RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Archive | November, 2016

Dimon’s proxy jab deserves consideration

Posted on 31 May 2015 by

One of the lessons of the financial crisis is that investors should beware of subcontracting key financial decisions to third parties.

History might have been different had they been less willing to trust the word of credit rating agencies in the run up to the 2007 crash. However wise intermediaries may seem, they are as prone to conflicts of interest as anyone else.

    Now Jamie Dimon thinks he has perceived a new threat: that of proxy advisers. These are entities that advise institutional investors how to vote their shares on governance issues such as pay and board composition.

    JPMorgan’s boss thinks that “lazy” and “irresponsible” shareholders have given too much power to two leading US advisers — International Shareholder Services and Glass Lewis. Many fund managers have farmed out decision making to these organisations — an effective duopoly in the US — leaving them to deploy large block votes at annual meetings as they see fit.

    Some have dismissed Mr Dimon’s intervention as sour grapes — it came just days after those same proxy agencies induced JPMorgan Chase’s shareholders to revolt in large numbers over his own outsize pay package. But Mr Dimon has touched on a point that should not be dismissed.

    There is nothing wrong with employing proxy agencies. Indeed, used intelligently, they can genuinely help investors to hold companies to account. They get around a collective action problem that springs from the dispersed ownership of public companies. Because each institution only holds a comparatively small stake in every company it owns, none has much incentive to engage in activism.

    It is a problem pithily summed up a decade ago by Tom Jones, then head of Citigroup’s fund management arm. “If we spend money to do shareholder activism, Citigroup asset management shareholders bear the expense but don’t get a benefit that is distinct from other shareholders,” Mr Jones said. He likened activism to “do-gooding” and said he preferred to engage in activities for which he was actually paid.

    Getting investors to club together to analyse companies’ governance helps to get around the free rider problem. The snag is that in fixing this glitch, proxy agencies can create fresh ones. These stem in part from the Cinderella status of governance within fund management businesses. While trumpeted as important, it is not an area on which institutions have historically lavished pay and investment.

    Many fund managers have leapt at the chance to delegate this task to external advisers, paying them a certain (often quite low) price per company vote. This is especially the case in the US, where regulations permit the whole process to be delegated. At many company meetings, ISS alone disposes of more than a fifth of the vote.

    A second issue is that the proxy advisory industry is itself concentrated. While the US regulators have not given advisers the sort of protected status they accorded credit rating agencies, ISS and Glass Lewis, have come to dominate the market — not only in the US but in Europe too.

    The risks this poses are two fold. The first is that companies will recognise the outsize influence wielded by these firms and simply lobby them instead of engaging more broadly with shareholders.

    A second connected concern is that proxy advisers may face conflicts of interest. ISS is under private equity ownership, while Glass Lewis is owned by Ontario Teachers, a Canadian pension scheme. Both are under pressure to increase their financial returns. One way they can do this is to sell services not only to investors but to companies too. ISS already offers advice to corporate bosses on how to improve governance, while Glass Lewis peddles them investor-relations services. Both firms claim these activities are sequestered from the advice they give shareholders, and they disclose the names of companies that they advise. But vigilance will be needed to ensure that the revenues they generate don’t come to cloud the judgments agencies make on the other side of the house.

    Of course, there’s an easy way for investors to sidestep any of these problems. That is not to delegate to a single external source, but to consult before taking governance decisions themselves. Indeed, to do otherwise is simply lazy. However conflicted he may be about his pay, Mr Dimon is entitled to point this out.

    Romário drives Brazilian probe into Fifa

    Posted on 31 May 2015 by


    Romario, the former footballer and now a senator in Brazil, is pushing for the probe

    Brazil’s upper house has voted to launch a congressional inquiry into corruption allegations relating to the country’s football federation and its hosting of the 2014 World Cup.

    The move comes as Brazil’s federal police launch a parallel investigation into charges brought by the US against officials of Fifa, football’s global organising body, who include a former head of the Brazilian federation, José Maria Marin.

      “With the passage of the days, numerous scandals involving the realisation of football championships in [the Americas] will be revealed,” tweeted Romário, the former Brazilian World Cup star who is now a senator and the main protagonist behind the inquiry.

      The Brazilian Senate and police inquiries reflect the widening global fallout from the indictment by the US Department of Justice last week of 14 men, three of them Brazilians, on corruption-related charges involving Fifa tournaments.

