Europe – an uncertain export market for UK?

Several eminent economists have attacked the Eurozone’s post-2008 economic strategy and warned that it could blunder into depression.

During a recent gathering of Nobel prize-winning economists at Lake Constance, Germany, Prof Joe Stiglitz said austerity policies had been a “disastrous failure”, while Prof Peter Diamond said: “Historians are going to tar and feather Europe’s central bankers”.

With Germany’s economy slowing, growth in France stagnating, leading to a mass Government resignation at the weekend, and Italy and Cyprus also contracting this is not good news for the UK’s businesses.

Europe is traditionally the UK’s biggest export market and the current situation is not encouraging despite economic recovery and signs of growth in the UK.

In fact, they are facing a double whammy because £ Sterling is so strong at present making exports to Europe expensive and therefore impacting on both margins and sales. And, if, as has been suggested the European Central Bank embarks on printing more money (quantitative easing) to ease its own dire situation this will further impact on UK sales to Europe by making exported goods and services even more expensive for European customers.

There is a genuine concern that any UK export-led growth, especially to Europe, could be stifled by the high value of £ Sterling.

In this uncertain market businesses, as we have said before, will need to broaden their horizons and look for export opportunities elsewhere.

Has anyone any suggestions for a promising potential export market and also which UK sectors might benefit?

Risk taking? Fat chance

This week the independent UK body researching issues related to pay, The High Pay Centre, published its annual analysis of CEO pay to reveal they are now paid 143 times as much as their staff.

Meanwhile, the Telegraph business pages report that corporate giants and PE (Private Equity) firms have accumulated capital reserves amounting to £4.1 trillion.

At the same time earnings in the UK have fallen by 10-12% in real terms since 2008, according to the Bank of England, and the Fawcett Society has released findings after questioning 1000 low-paid women that indicate that the gap between men’s and women’s pay has widened for the first time in five years.

Is there any relationship between these facts?

Possibly. Despite reports that the UK economy has recovered from the 2008 Great Recession, business and economic commentators, among them the Daily Telegraph’s Allister Heath, are arguing that it is still not sufficiently dynamic.

Heath points to a combination of factors including that Government measures introduced to mitigate the recession’s effects have frozen parts of the economy so that people fear moving jobs, businesses are not investing and so-called zombie companies are being allowed to survive well past their effective life.

He argues that a little “creative destruction” is required to really get things moving and that economies need to be in a state of permanent revolution in order to be successful.

He may have a point, but while there is uncertainty about future direction of policy in the run-up to an election, not to mention so much unfinished bank and financial sector regulatory reform, an ongoing unease about the fairness and morality of the way our economic system is structured and currently operates and so much uncertainty about a possibly stagnating Eurozone ( the UK’s biggest export market) there are likely to continue to be more questions than answers and precious little appetite for risk taking of any sort. Those who have will hang on to what they have accumulated.

Why should CEOs put their own salaries at risk by taking risks for the benefit of apathetic shareholders?

Can there be morality and ethics in business?

Ever since the Great Recession began in 2008 there has been an understandable focus on the moral and ethical behaviour of banks and other financial institutions – or the lack of it.

However, there has been a wider discussion rumbling along since May, when a conference was held in London on so-called “inclusive capitalism” where discussions touched on the so-called social contract of common values that tacitly exists in the market , whether it is in finance, business or government.

This theme has since been taken up in comment pieces, including Anthony Hilton in the London E Standard, reflecting on the ways in which businesses can treat customers unfairly, without it being obvious, for example instead of a price increase the manufacturers change the shape of a package or reduce its size to sell less for the same price.

His question was whether the responsibility for such behaviour rested with a company’s board of directors, with its CEO or managers, or with regulators to ensure fair dealing.

More recently Lord Digby Jones weighed into the discussion, arguing that the relationship between government, businesses creating wealth and society was broken. He put forward the notion of a business covenant, like the military covenant, that might set out simply and clearly the obligations of a business to its customers and its community, and what business might expect from government as part of the covenant.

Covenants, while not legally binding involve a clear statement of intent as to how the parties should deal with each other.

Despite the caution “caveat emptor” an economy and society can only function effectively when consumers and clients trust the businesses that supply their goods and services.

While consumers also need to take some responsibility for their purchasing and financing decisions, inclusive capitalism relies on there being a level of confidence that customers will be treated in a moral and ethical manner by those institutions, financial and commercial, that supply them.

