The Scourge of Private Interests

Jun 6, 2013   //   by Keith McDonald   //   Commentary / Editorial  //  Comments Off on The Scourge of Private Interests

Many of the issues of yesteryear are still just as prevalent today. Some, one suspects, are timeless. Greed will almost always divide and conquer. And if a functioning economy relies upon everyone co-operating in the public interest, we can pretty much forget about it.

Amid the tumult of the mid-seventeenth century, judges and politicians for the Crown argued that the gentry should surrender their lands to the public good because if state order broke down, their private fortunes would almost inevitably be lost anyway.

It was in everyone’s best interests to provide the state with whatever it needed, they were suggesting, because a functioning civil society was the only basis upon wealth could be built and sustained.

Roll forward 360-or-so years, and you wouldn’t think the situation had changed a great deal. As a nation, conditions are set up for growth – yet it remains shallow. We’re severely lacking in confidence – confidence in banks, confidence in the financial system, and confidence in the housing market.

Widespread co-operation to repair some of this confidence would improve conditions immeasurably. Unfortunately, the opportunistic factions too blinded by greed are determined to make this an almighty struggle.

Banks hoard while we get nothing

RBSIt’s hard not to start with the banks and their latest sins. If the rate-rigging, bonus-guzzling, techno-creaking, mis-selling episodes weren’t enough to blow our faith out of the water, banks now appear to be leeching from another trough at our expense – the Funding for Lending Scheme.

Let’s put this into context, first of all. The expansionary monetary policy in place at the moment is designed to encourage spending at the expense of saving. But it’s not really designed for this kind of situation.

At the moment, we’re more concerned about paying off debts and building up savings in the event of redundancy while growth and confidence are still shallow. A good proportion of savers feel the need to compensate for their real-term losses and save more, not less.

So, as I’ve argued elsewhere, a meaningful return on our savings would really help to propagate the sensation of spending power again. But this is moving further and further away from our reach.

One of the main reasons why returns on savings accounts fail to match inflation is the government’s Funding for Lending Scheme, which offers cheap funds to banks on the condition that they lend it out to homes and businesses.

If the scheme was proving a miracle fix, we might excuse it. But positive effects aside from the residential mortgage market appear to be negligible, while savings rates have plunged.

And it may come as little surprise either that this ‘condition’ upon which banks draw the funds has not been kept rigidly. Some banks, it would seem, have been leeching from the scheme while simultaneously cutting lending.

The opening quarter of 2013 shows little change from the second half of 2012, which could threaten the durability of this move into positive GDP.

Claims management companies: bleeding the system dry

It's Not All Doom And GloomGenerally, I’ve got little sympathy with banks. They’ve been exposed in true Promethean fashion over the last couple of years and deserve everything that’s been coming to them.

But the sooner they get a grip on themselves and sure up their capital base, the better for all of us. And I do find myself empathising when opportunistic slugs seek to drain money out of the system.

I’m talking, in the main, about claims management companies, of which I’ve always been dubious. Any sector of the market that is prepared to manufacture an accident or injury for you is bound to be bad news.

These firms exist to leech compensation, claim a hefty fee for themselves, and let the costs be absorbed by the rest of the market. What a stunning raison d’être.

The PPI insurance scandal has been an absolute windfall for them, but it’s not the great consumer championing we’re led to believe.

Yes, it’s vitally important that customers who were victims of mis-selling are adequately compensated, and the financial impact of the scandal needs to stun banks into permanently changing their ways.

But it’s also true that time, effort and funding has gone to waste as these companies encourage claims which are, at best, opportunistic, and at worst, fraudulent, in the hope that banks will pay up without a full investigation.

Part of the reason this is allowed to happen is because, aside from a small allowance, banks get charged £850 for each case that gets referred to the Ombudsman, regardless of the outcome or the realistic chances of success.

Claims management companies, on the other hand, are not liable for a penny, so they’ve got nothing to lose by spurring pointless claims. That’s not a balance of power to be encouraged if we want to restore any element of integrity back to the financial sector.

Housing market: cheap tactics

Tougher Rules on MortgagesMuch of our confidence hinges upon a healthy housing market, which has suddenly come back into focus with a bang.

The availability of cheap mortgages and the new taxpayer-funded Help to Buy scheme (the Shared Equity scheme in Scotland) are threatening to send prices soaring as supply fails to keep up with a three-year high in new inquiries.

It may come as little surprise that property developers have leapt onto the bandwagon, exploiting a number of loopholes to make a quick buck at the consumer’s expense.

Money Mail has found copious evidence of suspicious practices by developers, including:

  • making prices seem much lower than they are;
  • making repayment costs seem lower by advertising mortgage rates that don’t exist;
  • forcing buyers to use their own brokers for fees and commission rather than allowing them to find an independent advisor.

The suggestion in some adverts that have emerged is that houses are selling at a 20% discount, when the lower price merely reflects the assistance of the Help to Buy loan.

Other tricks include phantom low mortgage rates and the spreading of repayments over 35 years rather than the standard 25, which knocks around 30% off the realistic mortgage costs.

Developers have also been caught insisting that customers use a specific mortgage adviser, which brings in commission and referral fees.

The Government’s Homes and Communities Department (HCA) has had its work cut out to act as a makeshift advertising standards agency (for as I’ve mentioned recently, it’s hardly straightforward how the advertising of financial products is monitored).

So it’s reassuring that developers are helping to create confidence in the legitimacy and integrity of the housing market, which is already concerning analysts who predict a return to the boom and bust mentality of old. Learning lessons from (even recent) antiquity is never our strong suit.

Tax – What we Caan get away with

Creative Accounting from StarbucksAnd the biggest area of chagrin, I’d wager, is the issue of tax. The bottom line, as we all know, is that if large corporations were forced to bring all of their dealings above board, the public purse would be in an unrecognisably healthier position.

The biggest laugh is how ludicrously naïve it feels even just saying that aloud.

Between creative accounting to manufacture losses (Starbucks), running accounts out of Luxembourg (Amazon), and unashamedly claiming that no sales or transactions are made in the UK (Google), the measures that allow firms to shun tax on profits made in this country are an embarrassment to all compliant British taxpayers and businesses.

And now we’ve got business Czar, James Caan, whose latest government-driven venture has been criticised for aggressively marketing business loans to students, saying that we should leave poor Amazon alone as it would be tragic for Britain if it ‘withdrew’ from our shores.

Because of course, any business would willingly jack in its £3.3 billion UK sales if that’s what it meant to avoid its dues.

And tragic, too, because aside from the imploding British high street, UK businesses adore the friendly mode of competition from the retailer, which uses a ‘fulfilment’ title to describe its ‘delivery’ business.

Incredible. Speaking of which, a merry satire on the corporate mind, courtesy of The Incredibles.

Bob: Did I do something illegal?

Gilbert: *squirms* No…

Bob: Are you saying we shouldn’t help our customers?

Gilbert: The law requires that I answer “no”.


Bob: We’re supposed to help people…

Gilbert: We’re supposed to help OUR PEOPLE! Starting with our stockholders, Bob! Who’s helping them out, huh!?

Conceding private interests to support the public good is a great theory, but could we ever really expect the kind of co-operation that would make a real difference?

Probably not in this lifetime.

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