      In the UK, the banks HSBC, Standard Chartered and Barclays — all named in the US indictments as channels for allegedly corrupt payments to Fifa — were reported to have begun internal reviews to look at the transactions as the fallout from last week’s arrests continued to reverberate through the footballing world. Barclays and HSBC did not comment on the matter, while Standard Chartered said it was looking at two payments mentioned in the indictments.

      Brazil’s Senate inquiry will mark the first attempt to probe the country’s hosting of the 2014 Fifa World Cup and its dress-rehearsal event, the 2013 Fifa Confederations Cup, and will help create political support for the parallel police inquiries.

      Any findings of corruption in Brazil’s hosting of the World Cup could prove politically explosive for the ruling coalition, led by the Workers’ party (or PT), whose former president Luiz Inácio Lula da Silva championed the country’s winning bid for the event.

      Numerous scandals involving the realisation of football championships in [the Americas] will be revealed

      – Romário, senator and former World Cup star

      The public expense of hosting the tournament generated mass protests in 2013.

      Successive leaders of Brazil’s football federation, the CBF, have been accused of corruption, but the charges have rarely been made to stick.

      However, in the case launched by the US last week, the former CBF president and serving Fifa official Mr Marin was one of seven Fifa officials arrested by Swiss police at a hotel in Zurich for possible extradition to the US.

      Romário, in a speech to the Senate supporting the congressional inquiry, said the US Fifa investigation had created a chance to crack open the underworld of domestic football.

      “Marin is under arrest and this is an opportune moment for us to conduct a sweeping inquest into the CBF,” he said.

      The launch of the Senate inquiry also follows a police raid last week on an office in Rio de Janeiro of Klefer, a sports-marketing company, that was carried out at the request of US investigators.

      While Klefer is not named in the indictments, it is a business associate of the Traffic Group, controlled by the Brazilian sports marketing businessman José Hawilla, a key witness in the US Fifa investigation.

      Mr Hawilla, who has already pleaded guilty in the case, played a central role in the scandal with his company Traffic allegedly paying millions of dollars of bribes to gain access to the television and other rights for football tournaments throughout Latin America.

      Traffic Group and Klefer, controlled by the Brazilian businessman Kleber Leite, shared rights to Brazil’s domestic Copa do Brasil tournament, which is mentioned in the indictment as one in which bribes were paid.

      Mr Leite, who has not been named or accused of any crime, said he was co-operating with authorities and vigorously denied any wrongdoing.

      Mercia investors warm to start-up push

      Posted on 31 May 2015 by

      If only investors had it that easy: gaining some exposure to the next hot start-up without the risk that it might fail.

      Several University spinout groups such as Imperial Innovations and IP Group have had mixed fortunes as investors took fright after the 2008 financial crisis.

        Now, Mercia Technologies, which listed on Aim in December last year, has come up with possible solution: a hybrid that identifies promising, young businesses, but keeps funding the best performing ones for up to 20 years.

        The specialist investor aims to have sufficient spread that some businesses will be paying out dividends while it invests in other, younger ones. And while it has relationships with nine universities, mainly in the Midlands where it is based, it also looks elsewhere for opportunities.

        “About half our investments are university spinouts. We want to build digital businesses. They don’t tend to come from universities although many of the people that work in them do,” says Mark Payton, the chief executive. A former Oxford university academic, he has 20 years’ experience of spinouts and has made more than 30 venture investments.

        Investors seem to believe the story. In just two weeks, Mercia last year managed to raise £70m before expenses through a placing and flotation. The fund run by veteran fund manager Neil Woodford, holds 20.2 per cent of the stock, while Invesco has taken a 29.5 per cent stake in it.

        Mercia operates a dual strategy. It runs Mercia Fund Management, which invests in early stage companies along with private individuals using tax-friendly means such as the Seed Enterprise Investment Scheme. The £22m fund has a portfolio of 44 companies — about 15 of which are break-even or profitable. One is paying a dividend.

        MFM will normally make an initial investment of between £50,000 and £250,000. When one of these reaches the right stage, Mercia Investments takes a direct stake in MFM companies, leading them to an eventual sale or flotation.

        Mercia then offers existing investors and the founders the chance to sell part of their stake at a discount, allowing them to “clear the mortgage” while retaining an interest in growing the business, said Mr Payton.

        MFM sees about 400 business plans annually. In the first quarter it invested in 12. Mercia has invested roughly £13m in later-stage businesses since listing, which have attracted a further £57m from elsewhere.