Director guarantees should mean cheaper borrowing

Financial institutions, especially banks dealing with small business loans, are often asked for loans by directors of companies that do not have insufficient assets. This places banks in a difficult position because they often want to help their clients but at the same time they can’t take risks with depositors’ money. The result is that banks frequently require directors to give a personal guarantee as security for money borrowed by the company.

If the business is subsequently unable to repay the guaranteed loan then the bank expects to rely on its guarantee. Accordingly guarantors are now asked to seek legal advice before signing a guarantee or at least confirm they have been advised to get advice before signing.
Directors should therefore be mindful of the obligations they may be taking on when seeking business finance and weigh up the pros and cons.

We are, however, aware of clients being told by bank managers that they would never expect to actually call upon the guarantee. This confuses the issue as it begs the question why take a guarantee. However most likely if a guarantee exists, it will normally always be called upon in the event of a default providing the director has sufficient personal assets.

While a bank relationship manager may be uncomfortable asking a client to sign a personal guarantee and often confuse their client by trying to reassure them, the bank’s in-house recovery team won’t have a problem if the a bad debt is passed to them.

Some commentators and many aggrieved directors have tried to turn this into an ethical or moral issue but it is straightforward. Banks need security and they should not be lending money at risk, at least not retail or commercial banks. In turn the reduced risk to the bank should attract a low cost of borrowing to the client.

Is it time to accept some responsibility for our own behaviour?

As we emerge from the 2008 Great Recession, is it time to reflect on the broader values and behaviours that contributed to the hubris and subsequent crash?

Much of the focus to date has been on blaming others and in particular bank bashing. We have cheered from the sidelines or simply remained silent over attempts at regulating and curbing remuneration for bankers and CEOs. The aggrieved have engaged with the various inquiries into the conduct of banks and other financial institutions.

This all underpins our desire to blame someone else.

It continues, like the recent call by ResPublica think tank for bankers to be made to swear an oath to fulfil both a moral as well as an economic purpose. Presumably this is envisaged as the equivalent of the oath to which doctors sign up. While the Hippocratic Oath may on the whole work to prevent misconduct in the medical profession, applying it to bankers comes across as our continued belief that we bear no blame.

We implicitly know that legislating for moral or ethical responsibility for bankers will be almost impossible to enforce and will only end up with more clauses in contracts where we confirm we have taken independent advice.

For too long there has been an unspoken assumption that our values are different from those of bankers or CEOs. It is time for us all to take responsibility for borrowing more that we could afford, for believing that getting rich is easy and without risk, for contributing to the hubris.

Only when we accept some responsibility for our own behaviour can we change the values that contributed to the Great Recession.

Glass half full?

In an ideal world every small business is planning ahead but needs some clarity and certainty about the future economic environment in which it is likely to be operating.

The reality, however, is more like an exercise in crystal ball gazing.

Business headlines portray a rosy picture of the UK economy back to pre-Great Recession levels of performance which is underpinned by unemployment falling dramatically. It should however be remembered that we are already in the build-up to the next election, now less than a year away.

Other commentators who are not getting the headlines are promoting a level of caution that no one wants to hear. We have had quite enough bad news over the past 6 years and now want some good news.

It may however be unwise to be unaware of the warning from IMF Chief Christine Lagarde, that financial markets may be a little too optimistic, given that recovery is still lagging in Europe, one of the UK’s chief export markets.

It would also appear that not everyone is enjoying a boom if the reports are correct about UK businesses being in arrears with VAT, calculated as having have risen by £100 million to £2.6 billion in 2013, according to business finance provider LDF.

The Bank of England’s Monetary Policy Committee is also concerned about signs of a weakening in growth in the second half of the year, pointing out also that real wage rates have not yet started rising, while inflation is edging up.

We should know that economic forecasting is by no means a precise science, and if we had forgotten 2008 was a big reminder that chancellors of the exchequer cannot ensure there will never be a return to “boom and bust” economics.

Business planning needs to take into account confidence or lack of it. Hope and spin are not much help to the small business deciding whether to seek funds to invest in the future or avoiding taking risks.

So, apart from continuing to keep a close eye on cash flow as a prudent measure, is it time for businesses to plan for growth? And who is going to back them by sharing their risk?

Knowledge of history may help us avoid making the same mistakes

Empires at outbreak of WW1

Today 100 years ago Britain declared war on Germany.

Alarmingly many of the circumstances that led us to war then are being repeated today.

