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


Open-Ended Property Funds – Our Views

ShareSoc has now submitted our response to the consultation by the FRC on “Illiquid Assets and Open-Ended Investment Funds”. This follows on from the problems experienced last year where property funds had to close to redemptions but it can affect other types of funds also such as private equity ones.

In summary after listening to a number of our members on this topic, we have chosen to say that although we would not be opposed to the banning of such funds entirely, we suggest the best way to ensure there are no problems in future is to ensure that very strong health warnings are given to investors who chose to invest in such funds. Obviously in the case of commercial property funds, there are a number of closed end funds (e.g. investment trusts) covering that sector so most investors should have very good reasons to choose open-ended ones instead.

You can read our full response here: Open-Ended-Funds which also contains a link to the FRC consultation document.

There were a couple of interesting articles related to this topic in the Financial Times recently. One reported that big UK property funds are hoarding cash – in several cases well over 20% of their assets. Presumably this is because of fears of a repeat of last year’s run on the real estate sector. Holding large amounts of cash obviously provides the liquidity to enable high requests for redemptions to be met and to counter market volatility, but it also reduces the returns from the fund in the longer term as cash typically yields less than property. It would be unusual for a real estate investment trust to hold that much in case, and often they are more than fully invested as they use gearing to improve returns.

Another article reported on the Association of Real Estate Funds (Aref) response to the aforementioned consultation. Their report called for a “comprehensive review” of the rules governing retail property funds as it was unclear what fund managers were allowed to do. A somewhat odd comment and the FRC consultation document clearly covers the matter in some detail already. But another suggestion made is that the problem could be resolved by having a range of different fund structures because most investors are not actually looking to “day trade”. So a range of products reflecting the different liquidity needs of investors might be offered.

Comment: An interesting idea but would it really be practical? It would also add confusing complexity to investors choice. Investors find it difficult to anticipate when they might want to sell, and some sales might be crystalised by the death or major financial/personal crisis of an investor. Would they be considered an exception, or just told it’s bad luck they chose to invest in a fund that requires six months or a year withdrawal notice – because that is how long it might take to dispose of commercial property? For private equity funds, it might take even longer to dispose of assets.

And would investors choose funds with lower returns in preference to others with higher returns? Which might be the result of them offering high liquidity at all times, and holding cash or other low return assets to enable the former to do so?

Behavioural responses to such scenarios could be complex.

Roger Lawson

Finance Bill and Tax Changes

When a General Election is called, with the imminent prorogation of Parliament when all Bills that are passing through Parliament are effectively abandoned, the Government has to rush through any important Bills that it wants to get passed. That is what happened yesterday (25/4/2017) when only a few hours debate was available on the Finance Bill. That Bill contained many of the recent changes announced by the Chancellor in his Budget but many of them have been removed from the Bill so as to ensure its quick passage. It also avoids any politically embarrassing changes being implemented before the election. They may get revived in new legislation after the election in the new Parliament, reconsidered or quietly forgotten about. The latter being of course likely if there is a change in the political complexion of the Government or changes of Ministers.

These are some of the tax and other changes removed from the Bill:

  1. The reduction of the Dividend Tax Allowance to £2,000 from 2018. ShareSoc raised concerns about this and asked our Members to write to their MPs on the topic – see . It was certainly a vote loser for anyone who receives substantial dividends and it would definitely be good to get this reconsidered.
  2. The reduction in the annual pension allowance from £10,000 to £4,000 from 2017 to stop “re-cycling” of pension contributions where pensions were already being taken is out. So you may have another year to use the higher amount.
  3. The “Digital Tax” plan to force smaller companies to submit quarterly tax returns electronically is dropped. This was a very unpopular move by HMRC among small businesses as it would have imposed major extra costs on them. This is likely to simply be deferred.
  4. The change to increase Probate Fees very substantially on larger estates has been dropped – see This proposed change provoked a lot of criticism from the public including several ShareSoc Members. Again it would be good if this was reconsidered rather than simply postponed.
  5. Some changes to the rules on EIS and VCT investments and social investment tax relief are out.
  6. Corporation tax relief changes are out.
  7. Disclosure of tax avoidance schemes and penalties for enablers are out.

There are quite a lot of other clauses removed – one could say that a hatchet has been taken to the Bill to get it passed. But if you take the opportunity to ask questions of your prospective MPs in the hustings, you may like to pointedly ask them about their views on some of the above and whether their Party would revive these measures.