        “We have already worked with the management team and know the business,” says Mr Payton. There should be no surprise nasties under the hood.

        It holds pre-emption rights to maintain its position in companies on future issues of equity. If others do not take up their rights, Mercia Investments also has first option to make further investment through its third party holdings, because it might take them over the tax relief threshold.

        First established in 2011, MFM’s first fund has so far returned 15 per cent. Including tax relief that rises to 60 per cent.

        “There is plenty of impatient capital. But there is a shortage of patient capital,” Mr Payton says. We have a 15-year cycle. We are trying to build a valuable asset with our own investment capital.”

        Investments include nDreams, which makes software for virtual reality headsets, and Soccer Manager, a computer game business in Preston that operates across most gaming platforms.

        It has spent £5.7m on its 45 per cent stake in Science Warehouse. In April it paid £3.5m for a further 18 per cent, valuing the business at more than £19m. Science Warehouse, a Leeds University spinout, has been profitable since 2009 and increased its revenues 89 per cent in the last three years.

        For Mercia, there are lucrative fees as well as performance incentive. Future trade sales and flotations of the companies it invests in will generate even more.

        Mr Payton hopes there will soon be more of such listed investment funds to replace venture capital funds — many of which have struggled to raise money and which work to a compressed time cycle: investing in the first two years and selling out after five.

        But he also admits that Mercia is a “Marmite” stock as dividends may be some way off. “Some people get the capital growth model,” he says. Many fund managers would rather not invest in other fund managers, even if they have access to early-stage companies not normally on the market, says Marcus Tregoning, analyst at Cenkos, Mercia’s broker. That can reduce demand and depress the share price.

        The market remains open minded. The stock is hovering just above its 50p listing price. House broker Cenkos estimates its net asset value (NAV) at £75m. With a market capitalisation of about £113m, that gives it a price/NAV of 1.5. The sector has historically traded on roughly three times NAV.

        While the risk may be hedged, it is still a volatile business. Imperial Innovations and IP Group hit as high as four times NAV in the mid-2000s but IPG was worth just half its NAV after the 2008 financial crisis. It is now back to two times NAV.

        It is little coincidence, then, to see that Mercia’s largest are the sort that invest for the long haul.

        Deloitte UK eyes Benelux firms tie-ups

        Posted on 31 May 2015 by

        A0NH3E Deloitte©Alamy

        Deloitte UK is considering acquiring or merging with member firms from the Benelux region as clients encourage the big four professional services groups to achieve better co-ordination between countries.

        Discussions involve Deloitte UK and a couple of countries in the Benelux region.

          One person close to the discussions said: “It’s no secret that our clients are looking for us to behave more globally. Particularly on the advisory side, they want us to be able to behave more seamlessly in the way we serve them.”

          Any potential deal will be discussed at Deloitte’s global meeting in June, although a final decision would be from the member firms affected by it. Discussions are in early stages and no decisions have been finalised.

          Deloitte said: “On an ongoing basis, Deloitte UK does look for opportunities to collaborate more closely with other member firms in the Deloitte network, particularly in those markets where we believe we can better support our clients by doing so.”

          In 2005, Deloitte’s then global chief executive predicted that the group could become a single partnership within a decade.

          But the slow progress towards this goal is a reminder of how hard it is to persuade national member firms that are part of a global professional services network to sacrifice some of their autonomy in the interests of more efficient global co-operation.

          In 2006, the firm’s UK business acquired the shares of Deloitte Switzerland, transforming its Switzerland-based partners into members of a UK limited liability partnership.

          If Deloitte UK succeeds in amalgamating with more European members, it could pave the way for a similar model to be applied elsewhere in the world.

          The big four professional services firms — PwC, Deloitte, EY and KPMG — are structured as networks of legally separate national partnerships, which retain a significant degree of autonomy even though they share numerous co-operative agreements.

          Closer integration of large accountancy networks has historically been avoided because networks like to be able to distance themselves from a member firm if it runs into financial or reputational difficulties, in order to keep the global brand intact.

          Last year, Deloitte UK reported its slowest year of revenue growth for four years.

          Its UK revenue increased 1.4 per cent to £2.55bn in the 12 months to May 31 as UK economic uncertainty dragged on returns.

          The strongest performance came in the Swiss practice, which increased revenue 13 per cent to £236m.

          Separately, Deloitte UK will announce on Monday that it has promoted 75 new partners, the largest ever annual intake.

          Almost a third of the new partners are women, following measures by Deloitte to identify and retain high-performing women.

