Posts Tagged ‘Financial Services’


April was a good month for bonuses. The reason is not hard to see. The upper tax rate was cut from 50 to 45 per cent in April so a lot of bonuses were deferred from the previous financial year. In all, April saw no less than £4.2 billion paid out in bonuses; that was £1.7 billion up on last year.

Not bad.

Of the total amount paid out, the finance industry saw £1.3 billion. The ‘FT’ reckons that by deferring bonuses in this way, roughly £35 million was saved in tax.

But this begs the question: did the cut in income taxes just impact upon the timing of the bonuses, or, as a result of the lower tax rates, did companies choose to pay out higher bonuses?

The government reckons that by cutting the top tax rate, pay awards will rise, and its tax receipts will increase too. Economic theory has a name for it. It is called the Laffer curve. If the tax rate was say 100 per cent, in a free society no one would bother to work, and tax receipts would be zero. If the tax rate was zero, tax receipts would also be zero. So the government has to find the optimal level.

The current government seems to be saying that level is less than 45 per cent. Is that right?

© Investment & Business News 2013


According to a Halifax report, new mortgages are at their cheapest level in 14 years. Mortgages taken out during Q1 accounted for just 27 per cent of borrowers’ net income. In 2007 the ratio was 48 per cent; over the last 30 years the ratio was 36 per cent. Yippee to that.

It is just that…

Remember interest rates are at a record low. They are hardly likely to fall, but they are likely to rise. The Bank of England tries to re-assure us by saying rates are unlikely to go up until 2016. Alas, most new borrowers will not be repaying their mortgage in full between now and 2016. Who knows what rates will be in five years’ time, in ten years’ time or in 20 years’ time? It is anyone’s guess.

Remember that the markets have concluded that rates are rising sooner rather than later. The yield on UK government bonds is now at a two year high. Mortgage costs may rise in their wake.

Above all remember this. Sure, over the last 30 years mortgages on average took a higher proportion of new borrowers’ salary than they do now. But over the last 30 years wage inflation was ever present. Who cares about high borrowing to income ratios when incomes are rising so fast?

It is not like that now. Incomes are no longer rising fast, real incomes are falling. Those who celebrate the low cost of mortgages seem to have forgotten this.

© Investment & Business News 2013


Imagine you asked your bank for a business loan. Your bank manager – if indeed there are still members of the genus ‘argentaria procurator’ (that’s Latin for bank manager) left – might ask for the spreadsheets. If they revealed a big fat salary for you, the ‘procurator’ might say: “My Dear Homo Sapien, it appears you expect the bank to take all the risk.” You may well have found you were out on your ear (pércipe) before you could say “ego odi bancarii” (I hate bankers).

Imagine, with the help of your bank, you were trying to arrange one of those MBIs (management-buy-in), MBOs (management-buy-out) or indeed a BIMBO (buy-in-management-buy-out). You would be expected to chip in an amount roughly equal to your annual salary. Nassim Taleb would refer to it as “skin-in-the-game”. Shakespeare’s Shylock might have called it a “pound of flesh.”

Barclays is raising money to bridge a shortfall in its capital ratio. So far we have heard not a dickey bird about how management at the bank may contribute; not a hint about whether this year’s bonuses might be in the form of shares contributing to the fundraising.

Some might respond by saying “nam hypocritae.”

© Investment & Business News 2013


‘Seven habits of highly successful people’ was the title of a book published in the late 1980s and seems to have sparked off a trend. Successful people behave in a certain way, so if you behave that way too, you will be successful. But here is something we don’t often consider. How many of these characteristics shared by successful people, are also shared by unsuccessful people?

It depends on what you mean by success of course. But for the sake of this article let’s assume success equates to making a great deal of money.

Maybe what successful people really need is an eighth ingredient, and that ingredient is called luck. You can’t do much about luck; it is after all down to sheer… well to sheer luck. But there is something you can do to ensure fortune favours you. Alas, this is a lesson few entrepreneurs have grasped.

Actually, some successful entrepreneurs seem to have grasped it. Maybe they are trying to appear humble, or likeable, or just plain modest, but many successful people in business admit to luck. They will quite honestly say that if the particular gamble they had taken had not come off, things would have been very different for them.

They might also admit to major mistakes they made in their carrier, or bad judgement calls, but supposing those bad judgment calls were made very early on in their career before they had, as it were, made it? Maybe the difference between a highly creative and hard-working entrepreneur who makes it and one who doesn’t is one of timing. The successful entrepreneurs made the good gambles early on, while the unsuccessful one didn’t.

