A tale of three AGMs

by Cliff Weight

Last week I went to 3 AGMs. Aviva on Wednesday, 10 May in London and then Lloyds in the morning of the 11th and RBS in the afternoon, both in Edinburgh.

Aviva was very well attended with about 600 people in the Queen Elizabeth Centre. There were plenty of displays of the Aviva products, lots of staff to explain them and deal with any customer issues or complaints. There were also stands explaining the business (noticeable by its absence was Aviva Investors) and how Aviva contributes to the community. For those arriving early, and many did, there was plenty to see and do and to mingle with fellow shareholders and directors who also graced this pre-AGM event.

I wanted to ask a question. I was asked to register the question with a summary and was asked when I would like to ask the question and it was agreed I would ask not as one of the first but later in the meeting. There were 2 question stations and questioners were directed by staff to station A or B in an orderly fashion.

Sir Adrian Montague, the chairman, opened the meeting by saying he regarded this as one of the most important if not the most important day of the year for the company and stressed the importance of shareholders without whose money the company could not exist. After excellent presentations from the Chairman, Chief Executive and one other director, Sir Adrian opened the meeting for questions and introduced his “three strikes and you’re out rule”. I commend this! Questioners were allowed to ask a maximum of three questions or speak for three minutes but not to exceed either. He pointed out that, if you could not make your point in three minutes, you will have probably lost the audience’s interest by that stage. He also said that this was a shareholders’ meeting and that questions about customer issues were not appropriate and could be raised upstairs with staff who were there ready and prepared to deal with such issues. The meeting appeared to me to nod with approval at this approach which he maintained with almost 100% success. This led to a good series of questions and all those who wished to ask questions appeared to be able to do so.  Sir Adrian was an excellent AGM chairman.

A goody bag was provided to all shareholders including discounts for Aviva products, with coffee and biscuits beforehand and an excellent lunch afterwards. This was a very happy, informative AGM and Aviva are to be congratulated.

Lloyds was the second-best AGM of the three, with about 250 attendees, at the Exchange Centre in Edinburgh. The large auditorium was only about 20% full. There was no goody bag but there were plenty of handouts including bars of chocolate with the Lloyds motto “Helping Britain Prosper”, which were to be highly useful later in the day. There were a number of stands but the emphasis seemed to be on history and charitable foundations, together with a number of examples of businesses where Lloyds had helped them prosper. I would have like to have seen more stands explaining the different business lines, particularly Scottish Widows and how the Bank creates shareholder value.

The meeting was timed at a convenient 11 AM, which meant I could fly up from Gatwick on an early morning flight.  There are, however, no plans to change the articles of association to permit the AGM to be held in London which would of course be far more convenient for the vast majority of the Lloyds shareholders and might even encourage more fund managers to attend.

I registered my question and was given a yellow form which enabled me to sit near the two microphones. Staff called questioners in turn and this process worked well.

The chairman opened the meeting by setting the scene well, stating the purpose of the company was to help Britain prosper and to be the best bank for customers and shareholders. He said this requires creating a positive culture and removing older parts of the culture that were not appropriate, including dealing fairly and openly with past problems. He referred to the HBOS Reading trial and said now the trial had finished they will try and compensate claims as quickly as possible, in weeks not months. I mention this as it was relevant to how he answered questions later.

He spoke for 24 minutes, followed by the chief executive who spoke for 20 minutes and the CR update from Sara Weller of about eight minutes.

The chairman then opened the meeting for questions saying that it was a shareholders meeting and questions about customer issues were not appropriate. Clearly there is a balance to be struck here, as some customer issues are examples of generic problems in the bank which need to be highlighted and resolved. However, the Chairman, Lord Blackwell was far too liberal in indulging questions about specific customer issues and hence the meeting rambled on.

It was not all tedious. One amusing episode was when Gavin Palmer, when asking a question, apologised that he would have to leave before the meeting ended to go to the RBS AGM and he said, “he felt like he was going from the sunny side here to a dark place over there.” Much laughter ensued.

I and others left the meeting in full swing at 1:10 PM in order to go to RBS.  We were not able to partake in the lunch offered by Lloyds.

RBS’s AGM was the worst that I have attended, by a long way. It was scheduled to start at 2 PM, which meant it was impractical to attend all the Lloyds meeting and all the RBS meeting. This could have been a cock up or a conspiracy. I suspect it was the latter, as a means of reducing the number of attendees. There seemed to be lots of employees and advisers and hangers on, some of whom owned shares, but I doubt if there were more than 50 other shareholders.  It is extremely disappointing that such a large company has such a poorly attended AGM and does not seem to care.