Roger Lawson

Shorting Shares – An Example of Motives

One of the most peculiar stories in the last week was the revelation that the attack on the Borussia Dortmund football team’s bus was not a terrorist attack after all. According to German police it was done by an individual investor who hoped to profit by shorting the shares. By killing or injuring their star players, he expected their publicly quoted share price to fall sharply.

Indeed the share price did fall by 3% but as the injuries suffered were relatively minor to one player, it did not fall further. But it was only luck that meant the injuries were not worse and there could well have been fatalities.

The perpetrator (named as Sergej W. by the police) bought 15,000 put options a couple of days before the event at a cost of 79,000 Euros while sitting in a hotel room overlooking the scene of the attack. Both that and suspiciously worded notes left at the scene led to his arrest.

Let us hope that this scenario is not repeated by others. But being able to sell short provides a lot of opportunities, not just for creating “fake news” which is of widespread concern at present, but as in this case of actually creating negative news. It’s a lot easier to create negative news than positive news. Was the BP Macondo oil well disaster (total cost over $60 billion) an accident or driven by someone shorting the stock? Conspiracy theorists need look no further for a good story.

Perhaps investors will need to look carefully at negative news in future.

Roger Lawson

Postscript 29/4/2017: Some readers of this blog post interpreted the last but one paragraph as a humorous reference which might be considered inappropriate bearing in mind the deaths in the BP Macondo disaster. Considering that there were potential deaths in the Borussia Dortmund attack, the post was intended to highlight the very serious aspects of the affair. It was of course not intended to be humorous in any way but was encouraging readers to think about the other potential consequences of similar attacks (and oil wells are very vulnerable to terrorist attacks as is well known). The reference to conspiracy theorists was just meant to indicate that I did not consider it likely that Deepwater Horizon was a malicious act. But that does not mean there won’t be such attacks in the future. In the brief literary form that is a blog, one cannot explain everything in detail but it was meant to encourage readers to consider all the aspects of this matter.      Roger Lawson

A General Election – What Should Be In the Manifestos?

There is to be a General Election on the 8th June in case you have not heard. That has the unfortunate consequence on freezing Government business, with the prospect of changes of Ministers thereafter. Any formal consultations – for example on improved Corporate Governance and remuneration restraints – will be deferred. So the key question now is what would we like to see in the manifestos of the leading political parties? Here’s my list:

  1. A commitment to ensure that private shareholders in nominee accounts are fully enfranchised by changes to the Companies Act and a low cost “name on register” system mandated to be provided by all brokers with specific warnings about nominee accounts.
  2. The mandating of Shareholder Committees to improve Corporate Governance and ensure there is more restraint on pay. In effect return some more control on some matters to the owners of public companies, namely the shareholders.
  3. To cancel the proposed changes to dividend taxation and stop the double taxation of company profits (i.e. revert to the tax credit system) and properly index link capital gains taxes.
  4. To stop the proposed changes to Probate Charges so they more properly reflect the service being provided. It should not be turned into a tax, i.e. a fund raising measure to subsidise other Government legal services as recently proposed.
  5. To reform the insolvency rules so as to stop the abuses arising from Pre-Pack Administrations and ensure administrations are not just about protecting the interests of bankers.
  6. To improve the oversight of the auditing profession and strengthen the FCA and SFO so that frauds and false accounting are vigorously pursued. To ensure that companies and their directors are also accountable to shareholders by reform of the Companies Act and removing the Caparo judgement from law.

Now that would be a manifesto that would get my support, and no doubt that of many other people. It is of course very much the manifesto adopted by ShareSoc when it was set up – see, and other issues have been covered by our campaigns on Shareholder Rights, Remuneration and Shareholder Committees. But progress on achieving our aims do date has been slow. Here’s a good opportunity to move them along.

