Azure Global : 12/17/13

Tuesday 17 December 2013

Mark Carney stands by forward guidance policy

Bank of Englang governor denies approach on future interest rates is confusing for business or consumers

The Bank of England governor, Mark Carney, has robustly defended his forward guidance policy in parliament against critics who argue it is confusing and has done little to persuade markets that an interest rate rise can be delayed for three years while the economy mends.

Speaking to the House of Lords economics committee, Carney said businesses and consumers understood that forward guidance meantinterest rates would stay low until unemployment falls to 7%, which the central bank predicts will happen in 2016.

Carney said: "A return to growth is not the same as a return to normality", and base rates should remain at the historically low 0.5% level until the recovery was established.

He spoke as the Office for National Statistics revealed that the consumer prices measure of inflation slowed to 2.1% in November from 2.2% in October and was at its lowest since November 2009. The move closer to the Bank of England's government-set target of 2% will give policymakers more leeway to leave interest rates at their record low.

Carney told the committee Britain's return to growth was sufficient to justify resisting calls to increase the quantitative easing (QE) stimulus programme, which Threadneedle Street has held steady for the last two years.

MPs have accused Carney of establishing a highly technical policy of forward guidance that relies on several caveats, or knockouts; this reliance has, they say, undermined the simplicity of the message. Forward guidance includes clauses that allow the bank to push up interest rates should it believe inflation is likely to increase sharply.

Markets have estimated that interest rates will need to rise in 2015 in response to a sustained increase in GDP and higher-than-expected inflation.

Carney said forward guidance had reassured households and businesses that credit would remain cheap until the economy was in better shape.

"Forward guidance is having an effect in the real economy. My experience, having met with more than 300 businesses around the country, is that business people understand forward guidance well. This is confirmed by the reports of our network of agents across the nation," he said.

"What matters most for households and businesses is not market expectations of interest rates, but what actually happens to bank rate now and in the future. That is because the interest rates on 70% of mortgage loans to households and more than 50% of loans to businesses are linked to bank rate."

Lord Lawson, the former Tory chancellor, said he was concerned that the central bank's QE programme to stimulate the economy would be maintained long after interest rates began to rise. He was responding to comments by Carney restating the bank's long-held policy that interest rates should increase before the sale of assets under the QE programme.

Lawson, who wants the bank to start selling the QE programme's £375bn of government bonds, said there was disquiet about the long-term effects of QE, which had artificially forced down the interest rate on government debt.

Carney said interest rates would need to rise to cool the economy ahead of a sale of government bonds.

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Sterling to go plastic, Bank of England decides

New polymer banknotes to be introduced, beginning with Sir Winston Churchill £5 note in 2016

The Bank of England will announce plans on Wednesday to press ahead with switching to plastic banknotes, starting with the new Sir Winston Churchill £5 note in 2016.

The decision on polymer notes will mark the beginning of the end for 320 years of paper notes from the Bank. The move by Threadneedle Street follows Bank governor Mark Carney's native Canada, where plastic notes are being rolled out, and Australia, where they have been in circulation for more than two decades.

Carney launched a public consultation on polymer banknotes, seen as cleaner and more durable, shortly after arriving at the Bank this summer. However, the Bank's notes division has been considering plastic money for several years.

Bank officials have been touring shopping centres and business groups around the country with prototype notes to canvas public opinion and the final decision is due todayon Wednesday.

The Bank has promoted its polymer notes, featuring a see-through window and other new security features as less threadbare and tougher to counterfeit.

It has sought to quell concerns about the environmental impact of printing on plastic by suggesting they can last up to six times longer than the cotton-paper notes in circulation at the moment. The durability will also compensate for the higher production costs and save an estimated £100m, the Bank claims.

Its laboratory tests showed polymer banknotes only begin to shrink and melt at 120C, so they would fare better in washing machines but could be damaged by a hot iron.

The initial plan is to introduce polymer notes one denomination at a time, with the Churchill note in 2016 at the earliest and then the £10 note featuring Jane Austen next in 2017. The notes will continue to feature the Queen and retain their current colouring.

The move is the latest in a long line of changes for banknotes, first issued in return for deposits by the Bank when it was first established in 1694 to raise money for William III's war against France.

Colour £5 notes replaced white ones in the 1950s; the first portrayal of a monarch came in 1960, when the Queen appeared on a new £1 note; and the introduction of historical figures such as William Shakespeare started in the 1970s.

As part of the preparation for this latest change, banknote officials have already been working with retailers and the operators of vending machines and cashpoints.

Link, which runs the UK cash machine network, said its machines would need new cassettes to hold the plastic notes, because they will be smaller, and not because of the change in material. The 15% reduction in size for Churchill notes compared with the current Elizabeth Fry £5 note brings English notes into line with sizes in other countries. But they will remain larger than existing euro notes and the different denominations of sterling will retain tiered sizes to help blind people differentiate between them.