Coffee and biscuits were served before the meeting, which was rather meagre for those who had had no lunch at Lloyds!

It is clear that, unlike Sir Adrian, RBS do not regard this as the most important day of the year. After a 12 minute introductory speech from the chairmen (Sir) Howard Davies, the chief executive spoke for eight minutes and then Sandy Crombie, the remuneration committee chairman spent some time explaining the changes to be remuneration arrangements in quite some detail.

(Sir) Howard Davies opened the meeting to questions saying customer issues should not be raised and that there was a customer services desk in the room outside the meeting staffed with people ready to answer such questions (I could not locate this, but it may have been there). However, he allowed a very large number of questions which I would’ve considered to be customer service questions or customer complaints and should have been deemed as outside the scope of the meeting. I felt that most shareholders would view this is a waste of their time. It was also clear that there were very few institutional shareholders represented.

To ask a question, you did not have to pre-register it. Everyone was given a handset and when questions started we were asked to press buttons on the handset if you wanted to ask a question. So, you had no idea when you would be called or where you were in the queue. In the event, it worked OK and ShareSoc’s chairman, Mark Northway, asked the first question and I was allowed to ask two questions later in the meeting.

One questioner asked why the Chairman was badged as plain Howard Davies when he had a knighthood. (Sir) Howard meekly confirmed he had this honour. This was another sharp contrast to Sir Adrian and Lord Blackwell who proudly displayed their deserved honours.

After a mostly tedious two and half hours, the meeting closed and we returned to the pre-meeting room where I was amazed(!) to find there were no drinks and no food. Somewhat starved, I did however have my bar of chocolate emblazoned with the Lloyds bank logo which I was able to share around!

More detailed reports on these meetings are available to full members of ShareSoc, on our members’ network, here: http://sharesoc.ning.com/xn/detail/6389471:Comment:43628 (RBS report to follow).

http://www.sharesoc.org/How_To_Run_General_Meetings.pdf is a useful guide and can be sent to companies to help them improve their AGMs.

BP PLC Remuneration Policy – ShareSoc’s comments prior to the AGM

In preparation to BP’s AGM tomorrow (17th May 2017), ShareSoc’s Remuneration spokesman has prepared this post on the company’s remuneration policy and many other issues.

Overall, the changes proposed by the Company, discussed in detail below, should be considered positive.

The discontinuation of the matching share awards and simplification is particularly welcomed, as is the downward discretion applied by the remuneration committee during the year to reduce pay. However, even after the reduction Dudley’s aggregate incentive forward-looking opportunity could still be deemed to be excessive at 725% of salary.

I have commented with more detail (available to full members of ShareSoc) in the Remuneration Forum: http://sharesoc.ning.com/xn/detail/6389471:Comment:43625 . Full members will also find the Manifest reports referred to below at that location.

Background

At BP’s 2016 AGM, the remuneration report was defeated with 60.85% of the shareholder ballot failing to back its approval.

The defeat was connected to CEO Bob Dudley’s remuneration increasing by 20% to $19.4m during a year in which the Company reported record losses amid a global slump in oil prices, cut thousands of jobs and froze its employees’ pay. Following the defeat, the remuneration committee has undertaken consultation with shareholders and has put forward a revised remuneration policy for a binding shareholder vote at the 2017 AGM.

Revised Remuneration Policy

The Remuneration Committee has made several changes to the remuneration policy:

  1. Matching awards will cease to be granted from 2017 resulting in simplification;
  2. LTIP participation limit for the CEO decreased from 550% to 500% of salary. Under the old policy, the aggregate cap was 700% (matching shares + LTIP);
  3. LTIP participation limit for the CFO’s has been increased from 400% to 450% of salary;
  4. Post departure share retention policy of 250% of salary for two years introduced for executives;
  5. Pay-out for target performance under the annual bonus plan has been reduced by 25%;
  6. The mandatory deferral of bonus payouts has been increased from 33% to 50%;
  7. A maximum annual bonus will only be earned where stretch performance is delivered on every measure;
  8. The bonus performance scale for executive directors will be the same as the wider professional and managerial employee population; and
  9. The performance measures utilised in incentive pay have been amended.

Total Pay

The Company’s reported Single Figure for CEO Bob Dudley for the year stands at $11.6m, 40% lower than $19.4m in 2015. The fall in pay is due to lower performance-related pay and a discretionary reduction of $2.2m applied by the remuneration committee.