Roger Lawson

Hard Hitting BEIS Report on Corporate Governance and Pay

The BEIS Commons Select Committee have today published a strongly worded report on Corporate Governance after its recent hearings on the subject. Here are some of the key points they make:

  1. They agree with the Prime Minister that high levels of executive pay need to be tackled “for the benefit of society as a whole”. They forcefully recommend that Long Term Incentive Plans (LTIPs) should be abolished as soon as possible because they create perverse incentives and are often a way to conceal high headline pay levels. They suggest pay structures should be simplified and deferred stock options should replace LTIPs.
  2. They support the “comply or explain” basis of the UK Corporate Governance Code but they wish to see some changes made to it so as to improve shareholder engagement and make non-executive directors more accountable plus more powers be given to the FRC so as to assist. They are concerned that Section 172 of the Companies Act which concerns the obligations of companies to their stakeholders is being ignored. They think boards should be required to explain how they have considered the issues.
  3. They came out in favour of “Stakeholder Panels” to assist boards and improve engagement. This is somewhat disappointing when ShareSoc has suggested Shareholder Committees would be better (they mention the actions by ShareSoc and UKSA in respect of RBS). Stakeholder Panels are a very watered down version and in our view are not likely to prove effective in influencing boards although other witnesses supported them. Interestingly they mention that several witnesses mentioned the possibility of “digital engagement via online forums” which would be a novel approach.
  4. They do not directly support having workers’ representatives on boards although they do suggest that employees might be considered for the roles of Non-Executive Directors, and that employee representatives should be appointed to Remuneration Committees.
  5. They support the publication of annual pay ratios, but they are opposed to the introduction of annual binding votes on pay simply because past experience of such votes does not suggest they would be effective in controlling pay. However, they do suggest that a binding vote on pay be invoked in the following year if more than 25% of votes are cast against the Remuneration Report (presumably in addition to the three yearly binding policy vote already present). They also suggest a rule that the Chairman of a remuneration committee be required to resign if pay proposals do not achieve the support of 75% of shareholders.
  6. They suggest more disclosure is made about advisors engaged by companies and their pay.
  7. They propose that the appointment of new directors be explicitly done by open advertising or the use of external search firms rather than the currently common “informal” which is surely a positive move and in accordance with ShareSoc’s recommendations.

My personal comments: In summary they are not proposing any radical reforms to the whole approach to UK corporate governance, but they are putting forward some significant improvements. But they are proposing more reporting and more FRC regulation so bureaucracy will be increased further which may not be helpful and will certainly add to costs. In addition the use of “Stakeholder Panels” would add to the corporate governance burden while how they would operate and their benefits is not actually very clear. They could just turn into “talking shops” with no real impact on the behaviour of directors or influence over their recruitment.

But the scrapping of LTIPs and the other proposals on remuneration are certainly positive recommendations.

They unfortunately failed to tackle one reason why votes on pay have not been as effective as hoped. Namely that private shareholders are mainly disenfranchised and do not vote. In addition fund managers do not represent the views of their underlying beneficial owners in the funds they control.

No doubt there will be formal public consultations on these proposals if the Government adopts the Committee’s recommendations, to which ShareSoc will respond. So if you have any comments on them, please let us know by adding your views to this blog post.

The full report of the Business, Energy and Industrial Strategy (BEIS) Committee is available here: . It’s well worth reading.

Roger Lawson

Response to FSCS Consultation

The Financial Services Compensation Scheme (FSCS) pays out if you have lost money as a result of an authorised financial services firm going bust or otherwise being unable to pay compensation for various failings – for example a bank or stockbroker. The scheme is funded by a levy on services firms. The Financial Conduct Authority (FCA has recently undertaken a public consultation on changes to the scheme. ShareSoc has submitted a response giving our views on behalf of our Members.

At present there are limits to the protection FSCS provides which vary by financial product. In simple terms, it protects:

  1. Deposits up to £75,000 per person per firm;
  2. Investments up to a limit of £50,000 per person per firm. These include for claims relating to bad investment advice, poor investment management or misrepresentation where the claim cannot be met by the regulated firm or by insurance cover. That is obviously a very low limit for what many people have invested via a stockbroker, either in a pension (SIPP), ISAs or directly.

We have suggested that the compensation be increased up to a limit of £1 million. On current annuity rates, even that would barely provide a living income in retirement. As more people take charge of their own financial affairs, they are often reliant on others for investment advice and products/services in the financial area that are often complex and difficult to understand for non-professionals. The new pension freedoms are known to be causing the promotion of lots of dubious investment propositions.

But we support a change such that risky firms contribute more to the FSCS. The contributions made by financial services firms have been rising recently thus adding to the costs of companies such as stockbrokers which are obviously passed on to their clients. The FSCS levies have risen mainly because of a few large failures of firms operating in risky areas or who were simply imprudent in managing their activities.

ShareSoc’s response to the consultation can be read here http:/

Roger Lawson