The latest mis-selling scandal is one more symptom of a deeper problem
The payment protection insurance (PPI) scandal is, by common consensus, the worst case of financial mis-selling until the next one. These policies were foisted by banks on personal borrowers, supposedly to cover repayments if they fell ill or lost their jobs or encountered some other misfortune. But in many cases borrowers were not aware they were being charged for the cover, or were told falsely that they were obliged to buy it. If they were self-employed or too old, they would never have been able to claim on it anyway. Now the banks, led by Lloyds and Barclays, have abandoned their legal challenge against retrospective changes in FSA rules on selling PPI, and estimates of compensation required to placate offended borrowers are at £6 billion and rising.
Who will pay for that? The banks’ poor bloody shareholders, that’s who, and not their grossly overpaid top executives, who will remind us that they were many layers removed from branch staff who failed to read the small print of the PPI product before flogging it — just as insurance salesmen inadvertently mis-sold personal pensions a generation ago. The high-street sales force, we will also be reminded, do not earn big bonuses, so please don’t confuse this mis-selling issue with arguments about excessive pay. But, partly to deflect bonus envy, branch staff nowadays can routinely pick up incentive payments for products sold or referrals made to other departments — and that colours the ‘advice’ they offer to customers. Remuneration structures from top to bottom of the financial services industry have evolved in a way that acts against the best interests of customers and shareholders. The PPI scandal is just one more symptom of a deeper problem.
How the trick was done
‘How on earth do you buy a manufacturing company for £10 then extract £40 million from it for yourself before it collapses?’ a retired industrialist asked me this week. ‘The numbers usually work the other way round.’ In the case of the Phoenix consortium of Midlands businessmen who coughed up a crumpled tenner to take MG Rover off BMW’s hands in 2000 then left its debt- laden ruins to be sold off to China in 2005, the answer tends to be forgotten.
It was not because banks queued up to finance their bold business plan — far from it, in fact. Nor was it because DTI officials advised ministers that the Phoenix team had the experience and skill to make a success of the ailing car manufacturer against the odds — again, rather the contrary. No, John Towers, Nick Stephenson, Alan Beale and John Edwards were able to achieve this feat entirely because they had the backing of Labour’s industry secretary, Stephen Byers, hand in hand with Tony Woodley of the transport workers’ union. Against advice, Byers favoured Phoenix over a potential rival bid from the private-equity investor Jon Moulton, whom Woodley and his gang had branded an ‘asset-stripper’.
The Phoenix foursome have now been disqualified from holding company directorships for up to six years each. Byers, after being caught describing himself as a ‘cab for hire’ in parliamentary lobbying, seems unlikely to be offered prestigious directorships, and Woodley would presumably turn them down on ideological grounds. But that’s no reason not to put both in the stocks alongside their protégés.
All aboard
In 1872, The Spectator published a league table of wills worth more than £250,000, and the editors (the high-minded Townsend and Hutton) commented that it had ‘obtained more readers than the best essay on politics we ever issued… If we could publish a similar one of the living rich, our publishers would be unable to meet that day’s demand.’ The Sunday Times has cornered that market since 1989 and I scanned this year’s Rich List as avidly as ever. As I did so, the image came to mind of its 1,112 denizens as passengers on an ocean liner. At the captain’s table, the Duke of Westminster sits gloomily surrounded by oligarchs who don’t know which knife and fork to use, while Sir Richard Branson laughs a little too loudly at his own jokes. In the saloon, Nat Rothschild and his pals play high-stakes poker while J.K. Rowling challenges that nice Dame Mary Perkins of Specsavers at Scrabble. A jewel thief has been reported on A Deck — half the passengers are suspects — and down in steerage the last of the Irish real-estate tycoons are throwing a wild party. Is that an iceberg on the horizon, or is it just a launch full of tax inspectors?
Did I start a stampede?
Was it me? No sooner had I given myself a pat on the back last week for tipping silver before Christmas than the silver market collapsed by 30 per cent. Oil swiftly followed, wrong-footing some of the world’s most sophisticated investors as the barrel price dived $16 in two days, and gold dropped 9 per cent before perking up again. Everything from copper to cocoa joined the southbound stampede as traders rushed to close positions which had been clocking up handsome paper profits — and the narrower the market, the more dramatic the impact. Hence silver took the worst of it: as one trader observed, ‘If gold is a Monte Carlo casino, silver is a slot machine in Las Vegas.’
This brief (and it may be very brief if this week’s rebound is sustained) respite in the long-term climb of raw-material prices can only help global economic recovery — and should not be read as a signal that financial markets have lost faith in that prospect, but more as a reminder of the extent to which speculation amplifies short-term supply and demand factors. Some players, including Goldman Sachs and George Soros, saw the correction coming; some hedge funds evidently did not see it coming and are reported to have taken nine-digit losses. It may all be because someone out there tweeted ‘That Spectator chap’s starting to sound smug — must be time to sell.’ Sorry about that.
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