The bonus formula outcome was assessed at 81% of maximum, however, the Remuneration Committee reduced this to 61% of the maximum. In addition, the Committee exercised discretion to reduce the vesting outcomes of 2014 LTIP awards from 57% to 40% of the maximum. It should be noted that even after the fall in pay of $8m, Dudley’s pay remains above that of his European peers, including Royal Dutch Shell (£7m), Total SA (€€3.8m).

Alignment

The remuneration committee has amended the performance measures for incentive pay and removed overlap between plans.

Bonus

From 2017, the annual bonus will be measured on:

  1. Safety measures (20%) – split between recordable injury frequency and tier 1 process safety events;
  2. Reliable Operations (30%) – split equally between upstream operating efficiency and downstream refining availability
  3. Financial performance (50%) – operating cash flow (excluding Gulf of Mexico oil spill payments) 20%; underlying replacement cost profit 20%; and upstream unit production costs 10%

During the year, the bonus was measured on Safety (30%, split between loss of primary containment events, recordable injury frequency and tier 1 process safety events) and value creation metrics (70% split between operating cash, underlying replacement cost profit, corporate and functional costs, major project delivery).

LTIP

From 2017, awards will be measured on:

  1. Relative TSR (50%);
  2. Absolute ROCE (30%); and
  3. Corporate targets (20%). Corporate targets include; Shift to gas and advantaged oil in the upstream; Market led growth in the downstream; Venturing and low carbon across multiple fronts; Gas, power and renewables trading and marketing growth.

Previously, awards were measured on relative TSR (33%); operating cash flow (33%) and strategic imperatives (33%). The Company has provided forward-looking disclosure of performance targets this year whereas targets were not previously disclosed until at the end of performance-periods.

The Remuneration Committee will also incorporate the Group’s longer-term safety and environmental performance as an underpin as well as absolute TSR. This will include consideration of several measures, including loss of primary containment (LOPC) and input from the safety, ethics, and environment assurance committee (SEEAC) to inform the exercise of the committee’s discretion. Previously safety was used under the strategic imperatives condition. The environmental underpin for performance shares will include consideration of issues around carbon and climate change.

The TSR measure utilises a small peer group of only four companies (Chevron, ExxonMobil, Shell and Total). Threshold vesting of 25% of maximum occurs at 3rd place, 80% of maximum vests at 2nd place and 100% vests for 1st place.

Stakeholders

The Remuneration Committee does not directly consult employees on executive pay.

Explanation: ‘The committee does not consult directly with employees when formulating the policy. However, feedback from employee surveys, that are regularly reported to the board, provide views on a wide range of employee matters including pay.’

The Company used an employee comparator group comprising professional/managerial grade employees based in the UK and US which represents some 22% of the global employee population. This may not be sufficiently representative.

The CEO to average employee pay multiple is estimated to be 131 times.

Outstanding Issues

Although remuneration has been reduced there could still be perceived to be potential excessive levels of incentive pay;

  • High pension contributions (35% salary for FD);
  • No employee consultation and unrepresentative employee comparator group utilised; and
  • There is a lack of disclosure regarding outstanding equity awards and the fair value of equity awards granted.

ShareAction

In response to ShareAction’s report “Analysis of BP’s 2017 Remuneration Policy”, we believe that BP is proposing a prudent overall business approach which is trying to foster climate change protection as well as profitability aims.

The company’s prudential approach may be a direct result of the tumbling oil prices, the tight OPEC grip over the oil market, the late UK full ratification of the Paris Agreement (18 Dec 2016), and political uncertainties.

The latest Manifest “Say on Sustainability” framework assesses BP as having:

  • Good disclosure on GHG emissions (reporting available for the last 18 years);
  • Disclosure of progress against GHG emissions; and
  • Senior responsibility for ESG issues.

In addition, there is a public disclosure that the Company is investing into the low carbon economy and is implementing concerted efforts to address risks associated with climate change.

Whilst ShareAction’s report highlighting long-term climate change risks faced by BP and ways to address this via strategic alignment in pay policy is commendable, Manifest believes that some of the recommendations are set beyond current remuneration good practices, specifically extending performance measurement to reflect climate change risk horizons to 10-20 years; the Company’s current 6-year time-horizon (3 years-performance plus 3-years post-vesting holding is beyond best practice recommendation of 5-years) and may be technically challenging when remuneration awards are vested.

