest in 20 years. Those whose current two-year mortgage is coming to an end face paying an extra £1,080 a year for an equivalent deal in today’s market. Though mortgage rates appear cheaper than they were a year ago, critics argue they are higher than necessary given the record difference between interest charged by lenders to customers and the “swap” rate at which they borrow from other institutions to finance the loans.
The spread between mortgages and swap rates was 0.1 per cent two years ago, with banks making wafer-thin profits on home loans. Now it is a two per cent margin on fixed-rate deals.
Government pressure on taxpayer-funded banks to ensure lending was made available and profit margins were not too high appears to have had little effect. Up to 3.5 million UK households are unable to move because they have insufficient equity in their homes or cannot get a mortgage, it is claimed. Philip Hammond, shadow chief secretary to the Treasury, said: “The Government has pumped billions into the banking system, yet home owners and would-be home buyers still struggle to get mortgages they can afford.
“It’s time we had less grandstanding and more action to get affordable credit flowing again.”
Banks have also been criticised for imposing excessive charges on customers struggling to pay mortgages.
John McFall, Labour chairman of the Commons Treasury select committee, said: “We have heard evidence of charges as high as £35 from some lenders for simply sending a letter or making a phone call, and charges as high as £150 for a visit from a so-called debt counsellor.
“It would appear that banks are taking every opportunity to rebuild their profit margins.”
The Council of Mortgage Lenders said: “The industry is fully engaged to help its customers through the recession where they have a good prospect of being able to get back on track and sustain their home-ownership in the long term. Repossession remains a last resort.
“Lenders have worked hard to ensure that treating customers fairly is at the centre of their arrears management.”
Which? personal finance campaigner Phil Jones believes banks are rebuilding credit-crunch-ravaged balance sheets at consumers’ expense.
“Given the billions that have been put into the banks by the taxpayer, consumers find it extremely difficult to understand how they are getting a worse deal than ever,” he said.
Playing to the gallery won't resolve the banking bonus controversy
Scotland on Sunday - 16 August 2009
Hector Sants is hardly looking like the fat cat that got the cream. His report on banking bonuses last week satisfied no-one and forced him to go away licking his tail.
The Financial Services Authority boss got a hammering from all sides, for producing recommendations that were either too weak or too prescriptive. As we report on page five, there is a feeling that nothing much is likely to change, mainly because the power brokers in the City will, one way or the other, have their way.
Sants has hired nearly 200 of the 280 extra specialists he has targeted in order to boost performance of the much-harangued regulator which took most of the blame for the banking crisis. But he's now worried that the recruitment drive may dry up because of the Tories' plan to scrap the FSA if they win power at next year's general election. Who would forfeit a top post to go there if they're likely to be out of a job in a year's time?
Sants' chairman Lord Turner has already admitted that the mood of uncertainty resulting from the Opposition's plans was having an impact. George Osborne, the shadow chancellor, has now weighed in with a further attack on the bonus culture that he believes the FSA is incapable of handling. In an interview yesterday he called for bonuses to be outlawed at any bank that has been bailed out by the taxpayer.
But he's playing to the gallery on this. With an election campaign only months away he knows there are votes in attacking the greed culture that is blamed for helping to bring down the banks. If only it were as simple as banning bonuses altogether. Royal Bank of Scotland chief executive Stephen Hester would not be alone if he reconsidered his role in such circumstances. The promise of a £9.6m package for pulling off the turnaround may seem obscene to some, but it is pocket money for some of the US bankers and business leaders. Luring top talent to RBS and Lloyds would be a non-starter if they were unable to offer competitive rewards.
As our feature explains, any attempt to regulate pay is riddled with difficulties: uniting banks in one jurisdiction would be bad enough. Attempting to do so across international boundaries, when economies are often at different points in the cycle, is quite another.
These are changed times indeed when the Conservatives adopt risk-averse strategies and attack a Labour government for its more laissez-faire approach to enterprise.
Osborne's rather simplified answer to regulation – switching supervision to the Bank of England – offers no guarantees that it would be any better. The start-all-over-again disruption may weaken rather than strengthen the system just when we need the FSA to learn from past mistakes. Instead of pledging to abolish it, Osborne should have promised more powers for the organisation backed with greater resources.
RSA to stay in the uk after brokering tax deal with HMRC
Geoff Ho - Sunday August 16,2009
Insurance group RSA has dropped its plans to move to Ireland in protest over UK tax rates, after striking a deal with HM Revenue & Customs.