The prospect of polymer notes has raised some concerns for the visually impaired, however, as the popular practice of folding or creasing notes in different ways to identify different denominations will no longer be possible. Polymer notes can be folded but will not stay tightly folded in a particular way.

The Bank's prime task as banknote issuer is to maintain confidence in its money, and the move to polymer is expected to make life drastically more difficult for counterfeiters.

Advances in commercially available laser and inkjet printers over the past decade have helped criminals to produce fakes quickly and more cheaply.

The Bank concedes no note is counterfeit-proof but says the polymer notes will be slower and more expensive to copy.

The notes will be produced at the Bank's ultra-secure plant in Debden, Essex, by a private contractor.

The job is expected to go to either De La Rue, the existing maker of BoE notes, or Innovia, which manufactures most of the polymer notes currently in circulation around the world. The Bank has ruled out importing plastic money from China.

The British Plastics Federation welcomed the Bank's move towards polymer notes. "It's essential all the plastic banknotes are made in the UK. Why not make coins out of plastic? It will save wear and tear on our pockets," said director-general Peter Davis.

Sale of Lloyds Banking Group stake left Treasury £230m down

National Audit Office has scotched claim by George Osborne that Treasury made a profit of £60m from selling Lloyds shares

Taxpayers took a hit of at least £230m through the sale of a stake inLloyds Banking Group, the National Audit Office said on Wednesday, in a report that contradicts government claims that it a made a profit on the privatisation of the bailed-out institution.

On the day the 4.2bn shares in Lloyds were sold in September George Osborne tweeted: "Confirm have sold 6% of Lloyds shares at 75p. Profit for taxpayer & important step in plan to get their money back and repair economy."

The independent state auditor cast doubt upon the claim that a profit of £60m had been secured from selling off 6% of the state-owned stake in the bank, after it examined the borrowing costs incurred by the government when it bailed out the banks in 2008.

"Taking account of the cost of borrowing the money to buy the shares, there was a shortfall for the taxpayer of at least £230m," the NAO said.

Even so, it concluded that the transaction represented value for money. It said the Treasury should take the cost of financing the bailout into account when deciding whether to hold on to shares in Lloyds rather than selling them. The government is yet to sell off any of its 81% stake in Royal Bank of Scotland.

Its calculations could suggest that if the remaining 33% stake in Lloyds were sold off at a similar price and in a similar way then the loss to the taxpayer on the bailout could amount to £1.5bn.

The NAO's calculations show the Treasury could have claimed a higher profit of £120m – using a lower average buying price of 72.2p a share rather than 73.6p – by taking into account fees paid by Lloyds to the Treasury.

The chancellor has said that the next tranche of Lloyds shares is likely to be sold off to the public. The NAO said the move was ruled out in September because it would have taken six months to conduct a share sale this way and might not have produced the best return for taxpayers.

The NAO report, which backs the decision to sell the Lloyds shares and the way the sell-off was conducted, sheds some light on the processes considered by UK Financial Investments, which looks after taxpayer stakes in the bailed-out banks.

The financial secretary to the Treasury, Sajid Javid, focused on the NAO conclusion that the sale was value for money. He said: "The proceeds from the sale have reduced the national debt by over half a billion pounds but, as the NAO also rightly points out, the country has had to pay a high price for the extra debt it has taken on because of the financial crisis."

The NAO said that during 2012 and 2013 UKFI was approached by three potential purchasers and informal discussions took place but no deal concluded. Instead UKFI had concluded a sale to institutional investors was the best option.

Executives from UKFI have previously revealed that they ruled out selling the stake at a price above 75p because demand would have fallen away and it would have required selling 60% of the shares to institutions seen as shorter-term investors, such as hedge funds.

Such short-term investors ended up with 20% of the shares sold after approval from the chancellor. The NAO attempted to analyse if the shares that had been bought had been quickly sold on and found that while one institution had reduced its shareholding by about 10%, there had been no change in two institutions' holdings, and one institution had increased its holding by about 20%.

Amyas Morse, head of the NAO, said: "The programme of sales of the taxpayers' holdings of bank shares has got off to a good start. Sale options were reviewed thoroughly and UKFI looks to have got its timing right. The sale took place when the shares were trading close to a 12-month high and at the upper end of estimates for the fair value of the business".

António Horta-Osório, the boss of Lloyds Banking Group, was handed a £2.3m share bonus last month because of the rise in the bank's shares which closed last night at 76p.

Car insurance premiums too high, Competition Commission says

Motor insurance premiums are unnecessarily high for all drivers owing to the complex chain of claims, the Competition Commission has said.

The higher premiums come from the cost of replacement cars and repairs which is paid by the insurers of at-fault motorists.

The Commission discovered that post-accident repairs were often shoddy.

It also raised concerns about difficulties for motorists trying to identify the best value products.