Bill Gates famously failed to recognise the potential of the Internet. He also admitted to a degree of luck with Microsoft. Supposing his first big business decision was as hopelessly wrong as his judgment over the Internet. Would he still have become the world’s richest man?

Luck is not something to which we like to admit. It is also hard to accept that we are mortal. It is built into us, and for the young especially this is a very hard concept with which to come to terms. But here is something else it is hard to accept; not all our ideas are good, and if we are of an entrepreneurial leaning, not all our ideas will work.

But the narrative to which so many of us cling tells a different story. It tells us that successful people have seven characteristics in common. We hear of life stories, and how key decisions were made, and it is as if fate was working, making one person’s success inevitable. But if fate really does exist, why is it so hard to predict the future? If it was inevitable that someone was going to be successful, why is that so rarely predicted in advance?

The narrative of success only works in hindsight.

The European Flash Barometer once found that around 43 per cent of people in the UK (compared with 19 per cent in the US) believe that a new business should not be created if there is a risk it may fail. The implications of the findings of this survey are absurd. How can Brits really believe that a business should not be formed if there is a chance it might fail? A business that is guaranteed of success is a business that measures success by the most modest of ambitions.

Those 43 per cent of Brits who think a new business should not be created if there is a risk it may fail have fallen for the narrative that success is somehow predictable.

But while entrepreneurs may laugh at the findings of the European Flash Barometer, they themselves are just as guilty. They concede that risk surrounds us, except that they rarely acknowledge that their own business idea is risky; instead they say and appear to believe that it is guaranteed to succeed.

An entrepreneur might say don’t put money in other companies, on the stock market or in investment trusts, invest every penny you have in your own business. Business advisors may advise focus. A venture capital firm might say it is essential that entrepreneurs do not deviate from their core focus; from their business plan.

From the point of view of a venture capital firm, or VC, with diversified investments, it makes sense to urge entrepreneurs to remain focused. A VC may only need a small number of its investments to come off to stay in businesses. A VC with a portfolio of driven entrepreneurs, who put their heart and soul into their business idea, only need luck to smile on some of those entrepreneurs.

But for the individual, who can see the shortcomings in the narrative sold to them by the VC and public perception, will know that at least some diversification might make the difference between a comfortable old age and one spent in poverty.

© Investment & Business News 2013

Despite the economy avoiding a triple dip recession many leading entrepreneurs remain concerned about long-term growth prospects, according to the latest Smith & Williamson Enterprise Index. There was a marginal drop in the headline figure, although there were signs of positivity elsewhere.

The inaugural Index, carried out in January of this year, recorded a positive outlook as far as the economy was concerned, whilst the latest one has seen a slight dip in respondents’ optimism. The main concern for respondents centred around the fact they don’t believe Chancellor George Osborne is doing enough in terms of deficit reduction.

However, despite the fall in confidence, other figures from the survey suggest that the rise of crowdfunding as a means of finance for businesses could help with future growth.

With many businesses still struggling to get finance from the banks, crowdfunding is a route that many entrepreneurial businesses are considering.

“With most businesses unwilling or unsuited to raising traditional venture or growth capital, and with a scarcity of bank loans and overdrafts, there’s an increasing focus on the alternatives,” explained Guy Rigby, head of entrepreneurs at Smith & Williamson, the accountancy and investment management group.

“Enter crowdfunding. For businesses, there are essentially three types of crowdfunding: reward-based, loan-based or equity-based and there are an increasing number of providers competing to fill this space. Whilst, in some cases, there are regulatory challenges which undoubtedly need to be resolved, it’s new, it’s here and it’s a welcome alternative for the nation’s entrepreneurs.”

Coinciding with the increased interest in crowdfunding was a rise in export confidence. Of those entrepreneurs surveyed who actively engage in export, many expect their turnover to increase during 2013. However, this is not reflected across the wider spectrum, where turnover expectations for exporting and non-exporting businesses combined fell back against the initial reading.

Despite the fledgling signs of optimism in certain areas, it is the growing concern around Osborne’s deficit reduction plans that remain the biggest concern for entrepreneurs.

“Growth is returning but both tax rates and spending are still too high for the economy to really move forward,” said Steve Hallam, CFO at Legacy Portfolio.

“The imbalances that caused the recession still remain largely unaddressed and I don’t believe that simply throwing money at the housing market will help this.”