          As part of this, Deloitte is launching a new return-to-work initiative, aimed at attracting senior female leaders back to work after they have had children or taken a career break.

          The scheme offers a 12-week paid internship to women who have been out of the workforce for between three and six years.

          Tsipras accuses monitors of ‘absurd’ demands

          Posted on 31 May 2015 by

          Greek Prime Minister Alexis Tsipras delivers a speech during the the Economist conference entitled "Europe: The comeback ? Greece: How resilient?" in Athens on May 15, 2015. AFP PHOTO/LOUISA GOULIAMAKILOUISA GOULIAMAKI/AFP/Getty Images©AFP

          Greek prime minister Alexis Tsipras

          Greece’s chances of striking a deal to access a much-needed €7.2bn in rescue aid looked even bleaker on Sunday after Alexis Tsipras, prime minister, accused bailout monitors of making “absurd” demands and seeking to impose “harsh punishment” on Athens.

          Mr Tsipras’ accusations, made in Le Monde
          , came just days after his government claimed an agreement was imminent. They have increased the sense of chaos around negotiations in the week many believe a deal is needed to avoid a Greek default.

          On Friday Athens is scheduled to make a €300m loan repayment to the International Monetary Fund that is being closely watched by creditors after some Greek ministers hinted it might not be met without bailout aid. A further €1.2bn of IMF payments fall due over the subsequent two weeks.

            Several eurozone officials fear that, without a deal this week, there will not be time for Greece to legislate and implement an agreed list of new economic reforms before the end of the month, when its bailout expires. The uncertainty has sparked large-scale withdrawals from Greek banks, with about €800m taken out in just two days last week, renewing fears of a full-scale bank run.

            Greece’s three bailout monitors — the IMF, European Commission and European Central Bank — must sign off on the new reforms before the funds will be released, but in his Le Monde article, Mr Tsirpas accused them of being unyielding in the face of significant Greek concessions.

            “The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance,” Mr Tsipras wrote. “It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people.”

            The criticism appears directed at the IMF, which has taken the hardest line of the three institutions, particularly regarding cuts in public sector pensions, which Mr Tsipras described as already having been excessively slashed. EU leaders, including German chancellor Angela Merkel, have specifically warned Mr Tsipras no deal is possible without IMF approval.

            In an apparent attack on Berlin, Mr Tsipras also accused some within the EU of trying to break up the eurozone by centralising power among “core” euro members and tying the rest to “extreme neo-liberalism” through EU budget rules. Germany has been the leading advocate of such rules and strong, centralised power in Brussels to enforce them.

            “For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency,” he wrote, adding that such a path would mean the “abolition of democracy” in Europe.

            Eurozone officials have in recent days accused Mr Tsipras’ government of using similar public statements as a negotiating ploy, attempting to divide the IMF from the European Commission – which has been urging a compromise deal more acceptable to Athens – and failing to engage in substantive talks in Brussels.

            But Mr Tsipras himself has long been seen by creditors as their best hope for a deal. He personally intervened in February to extend the current bailout by four months after negotiations with more hardline lower-level officials faltered.

            British banks pay £12bn in penalties

            Posted on 31 May 2015 by

            A large computerised display of the British FTSE 100 index is pictured in London, on September 8, 2008. The London Stock Exchange said Monday it had been forced to halt trade after experiencing connectivity problems with some clients. "There was a connectivity issue this morning which affected some clients so we have suspended connectivity in order to bring it back in a controlled fashion," an LSE spokeswoman told AFP. At its suspension the FTSE 100 showed a gain of 3.81 percent at 5,440.20 points. AFP PHOTO/Shaun Curry (Photo credit should read SHAUN CURRY/AFP/Getty Images)©AFP

            FTSE 100 financial companies had to pay £12.6bn to settle legal and regulatory disputes last year — an 18 per cent annual increase and a sum that now makes up more than half of the total liabilities of groups in the index.

            British banks have faced an onslaught of penalties in recent years for offences including manipulation of Libor, forex, Isdafix and precious metals rates, mis-selling payment-protection insurance, money-laundering violations and client money failings.

              While companies expected an increase in litigation and higher fines for the banking sector following the financial crisis, the sheer scale of the penalties wasn’t expected, according to a report that analysed the costs that FTSE 100 companies have outlined in their annual reports as of the end of 2014.