Comments by Cliff Weight, ShareSoc Director and Remuneration Spokesperson. Disclosure: Cliff Weight is also a non-executive director of Manifest, the global governance experts.

RBS, Akzo Nobel and Hornby

The Royal Bank of Scotland (RBS) AGM is tomorrow and it will be interesting to see what excuses the board of directors give for rejecting the requisition of a resolution to establish a Shareholder Committee. ShareSoc believes the rejection has no sound legal basis and ShareSoc directors will raise this issue at the meeting.

Another similar case is that of Akzo Nobel in Holland where Elliott Advisors have been pushing the board to consider a takeover offer from US company PPG Industries. But they have stubbornly refused to entertain it. Elliott submitted a requisition for a General Meeting to consider the removal of the Chairman of Akzo, Antony Burgmans. Elliott had the required support of over 10% of the shareholders. The company rejected the request so Elliott are taking the matter to the Amsterdam Court of Appeal. The legal position is complicated by the presence of “priority” shares held by a foundation which was established as a defence against hostile takeovers.

Comment: this looks like a similar blatant attempt to defeat shareholder democracy by the directors, as at RBS. Let us hope that it is not successful.

Meanwhile the extraordinary General Meeting called by Hornby following a requisition to consider changes of directors by Alexander Anton and other shareholders will be adjourned indefinitely as the requisition has been withdrawn. That follows a declaration by the company that they had committed votes to defeat the resolutions proposed.

Roger Lawson

Pearson Pay Vote Lost

Shareholders in Pearson (PSON) yesterday rejected the Remuneration Report on a vote at the company’s AGM. That was by 61% opposed to 32% supporting with 6% abstaining. But they approved the Remuneration Policy.

Opposition to the Report seemed to be based on the fact that CEO John Fallon achieved a 20% rise in total pay despite a record loss and several profit warnings.

However the share price rose on the day substantially by 12% perhaps because of a positive first quarter trading statement issued in the morning in certain areas, although the overall 2017 outlook guidance was unchanged.

What is puzzling is that the remuneration votes at Rolls-Royce the previous day were passed with ease, where there were similar negative comments by ShareSoc, some proxy advisory services and the media on the bonuses achieved by CEO Warren East even when underlying profits fell substantially. See my previous blog post for more information. Why did that revolt turn into a damp squib, when it was just as justified as the opposition to pay at Pearson?

Is this simply the perversity of institutional voting, better communications from the company or was there some other specific reason?

Roger Lawson

Rolls-Royce – Audits Investigated and AGM

Yesterday (4/5/2017) I attended the Rolls-Royce (RR.) Annual General Meeting in Derby. In former years they used to hold the meetings in London but it’s been Nottingham and Derby the last couple of years. As a result, from talking to a few attendees it seemed to be mainly Rolls-Royce employees and retirees attending rather than the normal private investor crowd. The choice of venue may of course be deliberate so as to achieve a more sympathetic audience.

But the story promoted by the company is much the same – orders up, sales down and profits down, but the company says it has a bright future in summary. In the last year we have also had the settlement of past bribery in the company, and the issue of needing to change their revenue recognition on maintenance contracts (these issues have been well covered in past ShareSoc blog posts). In addition there was a massive reported loss arising from foreign exchange hedges being revalued.

The same day it was announced that the audit of the company’s accounts by KPMG in 2010-2013 are to be investigated by the Financial Reporting Council. Which seems very appropriate bearing in mind what was disclosed at the AGM.

Here is a brief summary of what was said by Chairman Ian Davis and CEO Warren East, and what I said in the Q&A session (not verbatim – summarised for brevity) . There is a fuller report on the ShareSoc Members Network:

Ian Davis confirmed the outlook for 2017 was unchanged – a trading statement was issued in the morning which said trading was in line with expectations but that profit and cash flow would be weighted towards the second half of the year. Cost savings were given as being “on-track” and the company priorities includes continuing to “rebuild trust and confidence in our long-term growth prospects” which is a clear admission that investors had lost faith in the company. The share price has improved over the last few months but it’s still considerably lower than it was back in 2013-2015.

Mr Davis said he was impressed by Warren East’s building of his management team, and that the long-term prospects for the company remain outstanding. The order book has grown to £80 billion.

