Damned if you do . . . damned if you don't

Reading earlier today the pressure that is being placed on RBS in particular to agree to debt restructuring and help save Peacocks from administration I couldn't help but think how perverse the world is.  I am not a fan of the mistakes made by big banks which led to the collapse of the financial world as we knew it.  It has left one hell of a mess and the tax payer as owner of a number of rather unattractive assets.  However now that we find ourselves in the position of owning or part-owning large banks with significant exposure to numerous enterprises we should be a bit more circumspect regarding what we do with that ownership.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press.  The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business.  The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away.  I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems.  One can predict the questions that would be raised in Parliament if they do walk away:

"Can the Prime Minister explain why the state-owned bank, RBS, failed to save Peacocks from administration wth the loss of thousands of jobs?  Is not the minimum that the public can expect from the billions spent on saving the bank that it will not desert its borrowers in their time of need?"

What a load of rubbish.  This would be typical political spin using the livelihoods (and loss thereof) of voters as a tool to hit the coalition.  The taxpayers who own RBS are not merely those employed by Peacocks; they are all of the tax payers.  I do not believe any of us would like RBS to make bad business decisions simply because the right business decision will cost jobs.  For RBS to have the potential to see itself returned to public ownership it must be allowed to make decisions without concern that political pressure will be brought to bear.
I have personal experience of this political pressure.  I was involved in an administration a while ago involving a bank with significant state ownership.  The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses.  However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it.  To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses.  Undoubtedly this is true.  However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!

Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed.  This does not mean that administrators will definitely be appointed but makes it significantly more likely.  If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct.  Time will tell.

I didn't do it so I am not helping tidy up

The usual line from my 5 year old when we ask him to help his 3 year old brother tidy up the toys which his 3 year old brother has tipped all over the floor is "I didn't do it so I am not helping tidy up".  If only life was so simple.

I have my suspicions that I will come in for a certain amount of criticism for some of the things I write in this latest instalment.  However, I am man enough to take it (bullet proof vest and bodyguard now in place) so what the hell.

This morning I woke up to Radio 4 and then Radio 5 (two alarms because I am rubbish at getting up and my wife gets up 15 minutes after I do and hates Radio 4).  Radio 5 started talking about how the Unions are having a big meeting to discuss potential collective action (aka General Strike) to stand up the Government and oppose the huge cuts being imposed across the economy and resulting in, as they called it, "attack on our public services".

One of the people Radio 5 spoke to was a businessman whose argument was that whilst it is true that the bankers bore most of the responsibility for the financial crisis that we are in, everyone has to shoulder the burden of getting us out of it.  He went on to say that bankers have paid a price (I believe he meant financially as well as in terms of increased regulation), that the private sector generally which is no less blameless than the public sector has swallowed an incredibly bitter pill in cuts, real time wage cuts, job cuts, profitability cuts and therefore the public sector has got to swallow its pill too.

Mr. Private Businessman, I salute you.  In truth I salute you because of a specific point that many have failed to pick up on.  The current mess we are in will not be solved by playing the blame game.  The UK is in dire straits.  It is in dire straits for lots of reasons.  Labour would have us believe that it is in dire straits solely because of reckless activities by the banks and global events.  Of course they would, after all, the downturn happened on their watch.  The Tories are just as happy to bash the bankers.

Personally I expect more from my Government.  When I make a mistake (never happens of course but when it does) I do not seek to place the blame on external events.  Instead I turn around and say, the mistake has been made for which I am obviously sorry.  That cannot be undone.  But what matters now is taking the right action together to rectify the mistake.  If I am prepared to take credit when things go well due to my actions I must also take responsibility when my actions result in things going not so well.

But more than that.  When I am acting for a client and the client makes a bad decision even if that decision was made against the best of my advice I do not turn round and say, it's not my fault and therefore I am not gonig to help you out.  On the contrary, I say to the client, this is the position let's see what WE can do to sort it out.  My success is linked to my client's success.  If my client's deals constantly go stale it does not bode well for me.