              “The cost of litigation was once seen as just a cost of doing business,” said Raichel Hopkinson, the head of the practical law dispute resolution service at Thomson Reuters, which conducted the research. “But in the last few years a succession of FTSE 100 and Fortune 500 companies have had to raise new capital, suspend dividend payments or dismember their empires in order to pay fines or restitution orders.”

              The world’s biggest banks are facing increasing pressure to control compliance and regulatory costs from investors, analysts and some executives, as regulators are more focused than ever on compliance.

              In the most recent batch of billion-dollar penalties, six banks were fined $6.5bn over rigging of foreign exchange markets in May. Four banks also agreed to plead guilty to conspiring to fix prices and rig bids in the $5.3tn-a-day forex market. The penalties brought the total that banks have paid in fines and settlements since 2008 to more than $160bn.

              “This is now the era of the billion-dollar fine,” the report said. It is not just in Britain, either. “UK-listed banks are also now being hit by a new class of fines from overseas regulators and enforcement agencies running into the hundreds of millions of pounds.”

              At the end of 2014, companies on the FTSE 100 index faced liabilities of £24bn, up from £18.1bn at the end of 2011. Without the effect of the costs for BP over the Deepwater Horizon spill, liabilities were £21.2bn last year, a steady increase from the £10.9bn in legal costs in 2011.

              Companies set aside £239.5m on average, though the provision for companies outside the banking sector are half of that. Of the FTSE 100, 16 members reported legal and regulatory liabilities of £250m or more. They include four banks, two in oil and gas, two in mining, and one company in each of the pharmaceuticals, food and drink, telecoms, aerospace, retail, tobacco and engineering sectors, the report said.

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              Banks are expecting further penalties over manipulation of energy markets and precious metal prices, anti-competitive behaviour over credit default swaps, anti-money laundering and sanctions failings, tax-related litigation, client losses associated with dark pools and high-frequency trading, and further litigation costs from Libor and forex-rigging cases, according to the research.

              “The rising number of complaints to the Financial Services Ombudsman about packaged fee-paying accounts that include insurance could also put these products under the regulators’ spotlight,” the report said.

              Some banks have responded to increasing legal costs by hiring from the enforcement agencies to advise them. Standard Chartered has added Frances Townsend, a former assistant to the US president for homeland security and counterterrorism, and Boon Hui Khoo, a former president of Interpol, as senior external advisers to its board financial crime risk committee. Bill Hughes, the former head of the UK Serious Organised Crime Agency; Dave Hartnett, the former head of HM Revenue & Customs; and Sir Jonathan Evans, the former head of MI5, have joined HSBC’s financial system vulnerabilities committee.

              After banking, the largest legal provisions were set aside by the oil and gas and mining sectors, which budgeted £3.8bn and £2.6bn, respectively. FTSE 100 pharmaceutical companies increased their legal provisions last year by 8.6 per cent to £731.7m to face increased global scrutiny around antitrust issues and litigation over intellectual property, sales practices and product liability.

              UK and US manufacturing activity in focus

              Posted on 31 May 2015 by

              The coming data-heavy week presents a broad mix of indicators for leading economies. Monthly activity surveys for the US, UK and China are out on Monday and Wednesday, eurozone inflation and growth data are published on Wednesday and Friday respectively, then there are interest rate announcements from the European Central Bank and Bank of England on Wednesday and Thursday with US non-farm payrolls available on Friday.

              Little action is expected from the ECB or BoE meetings this week, UK inflation turned negative in April making the chance of a near term rate rise even less likely.

                Ranko Berich, head of market analysis at Monex Europe sums up the situation at the ECB: “The eurozone economy is undoubtedly beginning to turn a corner, but the ECB has been utterly adamant that no amount of good short-term data will shake its commitment to completing its QE programme. Extremely accommodative monetary policy is here to stay for the foreseeable future.”

                Monthly manufacturing activity for May, measured by the purchasing managers’ index is out for the UK on Monday. Election uncertainty slowed activity in April but the sector continued to expand, while improvement is expected for May with the index moving to 52.8.

                The US equivalent, from the Institute for Supply Management, has been hit hard since the end of last year. Falling investment in the energy sector and sluggish export growth have weighed on certain manufacturing sectors, pushing the index from 57.9 in October down to 51.5 in April. The May figure is expected to rebound marginally to 52.

                UK service sector activity has seen constant expansion since the beginning to 2013; the April reading of 59.5 remained strong and well above the 50 level that indicates growth. This trend is expected to continue in May albeit at a slightly reduced rate of 59.1. US services measured by the ISM non-manufacturing PMI has followed a similar path of strong growth, averaging 57.2 in the past six months and a reading of 57.8 in April. May’s figure is expected to remain on trend with a reading of 57.0.