After that short presentation, Warren East spoke at more length. He said that 2016 was a year of stabilisation and was a great foundation for moving forward. Underlying revenue was down slightly but underlying profit was down significantly [49% down in fact]. He explained the large “headline” fall in profits has being due to derivative contract revaluation. But he did say that underlying profit (which excludes derivative charges) fell due to significant headwinds in the civil aviation business. However they have grown the wide-body engine market share from 30% to 50%. There was a once in a generation transition to more efficient engines. The launch costs will decline and the installed base will grow.

They are losing mid-range and corporate jet market share, and defence is still a challenging market. In power systems there was a stable performance and the installed base grew. Marine suffered from extreme weakness due to a dearth of orders for new vessels and servicing. There have been major job losses. In nuclear there had been some investment in the development of small modular reactors.

Mr East continued by saying they had invested a lot in 2016 in R&D, in assets and in operational excellence. But they had not forgotten cost control. He said investors were now more confident in the company now – hence the improvement in the share price. They have restored trust in the company.

Mr East then talked about the new management appointments and said they still need to follow through on strategies set in 2016 while also thinking about the future.

He explained the deferred prosecution agreement over the bribery allegations (£671 million in fines, plus an obligation to change their behaviour). There had been extensive action within the business to change policies in this area.

I covered a number of issues when questions were invited:

1) I questioned whether the former management (e.g. the CEO) should be subject to clawback on bonuses because of the bribery and other issues. The answer given by Ruth Cairnie (Chair of the Rem Comm) was that the management who were involved in the bribery scandal had lost all their bonuses and options and that clawbacks had been introduced. But the Chairman said that the former CEO knew nothing about the matter at the time. Incidentally there was an amusing comment from Matthew Vincent in the FT today which was “All of this prompts the question: which euphemism did Rolls-Royce use for the £100,000 or so it spent on a Silver Spirit car to indulge the automotive appetites of an Indonesian intermediary? Miscellaneous travel?” That question was directed at KPMG but it might just as well be directed at the former CEO surely.

2) I suggested a shareholder committee would perhaps help Rolls-Royce deal with the various problems they faced.

3) As regards the accounting change to future maintenance, which had been explained away as a “technical accounting issue”, I said that it was not just a technical matter but a question of prudence. In my view it was not prudent to recognise future sales and profits in the current year. And it was certainly not clear in the past that this dubious accounting treatment was being used.

4) I also commented negatively on the complexity of the Remuneration Policy. Ruth Cairnie said it had been simplified but I pointed out that the maximum salary multiple in the LTIP had actually been increased. I spoke to Ruth at some length after the meeting on remuneration. I pointed out that such LTIPs result in enormous payouts at companies like Persimmon and Berkeley Group (WPP is another example incidentally) and that a recent Commons Committee said they should all be scrapped. She responded that they had to pay a competitive “package”. I agreed with that but said it would be better to have a higher fixed base salary and do away with LTIPs, or pay bonuses in cash or shares annually. There was no incentive provided by LTIPs as anyone familiar with business management would know – rewards for good performance need to be made soon after achievements. I also said to her that if public companies did not reform their attitude to pay and the levels they considered appropriate that the Government might take a hand. I did say to her that it was her responsibility and she could do something about it. She did not seem happy with my comments but reiterated the usual stance about having consulted all their major investors. Indeed they did achieve 95.6% support on the Remuneration Policy vote and 98.7% support on the Remuneration Report vote.

It was only a moderately useful meeting to attend. As in previous years, treated more like a PR exercise for company pensioners than a serious meeting for investors by the Chairman. Bearing in mind that the Chairman has been Chair of this company for several years, it surprises me that he is still there when the company has had so many problems on his watch. I would certainly prefer a new Chairman. Matters such as remuneration tend to be driven by the Chairman and his response to criticism of any kind is not helpful. But he still got 99.5% of votes to re-elect him. Surely an example of how corporate governance by institutions tends to be brain-dead. The votes on remuneration also demonstrate a pathetic response to the pay issue.

In essence the old problems are still there. Orders going up, but sales falling, i.e. orders not able to be delivered and turned into cash. They need to start using a different measure of likely future business. With such a large and complex business, it is difficult to say yet whether Warren East has really got to grips with reforming the company. We will have to wait and see.

Meanwhile there was a good editorial in the FT on how the defects in auditing at companies such as Rolls-Royce “highlight the failure of the accountancy profession and its regulators to resolve in the intervening 15 years [since Enron and the demise of Arthur Andersen], the fundamental question of how far auditors should be expected to go in their efforts to uncover bad behaviour”. One cannot but agree with that and with their view that 4 major audit firms is not enough to ensure competition and that it tends to encourage cosiness between auditors and their clients. But there are surely more substantial reforms necessary to really improve auditing standards which the profession itself seems to not accept as being required in any way.