RSA made the threat last year, after the Government announced plans to change the way profits companies make overseas are taxed.
A number of firms have threatened to leave the UK in response to the changes, the latest of which is household products group Reckitt Benckiser, makers of Dettol, Vanish and Nurofen.
However, RSA has agreed a deal with HMRC, which it says will help it save almost as much money as if it had relocated to Ireland. The deal will see RSA set up an Irish reinsurance company next year, through which it will channel its non-UK risks. According to analysts at broker Keefe Bruyette & Woods, the move will see RSA being taxed at 12.5 per cent.
RSA’s decision to stay in the UK will come as a relief to the Government, after a number of firms fled to lower tax regimes.
United Business Media and drugs firm Shire are in the process of moving to Ireland, following fund management giant Henderson Group and global advertising giant WPP. Other firms, such as publishing company Informa, have fled to Switzerland.
Alistair Darling: new law to curb City bonuses
Isabel Oakeshott and James Ashton - Sunday Times - 16-08-09
Alistair Darling is ready to legislate to curb City bonuses amid mounting public anger about the return of huge rewards for bankers.
The chancellor has signalled that he will change the law to ensure executive bonuses are not paid to employees whose transactions put banks at risk.
The new rules would cover the whole British banking system rather than just those institutions that have been partly nationalised, such as the Royal Bank of Scotland (RBS) and Lloyds.
The move follows evidence that lavish rewards are returning to the City less than a year after the banking system almost collapsed, with predictions that bonuses will reach £4 billion this year. Goldman Sachs employees are in line for pay and bonuses averaging £430,000, and one new banker at RBS will get a guaranteed £7m bonus.
In an interview with The Sunday Times, Darling warned that the bonus culture had had “disastrous consequences” and acknowledged that the public was no longer prepared to see huge sums being awarded to people who threatened economic stability.
“If we need to change the law and toughen things up, we can do that. I’m quite clear that some of the problems we have today were caused by the fact that some traders were incentivised to take risks which neither they nor their bosses fully understood,” he said.
The announcement follows an outcry about the failure of the Financial Services Authority (FSA) to take a tougher stance on City bonuses. The City watchdog dropped plans to stipulate that bonuses should be based on overall performance of a company, including it in the new code only as “guidance”.
A Sunday Times YouGov poll today reveals widespread dissatisfaction with the FSA, with almost eight out 10 people criticising the body’s handling of City pay.
Ministers fear some banks and other City firms have already adopted a “business as usual” attitude, despite being rescued by taxpayers, and believe further action must be taken to enforce change.
Darling said: “The public is rightly concerned because the taxpayer has had to stand behind a number of these banks, and the whole banking system, in effect. So people want to make sure we don’t get ourselves into this situation again. The FSA code is only part of our approach.”
Under Treasury plans, the FSA will be given powers to control bonuses in all banks, a move that is likely to require legislation. Darling did not specify whether he would cap bonuses or outlaw guaranteed bonuses. The authority’s primary task is to regulate risk rather than control remuneration.
Darling’s plans appear to go further than the Conservative policy under which the FSA would be scrapped and its powers handed to a strengthened Bank of England. George Osborne, the shadow chancellor, has pledged to give it “more clout and authority” to deal with bonuses, but stopped short of proposing legislation.
Ministers are awaiting the publication of an independent review of banking bonuses and corporate governance by Sir David Walker, former chairman of Morgan Stanley, which will examine the case for caps on payments, before introducing new laws.
Barclays, which is backed by taxpayer-funded guarantees, has offered five commodity bankers at rivals JP Morgan bonuses of up to £30m to join its investment bank, defying FSA recommendations that such deals be scrapped.
RBS, which was bailed out with £20 billion of taxpayers’ cash, has offered multi-mil-lion-pound “golden hellos” to two new recruits.
Darling said: “I am not against bonuses where you are rewarding good behaviour and long-term growth. What you can do is make sure you don’t get yourselves into a situation where firms actively have a pay system that results in them being exposed in a way that led to ruin.”
Hector Sants, the FSA’s chief executive, has accused ministers of “passing the buck” on pay policy, warning it does not have the remit to go further. The Sunday Times has learnt Sants privately warned banks there would be no let-up in scrutiny of their bonus systems. He is said to have been stung by last week’s criticism, and rang the big banking groups to demand to see worker contracts that guarantee bonuses.
The move, two months earlier than planned, could force bankers to tear up contracts the FSA thinks encourage excessive risk taking. The alternative is to make them pile extra capital on their balance sheets to compensate for the risk.
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