                Eurozone prices edged out of deflation territory in April as downward pressure on food and energy prices subsided, leaving prices flat over the year. Oil prices have rebounded by about a third from the lows seen at the start of the year and as a result overall prices are expected to rise again in May, with analysts expecting 0.2 per cent annual growth when figures are released on Tuesday.

                The second estimate of eurozone GDP is released on Friday. While analysts do not expect the 0.4 per cent quarter-on-quarter growth figure for the first quarter to be revised, the additional detail that becomes available is expected to reveal a strong boost to consumer spending as a result of lower energy costs.

                US non-farm payrolls out on Friday are expected to remain firm, with a 223,000 gain in May, in line with April’s figure. The unemployment rate is expected to remain at 5.4 per cent.

                Why Britain has no chance of EU treaty change

                Posted on 31 May 2015 by

                epa04773745 German Chancellor Angela Merkel (R) and British Prime Minister David Cameron (L) answer questions from journalists after their talks in Berlin, Germany, 29 May 2015. Cameron is on a tour through the European capitals. He wants to negotiate reforms in the UK's EU membership before the referendum planned for the end of 2017. EPA/WOLFGANG KUMM©EPA

                German Chancellor Angela Merkel, right, with British Prime Minister David Cameron

                There are two overriding reasons why the EU needs to change its treaties: first to fix the eurozone; and second to fix the relationship between the EU and Britain. Of the two tasks, repairing the eurozone is the more difficult. But neither can be tackled alone; the EU will not go through the hell of treaty change twice in quick succession.

                The bits that need fixing in the eurozone have not changed since the days of the financial crisis. The eurozone will need a proper fiscal backstop for the banks before the next banking crisis.

                  The current banking union — if you want to call it that — has joint supervision and a common legal framework for bank resolution. But, crucially, the banks remain national organisations, governed under national law.

                  A proper banking union would require a joint legal framework and a joint fiscal commitment, and especially a joint bankruptcy code. It would constitute the kernel of a fiscal union. Member states would probably want it to include other policy areas as well, including perhaps a common employment insurance fund.

                  The more the eurozone integrates, the bigger the problem for EU members such as Britain that are not in it. This conflict was not foreseen in the existing treaties. I do not fully agree with David Cameron’s list of grievances, but given where we are today, some of the British prime minister’s demands are perfectly logical.

                  For starters, European law stipulates that the euro is the currency of the EU — and it says so without qualifications. It did not foresee that the British and Danish opt-outs from the euro could be permanent. Once you come to accept reality as it is, it would be illogical to expect Britain to subscribe to the ideal of “ever-closer union”, another treaty commitment. By not accepting the euro, Britain automatically rejected the notion of ever-closer union. There are also areas where the interests of the eurozone and Britain naturally collide, as in financial regulation — something that was not foreseen either.

                  On a technical level, it would probably be possible to change the treaties in a way that allows both more integration for the eurozone, and more disintegration for Britain. But as so often, politics intrudes; there are two reasons why treaty change will not happen soon.

                  The first is French opposition. Last week was the 10th anniversary of the French No vote in a referendum on the EU’s constitutional treaty, which was subsequently dropped and transmuted into the Lisbon treaty. The French political establishment, and especially the governing Socialist party, is still traumatised by that defeat. President François Hollande, keen to avoid reopening old wounds in his party, is in no mood to discuss the subject before the next presidential election in the spring of 2017. Expect no treaty change discussion until then at the earliest.

                  Last month, an Ifop poll for Le Figaro asked how the French would vote in a referendum on a treaty change; 62 per cent said they would vote No. This despite the fact that a majority wants a European army and a European president, both of which would require treaty change. What these polls tell us, aside from the fact that you get stupid answers when you ask stupid questions, is that we should never take the outcome of a European referendum for granted.

                  The second reason why treaty change will not happen is a lack of agreement about what should be changed. The June summit of European leaders will discuss various proposals to improve governance in the eurozone. What is remarkable about the discussion documents that have been leaked is their lack of ambition. The big idea of the joint French and German paper is to remove powers from the European Commission — as though excessive centralisation had been the eurozone’s problem.