Roger Lawson

Sainsbury (SBRY) Results

Supermarket and other goods retailer Sainsbury issued their preliminary results this morning. Growth in everything except profits and dividends is what one might say from a quick read of the data. Lots of positive noises about out-performance in the markets where Sainsbury and newly acquired business Argos compete. Group revenue up 11.6% due to the acquisition, but earnings per share down by 27% and the dividend has been cut. The latter decline was forecast by analysts but the share price has fallen by 5% on the day. Perhaps it was the rather bland “Outlook” statement that spooked investors, or they were hoping for more. When one says things like “The market remains competitive…” is that really saying anything we did not already know? When has the grocery sector not been competitive anyway?

But profits are due to fall in the next six months in comparison with the last due to rising costs according to CEO Mike Coupe.

The announcement also said: “…we continue to innovate in quality and to invest in price”. I think the latter means they are cutting prices but what does the former mean? Are they improving product quality or changing it in some other way?

Whoever wrote this surely needs to take some lessons in how to write announcements that are clear, concise and to the point.

But there is quite a lot of positive news. General Merchandise and Clothing in Sainsbury grew and Argos grew sales by 4.1%.

Digital sales continue to grow and it said 53% of sales were now made online. However, having used the Sainsbury on-line service today (a rare occasion), I can’t say I found the site very exciting. Bland presentation and limited product range. Even as a very small shareholder in the company, one does need to experience the customer proposition occasionally.

In conclusion, the company seems to be heading in the right direction, but clearly the price competition in the traditional supermarket segment from low cost competitors is still proving to be a headwind. Like-for-like sales were down again this year. As readers may have noticed, our household food bill has actually declined in the last couple of years, and that’s not just down to more dieting or more eating out. However food price inflation is increasing so that might help food retailers because they apparently made hay when prices were constantly rising as folks just did not notice that profit margins of retailers were also rising. However, price inflation on general merchandise and clothing may reduce demand as consumers reduce expenditure.

So it’s a mixed report, or still a “work in progress” so far as this company is concerned in relation to revitalising the business and achieving some growth. It will be interesting to see what retail analysts and the media make of this announcement in due course.

Roger Lawson

Banks and Bank Credit Card Accounting

It’s going to be exciting week next week for RBS and Lloyds Bank shareholders with both AGMs on Thursday in Scotland – we expect to issue a report on events. Indeed it’s going to be an exciting period ahead because the law suits by those investors in the RBS rights issue who have not yet settled, and an action over the takeover of HBOS by LloydsTSB, are both getting into court in the next few months. Having Fred Goodwin on the witness stand, as expected, will be particularly interesting.

But the really astonishing recent news to this writer was the revelation on Monday (1/5/2017) by the FT that bankers are recognising future profits on zero-interest credit card customers. Bankers who offer zero interest balance transfers recognise some of the revenue and profits from new such customers based on the expectation that the customer will remain a customer, and not fully pay of the debt, when the interest free period ends.

Now a lot of them might not, but surely it is imprudent to recognise the cost of such promotions as other than a marketing expense which is surely what they are? And recognising future profits in the current accounting period is definitely neither sound accounting nor prudent in my view.

Was this not what Rolls-Royce had been doing which they have had to back-track on? With a major impact on their bottom-line as profits were routinely being overstated (see previous blog post on that).

The level of credit card debt is currently of concern to the Bank of England, and they might bring in tighter regulation on such offers and the level of debt. Or the customers might suddenly realise that not paying off such very expensive debt was nonsensical, particularly as the ability to roll it over to another credit card company might disappear. So all those future bank profits on credit card lending they are recognising now, and paying bonuses to management on them, might vanish.

Virgin Money is one bank where it is suggested they could lose as much as 18% of their earnings if there was a move to “cash accounting” on such arrangements, i.e. profits can only be recognised when the cash arrives.

So there are two questions that investors in banks might wish to ask at this year’s AGMs: 1) Are you doing this and if so why are the directors following this imprudent accounting practice? and to their auditors: Why are you approving this imprudent practice and under what accounting principles?

I fear this may be yet another example where banks will face regulatory action, and have to write off some of their claimed profits. And will investors ever learn to trust the reported accounts of banks when this kind of sharp practice continues?

Roger Lawson