During the early 1900s the Empires of Austria-Hungary, Russia and Germany could not reach agreement over the Balkans. The Ottoman Empire was shrinking. Alliances between the various countries obliged support in the event of war.

Russian political manoeuvring in the region destabilised the situation. Unrest among the Serbs, Croats and Bosnians led to local militia seeking to establish control.

Demands were made, which when not fully met justified Austria-Hungary declaring war against Serbia on 28 July 1914.

The Russians weren’t prepared to lose their influence so they partially mobilised on the 29th.

The Germans mobilised on the 30th so the Russians responded by fully mobilising.

The Germans declared war against Russia on the 1st August 1914.

On 4th August, Belgium sought neutrality and refused to allow German troops to cross its borders, Germany declared war on Belgium so that day Britain honoured its alliance.

Does any of this resonate with the current situation in Ukraine?

What would be on your wish list for banking reform?

A full-scale investigation into whether there is sufficient competition among banks is perhaps a step closer, though not yet a certainty, following the announcement that the CMA is to study and consult further before making a decision in September.

Quite why the CMA (Competition and Marketing Authority) needs further consultation before making the decision is a mystery when its studies so far have led to a provisional conclusion that small businesses and personal account customers have not been receiving a good service from the banks.

There has been enough evidence from the FSB and regularly released figures that small businesses have been finding it increasingly hard to access lending from the banks, that they have been mis-sold products (eg Interest Rate Hedging Products) and that the days of having a relationship with a proper bank manager who knew and understood them are long gone.

So assuming that the CMA does start a full-scale investigation in September, likely to take at least 18 months to complete, as a small business what would you like on your wish list for banking reform?

A chance to get involved in a much-needed review

The terms and conditions governing most financial transactions affect us all in both our business and our personal lives.

A modern, properly transparent and regulated personal property security law, or transactional law, is central to the functioning of an economy, affecting everyone from small businesses, borrowers and finance providers of all types, creditors and debtors, lawyers, insolvency practitioners and lawyers.

According to Professor Louise Gullifer, executive director of the Secured Transaction Law Reform Project, a wide-ranging project investigating English transaction law, the current situation has serious flaws, some of which follow:

It is a complex mixture of case law and a number of statutes, which may guarantee lawyers an income but is opaque to both them and the non-experts it might be affecting.

Current law on fixed and floating charges can affect the cost of credit and the willingness of financial institutions to lend especially to unincorporated small businesses, forcing them into structuring themselves in forms that may not be appropriate to their needs in order to access secured finance.

In the case of insolvency, the lack of an up to date, clear and transparent registration system for secured assets can complicate matters for both creditors and debtors.

Business rescue is often hampered by the emergence of security that is not registered with Companies House or on the Land Register. This relates to a lack of transparency about ownership or control of specific pledge assets that distorts most balance sheets such that corporate solvency and viability is often not clear.

This is a wide-ranging and comprehensive project looking into this and the organisers are inviting as many people as possible to get involved, make comments, or raise concerns.  There’s more on the secured transactions law reform project website: http://securedtransactionslawreformproject.org/

SMEs still waiting for redress from IRHP mis-selling

Our regular followers will know that we have been keeping an eye on this issue for some time – here’s an update.

More than two years after a scheme was set up to help SMEs recover from bank mis-selling of Interest Rate Hedging Products a Bully Banks conference earlier this month has condemned the redress scheme.

Bully Banks was set up to support SMEs and to lobby for redress for their losses to restore them to the position they had been in before being sold IRHPs.

Many business owners at the conference reported that the scheme, administered by the FCA (Financial Conduct Authority) was failing to deliver. The FCA was described as “indifferent”, unaware and complicit in its handling of the banks under the scheme.

Bully Banks reported that “only 400 SME customers have had consequential loss agreed and those for a derisory £1,800 per customer”. They also reported that more than 35% of those seeking redress had been excluded on the grounds that “they should have been knowledgeable enough to see through the bank’s deceit” and that many thousands of SMEs have become insolvent as a result of the mis-selling. Cynics might argue that some insolvency procedures were initiated by the banks to avoid paying out or being pursued for mis-selling.

Given that plenty of politicians, economists and senior figures in finance were caught out by the onset of the 2008 financial crisis, in which mis-sold complex and incomprehensible financial products played a significant part, and are still struggling to make meaningful reforms to prevent a repeat it is a bit rich that 35% of SME owners are being penalised for a failure to understand the implications of some of those same products.