© Investment & Business News 2013

What is better: boom and bust or gradual?

In the US it was boom time in the noughties. Real house prices soared some 40 per cent between 2000 and 2006. Household debt leapt from around 90 per cent of income in 2000 to around 130 per cent in 2006.

In Europe, things were more gradual. Real house prices peaked in 2007 when they were around 30 per cent up on the 2000 level. Household debt to income rose from about 80 per cent of income in 2000 to around 108 per cent by 2012.

It is just that in the US, real house prices crashed, falling back to their 2000 level by around 2012, and have been slowly recovering since then. Household debt to income dropped from 130 or so per cent to around 106 today.

In the euro area, house prices have now fallen back, but are still some 18 per cent over peak.

In other words, US household debt to income is now lower than in Europe, and house prices appear to be on the road to a slow recovery.

In Europe house prices probably have further to fall and debt to income is looking worrisome. The US had a very nasty recession circa 2008, but is now recovering. The euro area seems stuck in depression.

© Investment & Business News 2013

The Bank of England has made tweaks to its funding for lending scheme – all told they seem to be encouraging, but is there a catch?

Firstly, the UK’s Central Bank has extended the window of its funding for lending to 2015.

Secondly, it has made changes so that banks can use the monies made available under the scheme to lend to financial leasing and factoring companies. In short, the Bank of England is encouraging lending to companies that provide financial support to other companies.

Also – and this took most by surprise – banks will be able to acquire £5 of cheap lending from the Bank of England for every £1 they lend to SMEs (that’s firms turning over less than £25 million). In other words the Bank of England is saying: “I will lend you a fiver at a really low interest rates and really good terms, if you lend £1 to Sid and Tom, and Jack, and indeed Joan. An even more generous scheme is available for banks which lend in the next few months.

The big snag with all this is that many banks are still undercapitalised, and no matter how much cheap money is waiting for them in loans they can’t make these loans unless they have more capital. And the way to get more capital into banks is for them to make more profits, which are then largely retained in the business, which may mean they need to engage in more investment banks paying huge bonuses. Either that or they simply need to reduce lending altogether.

However, changes to the funding for lending scheme also allow scope for banks to lend more money to buy-to-let investors.

The Bank of England does not get it.

SMEs don’t necessarily need more debt. And banks dare not make too many loans to business, because these are inherently risky. Buy-to-let, however, is seen as less risky. A rise in buy-to-let activity may lead to a rise in house prices, which may increase the amount of collateral available as security against bank loans to businesses.
But that is not what the UK needs. It needs lower house prices.

As for business, it doesn’t need more debt. It needs more investment in the form of equity; more venture capital and business angels; more investors sharing in profits, rather than making money from an interest rate on loans provided.

If the funding for lending scheme was to revolutionise the lending to VC and business angel networks, that would be a different matter entirely.

Look through a list of former US bankrupts and its reads like a Who’s Who. Implicit in the US business world is an assumption that it is better to have a go and fail than not even try. And more to the point, if you do fail, have another go. In Europe, the stigma of failure is such that it is a wonder that there are any entrepreneurs at all.

Now Ireland has overhauled its bankruptcy rules, and in so doing ensured it no longer lags half a millennium behind the US. It is now merely a couple of centuries behind.

Right now in Ireland, if you go bankrupt, the period of your bankruptcy lasts 12 years. If you go bust, you are condemned to misery for around a quarter of your working life. It isn’t much better than debtor’s prison. Then again, for that very reason, bankruptcy is very unusual in Ireland.

Now insolvency rules are being overhauled. The bankruptcy period is being shortened.

It’s an improvement, but… Under new rules individual debtors will be restricted for a period of up to seven years from spending more than 247 euros a month on food, 57.1 euros on heating, and 125.97 euros on so-called social inclusion – that is a grandiose term for going to the cinema, or to see sporting events.

The thinking behind the rules is in part to protect debtors from being forced by creditors chasing bills to go hungry, or cold.

But these comments from Lorcan O’Connor of the Insolvency Service of Ireland are telling: “There are very few people in Ireland who could claim to be experts in personal insolvency.”

Perhaps the single biggest respect in which the US economy scores over other countries is the way in which it has an innate ability to reinvent itself. Mistakes are not only considered inevitable; in some ways they are seen as a sign of ambition, of big ideas.

Europe, perhaps with Ireland in the vanguard, is still living in a past which sees failure as an anathema, and as a result, risk is suffocated virtually at birth.

©2013 Investment and Business News.

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