                  The whole purpose of the Italian proposal, meanwhile, seems to be to avoid upsetting the French and the Germans by studiously avoiding any mention of eurozone bonds. No one really wants to touch this subject right now. Germany can be relied on to boycott meaningful eurozone reforms for as long as its economy benefits from the eurozone’s internal imbalances. That might not change for a decade or so.

                  Until that moment arrives, any debate on treaty change is likely to end in failure. There is a saying in Brussels: never waste a treaty change. If you do something this difficult, you have to make sure you get it right.

                  Mr Cameron’s problem is primarily one of timing. The last treaty change took almost eights years from inception to completion. This one may take longer. The more referendums there are, the longer it will take. And the longer it takes, the smaller the value of any undertakings Britain might receive in respect of a future treaty change.


                  Top US fund managers attack regulators

                  Posted on 31 May 2015 by

                  Fidelity Inventments sign©AFP

                  US fund managers have launched a new attack on global regulators as they fight a rearguard action against possible rules that would treat groups such as Fidelity and BlackRock as threats to the financial system.

                  The Financial Stability Board, a global watchdog chaired by Mark Carney, governor of the Bank of England, is exploring whether to designate the biggest asset managers as “systemically important” and hit them with tougher rules and heightened scrutiny.

                    But Fidelity said the FSB’s approach was “irredeemably flawed” and told regulators in a letter that regulating a fund manager as systemically important “would be counterproductive and destructive”.

                    Fund managers argue that they do not pose systemic dangers to financial stability because they do not take deposits, guarantee returns or face the risk of sudden failure like a bank.

                    But regulators have other concerns. Last month Mr Carney highlighted the risk on investor runs on “funds that offer on-demand redemptions but invest in less liquid assets”. The watchdogs are also looking at the stability impact of securities lending by asset managers, and the complexity of fund businesses structured as holding companies, which bear a growing resemblance to banks.

                    Empowered by the leaders of the G20 top economies, the FSB has designated 30 banks and 9 insurers as global institutions that require tighter regulation because of their potential to cause systemic contagion.

                    Next in its sights are asset managers, although the FSB, which is based in Basel, Switzerland, is debating whether it makes more sense to regulate entire institutions or particular products and activities.

                    Fidelity and the Securities Industry and Financial Markets Association (Sifma), a US trade group, accused the FSB of ploughing ahead while ignoring an avalanche of empirical studies and previous industry comments.

                    BlackRock, the world’s biggest fund manager by assets, was less aggressive and said there was a case for enhancing the regulation of some individual investment products and practices.

                    European asset managers are more relaxed about the FSB’s work as they are smaller than the biggest US groups and less likely to be targeted. Axa of France said it had not written to regulators.

                    The industry is privately concerned about how new rules would affect their profitability and competitiveness, although in public they emphasise how customers would be harmed by new regulation.

                    It’s very clear that asset management activities can create systemic risk. I don’t think there should be any debate about that. The question is how best to address it

                    – Marcus Stanley at Americans for Financial Reform

                    Advocates of reform say the asset management industry’s claims to pose no threats to financial stability are hollow.

                    Marcus Stanley of Americans for Financial Reform, a group that wants tougher regulation of Wall Street, said: “It’s very clear that asset management activities can create systemic risk. I don’t think there should be any debate about that. The question is how best to address it.”

                    He said asset management was closely tied to the devastating 1987 stock market crash, the collapse of the hedge fund Long Term Capital Management in 1998, and the panic that spread through short-term money market funds in the last crisis.

                    Sifma said in a letter that the FSB’s approach “could lead to increased costs and other negative consequences for investors and capital markets without actually addressing any systemic risk concerns”.

                    The FSB has not set a deadline for its work and says it has not prejudged its outcome.

                    Additional reporting by David Oakley in London and James Shotter in Frankfurt.

                    Councils across Britain flag housing fears

                    Posted on 31 May 2015 by

                    BRISTOL, ENGLAND - APRIL 17: The sun illuminates properties that were recently built by a housing association to provide affordable homes in a mixed use development called J3 on April 17, 2015 in Bristol, England. Housing, like the economy and the future of the NHS have become key election issues in the general election being held in the UK next month. (Photo by Matt Cardy/Getty Images)©Getty

                    Planning rule relaxations introduced by the last government are holding back the construction of cheap housing — and contributing to Britain’s “severe” housing crisis — according to local councils.

                    Chancellor George Osborne liberalised planning rules in 2012, arguing that it would help kick-start what was then a moribund housing market. Since then housebuilding activity has edged higher and house prices have begun to rise steadily.