Unfortunately, more and more, both in business and in politics all we see is the blame culture.  All anyone is interested in doing is passing the buck.  We are more than happy to claim the credit when things go well but the minute it does not go according to plan we just point the finger at someone else and look to walk away.  Gordon Brown was more than happy to claim the credit for the boom times but the minute the bubble burst it was not his fault but due to "global events".  He was right, the bust was due to global events but so was the boom.

So, we are all in it together and must all shoulder the pain.  Except for one thing, and here is the real kicker, the painful part, the part which everyone hates.  We are not all in it together.  Because there is a certain group of people who have the ability to rise above it all and walk away leaving the rest of us behind; that is the very rich and beyond.  Herein lies the problem.  We live in a global economy where the richest among us have the ability to literally pick themselves up and move to another place at their leisure.  What this means is that it is impossible to get them to pay their "fair share" all we can do is get them to pay the share they are prepared to bear.  There is nothing we can do about this so forget about it.  Life sucks at times.

However, for the rest of us, including working, middle and even some in the upper class who may not be quite as upper class as they like to think, we genuinely are in this together.  I do not believe that the current Government wishes to destroy public services.  They are making difficult choices and will be certainly getting some of them wrong.  But it will help no one if every individual simply points the finger and says it was not my fault and so I should not pay. 

We may not have made the million plus holes in the dam but if we don't all stick our fingers in the holes we will all drown in the flood. . . except for the rich who can afford the helicopters to escape it.

Carbon Reduction Commitment: Another victim of the austerity budget

The Spending Review 2010 found some innovative ways to increase the Government's revenue by using the CRC Efficiency Scheme.
One of the tools to be used was a statutory scheme whereby all participants would initially buy their annual Allowance through a bidding process. Initially the number of Allowances was to be unlimited but then it was to be capped thus encouraging participants to reduce the Allowance they require and save them money.
The second part, and what might be called the carrot, of the scheme was that the revenue generated by the auction of Allowances would be recycled to the participants so that, as you might expect, the best performers would receive the reward in the form of cash back.
In the Spending Review 2010 two major decisions were revealed:

1. The first sale of Allowances will be in 2012 rather than 2011.
2. Revenue from the sale of Allowances will be used to support public finances rather than recycled back to Participants.

The second decision is a significant change as it means that the league tables to be produced will now only have a reputational impact as opposed to a financial and reputational impact. Whilst many owners and occupiers will be concerned regarding their reputation and green credentials the cost-benefit of reducing emissions becomes much harder to justify on a reputation only basis unless one is significantly behind ones peers.

A knock on effect for Landlords is that whereas before there was some possibility of recouping some of the costs of compliance by moving up the league tables and receiving the reward of "revenue" from the sale of Allowances; now compliance is a fixed cost with no direct financial return. Depending on the terms of service charge provisions in leases it may not be possible to recover the cost of compliance from tenants. This will create an irrecoverable cost which must be deducted from the "bottom line" meaning values will suffer.

All landlords should instruct their lawyers to review the terms of their service charge drafting to ascertain whether or not the cost is recoverable. If it was before the change announced in the SR2010 then nothing will have changed. If it was not it may be now.

Commercial Lease Code - let's be radical

The news that the 2007 Commercial Lease Code has not proved any more well known than its predecessors has been met with dismay by the Government. Larger, institutional landlords did embrace to some degree the Code and did their best to publicise it. However the fact remains that much of the country's commercial estate is owned by small landlords and managed by small agents who have no interest in publicising the code as all it would do is damage their negotiating position and, in the case of agents, raison d'etre. So the prospect of legislation looms closer.
What I am about to say may shock you but . . . bring on the legislation. But not in half measures. Let's not tinker around the edges. Let's be radical.
I propose that for all leases of an area less than a certain minimum and/or a rent below a certain level (eg. £50k per annum) there should be a statutory prescribed form of lease. It could have the following:

• a minimum 2 year and maximum 10 year term
• Index-linked upwards only rent
• Security of tenure
• Repair to standard at date of first lease
• Assignment with consent not to be unreasonably withheld ("ntbuw")
• Underletting of whole with consent ntbuw
• Specific user with change permitted within same use class ntbuw subject to estate management considerations
• No alterations apart from internal non-structural with consent ntbuw
• Service charge drafting would be fixed by reference to the RICS Code

These are just suggestions but you get the idea. It may be that a few variations of the leases would be needed for different types of property and rental structures but all of this is achievable.
Why do this? Well the amount of time and money that is spent in the negotiation of heads of terms and subsequent documentation of those heads is one good reason. All landlords and tenants would need to agree would be the rent and term.
But the benefits go further. When an investor is reviewing a portfolio of properties low value leases would not need to be reviewed for consistency as the terms would be dictated by law. Certificates of Title could be reduced in size. Lawyer review time would be cut leaving more time to do the deal. Disputes would be dealt with more easily since the wording could quickly be interpreted by the courts and the number of disputes would fall. Everyone would benefit to some degree at some point.
The downside? Mainly in reduced flexibility although quite how much flexibility would be lost is questionable. Agents might need to reduce fees to reflect the lack of terms to negotiate but they would still be needed to find the tenants and get them signed up. Lawyers would lose out on fees as our services would not be required for straightforward leases but we would still be needed to negotiate agreements for lease, licences for alterations, etc.
So I say let's legislate, let's be radical, let's create the standard lease.

IFAs and the end of the commission income (See FT.com)

As reported in the FT the FSA are intending on putting an end to commission based compensation for independent financial advisors (IFAs). Instead all IFAs would need to agree a fee with the client and that fee could either be paid upfront or deducted from the investment. It has been hailed as a wonderful step forward for the man on the street seen as adding further protection. However, as someone who uses IFAs I am not quite so sure the benefits of such regulation outweight the downside.
I have had an IFA for a number of years. When I first started out with my current firm remuneration was, at my option, commission based. This meant that I paid nothing for their services and they got nothing from providing services unless I actually bought some form of investment. As a result of their advice I purchased life insurance, critical illness cover and started saving properly into a pension. I would never have done this without the advice of my IFA and I am pretty certain I would never have gone to see an IFA if I would have needed to pay.
However, a couple of years ago my IFA changed the basis of our arrangement so that it no longer received commission. Instead I pay an annual retention fee (£1,200 plus VAT) and then if they place investments for me I pay a lump sum for their advice (they may still be able to get commission if I agree but I cannot remember).
I must say that the service and advice I am getting has improved since this new arrangement was put in place (although this might be more a result of my personal advisor changing and the new advisor simply being a lot better). However, £1,410 is a lot of money to pay just to have someone meet with you 2 or 3 times a year and tell you that you should try and save more, utilise your ISA allowance to the full even when you have no liquid assets and that cutting your pension contributions risks ruining your ability to retire.
True I have received helpful advice. They arranged for my pension investments to be changed; they drafted the letter to HMRC to ensure I was benefitting from tax breaks on my pension contributions. Does this justify the cost?
Very difficult to say and when things are tight is this not just a luxury that I should get rid of? I could have done these things myself but just didn't get round to it - why should I when they were being paid for it!
One thing I can say is that if I was contacted by an IFA for the first time and invited to come for a free chat but warned that if I did want to instruct them I would have to pay I would say, "Thanks but no thanks - I can manage on my own".
Therefore, whilst the Government's move might save some people from the clutches of unscrupulous poor advisors making bad recommendations purely for the commission, it will also likely lead to an increased number of people who do not have adequate protection in place for emergencies or retirement both of which will ultimately mean a bigger tab for the Government to pick up.