                      But the changes, in a new National Planning Policy Framework, watered down the requirement for housebuilders to construct a proportion of properties on their sites priced below market value in exchange for planning permission.

                      That has made it easier for developers to argue they cannot afford to build “sub-market” homes, according to more than half of local authorities surveyed by the Town and Country Planning Association for the Association for Public Sector Excellence. Only 14 per cent said the changes to planning rules had been helpful.

                      Councils have few alternative sources of new sub-market housing, the TCPA found: more than two-thirds of councils surveyed said that housebuilders’ planning agreements were the main source of new subsidised homes in their area.

                      The findings come amid concerns that the new administration’s flagship policy of extending the “Right to Buy” scheme to housing associations could exacerbate the shortage of social housing.

                      Lord Kerslake, former head of the civil service, will warn this week that the policy will not address the urgent need to build more affordable homes.

                      The crossbench peer will use his maiden speech in the House of Lords to argue that extending the right-to-buy scheme is “wrong in principle and wrong in practice” and will do nothing to address Britain’s housing shortage.

                      Meanwhile the New Homes Bonus — a government grant intended to reward councils that approve higher levels of housebuilding — has been ineffective, the majority of councils surveyed by the TCPA said.

                      Last year the National Audit Office concluded there was little evidence that the NHB had made a difference.

                      Kate Henderson, chief executive of the TCPA, said the UK faced “big questions about how we fund affordable housing” in a planning regime which asked less of developers.

                      Martin Wolf

                      Tories wrong to buy votes with housing

                      LIVERPOOL, UNITED KINGDOM - FEBRUARY 20: People walk along one of the streets in the 'Granby Triangle' which have been regenerated. Liverpool Council sold off a selection of it's derelict housing stock for one GB Pound each. Regeneration has now begun on some streets. February 20, 2015 in Liverpool, United Kingdom. As the United Kingdom prepares to vote in the May 7th general election many people are debating some of the many key issues that they face in their life, employment, the NHS, housing, benefits, education, immigration, 'the North South divide, austerity, EU membership and the environment. (Photo by Christopher Furlong/Getty Images)

                      It is not the job of the government to fulfil people’s aspirations

                      Read more

                      The relaxed planning rules had “really disenfranchised councils and made them feel disengaged from their communities” by removing their discretion on decision-making, she said.

                      Councils should instead be “genuinely empowered to make decisions about the future of their area”, Ms Henderson added.

                      Britain needs to build 200,000 to 300,000 homes a year in order to meet the needs of its growing population, according to economists. Paul O’Brien, chief executive of the APSE, said Britain had only ever managed to achieve that in the years after the second world war, when councils had a much more dynamic role in housing.

                      Councils’ construction activity peaked in 1954 at 240,000 homes — more than two-thirds of the total. In 2012 councils across Britain built just 2,500 properties, 1.7 per cent of all homes built.

                      “It’s very difficult to defend the situation we’re in. It is ridiculous that we have such a housing shortage and there’s an obvious solution out there; local authorities could make a major contribution,” Mr O’Brien said.

                      The TCPA and APSE called on the government to give councils a more proactive role in assembling land for development and coordinating new housing schemes, and more freedom to borrow money to finance housebuilding.

                      Financial viability assessments should take into account the wider economic benefits of new sub-market housing, the TCPA report suggested; in some cases this would override developers’ arguments that they could not afford to build the homes.

                      More changes planned


                      The planning system is set to see further changes as a result of measures announced in last week’s Queen’s Speech.

                      The government will introduce time limits within which councils must make decisions on some local matters, a proposal originally announced by the coalition government. If a council fails to make a decision within eight weeks, the applicant will receive a refund of the fees paid.

                      The policy would “simplify and speed up” the planning system, the government said in a briefing document accompanying the Queen’s Speech. Other planning changes are expected to be announced.

                      The changes are the latest evidence of the fundamental tension between two Conservative party policies: planning system liberalisation, and giving local communities a greater say in the planning process.

                      The most high-profile example has been permitted development rights — rules which make it easier for property developers to change buildings from one use class, such as offices or shops, to housing.

                      Councils in Britain’s biggest business districts, such as Westminster, complain that the relaxation of the rules gives them too little discretion. The former communities secretary Eric Pickles backtracked on a further relaxation of permitted development rights shortly before the general election.

                      Local campaigners have been particularly vociferous about the impact of the rule relaxation on pubs, which are a popular target among developers for conversion into homes.