Repairs and replacements

The Commission has been studying the £11bn private motor insurance market for more than a year, following a referral from the Office of Fair Trading (OFT).

It agreed with the OFT that the system was not working well for motorists.

It found that premiums were pushed up because the insurer of a driver who was not at fault in an accident arranges for a replacement car or repair, but the at-fault driver's insurer foots the bill.

"This separation of control and liability creates a chain of interactions which result in higher costs for replacement cars and for repairs being passed on to at-fault insurers," it said.

"The Commission estimates the extra premium costs to be between £150m and £200m a year.

"There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem."

The Commission will now consider ways to fix the market, with a final report published by September 2014.

The options include a cap on the cost of replacement vehicles, or making an insurer of the not-at-fault driver responsible for providing the replacement vehicle.

Alternatively, the insurer of the at-fault driver could manage the claim.

Worries

Other concerns raised by the Commission, affecting drivers of 25 million privately registered vehicles in the UK, include:

"Too many" substandard repairs following an accident
Limited information about add-on insurance products, making it difficult to identify the best-value offers on the market
Price-parity contracts between price comparison websites and insurers, which mean that the policy is not offered more cheaply elsewhere.

The Commission will consider the idea of compulsory audits of repairs and the requirement of clearer information on price comparison websites.

"[These] possible remedies are a further step along the road to getting a market that enables insurers to deliver fully for consumers," said James Dalton, of the Association of British Insurers (ABI).

"We look forward to continuing to engage with the Competition Commission as it carries forward its work and we hope that this will lead to further improvements in the market and lower premiums for customers."

UK housebuilders counter Ed Miliband's land-hoarding claim

Plots are developed as soon as they have planning permission and 557% profit rise 'comes from very low base'

Britain's housebuilders have launched a scathing counter attack againstEd Miliband's claim that they are hoarding land for profit.

The industry said plots are built on as soon as planning permission is secured, and argued that the 557% increase in profits among the nation's four biggest housebuilders this year comes from a very low base following the financial crisis.

Pete Redfern, chief executive of Taylor Wimpey, said: "The industry is only just returning to the point where it is meeting its cost of capital following the most prolonged downturn in housing history.

"The comparison used for profitability is against a point where many in the industry were loss making, so a percentage improvement is rather meaningless."

Britain's chronic housing shortage is expected to push up prices by as much as 8% next year according to the property website Rightmove, unless a flood of new properties are built.

The biggest four developers by turnover – Barratt, Berkeley, Persimmon and Taylor Wimpey – have a collective land holding of almost 300,000 plots.

Miliband is accusing housebuilders of holding on to land to push up values, and claims some "stick-in-the-mud councils" are blocking development.

Redfern strongly rejected the Labour leader's accusation that housebuilders are hoarding land.

"We continue to start all sites as soon as possible once an implementable planning permission is received. Taylor Wimpey specifically and the industry as a whole have only a tiny percentage of sites that have a planning permission, where construction has not been started."

A spokesman for the Home Builders' Federation (HBF), the industry's trade body, said: "Developers don't land bank, all the evidence is there. As soon as developers get a planning permission they want to start on site. Developers are not land hoarders."

One major housebuilder said companies in the sector would be perceived as hugely risky and lose investment if they did not have sufficiently long land bank holdings of typically more than four years.

The HBF said the industry would work with Michael Lyons, the chair of Labour's new independent commission on housing, to improve understanding of the issues.

"We are looking to work with the Lyons Commission to help them understand the complexity of housing delivery going forward."

Lyons said the country needed to build more than 200,000 homes a year by 2020 if demand was to be met and the backlog of under-supply addressed.

Shares in the sector were down on Monday morning, with Persimmon shares 1.7% lower, Barratt down 0.9% and Taylor Wimpey off 0.2%.

Banking reform bill could be approved before Christmas

Bill designed to prevent further banking scandals and misconduct enters Lords for what could be the last time

Andrew Tyrie's work is nearly done. The Conservative politician, who has been a key figure in attempts to clean up the banking system, stood up in the Commons last week to remind fellow MPs of the tasks that had been set for the parliamentary commission on banking standards, which he had chaired.

The first was to report on professional standards in the banking industry in the wake of the Libor rigging crisis, and the second was to outline the lessons that could be learned for the government, while making recommendations for legislative change.

Much of that work may be concluded this week, with the 200-page banking reform bill entering the Lords on Monday for what could be the last time. With just one amendment to the bill still proving contentious, there is an expectation the work will be completed before the Christmas recess.

The legislation includes a package of measures intended to force senior bankers to take responsibility when things go wrong, allowing bankers to be charged with reckless misconduct if their institutions go bust, and forcing them to erect an "electrified" ringfence between their high-street and investment banking operations.

Last week's debate in the Commons coincided with a timely reminder of the scandals that had first set Tyrie and his fellow commissioners – made up of lords and MPs including the former chancellor Lord Lawson and the Archbishop of Canterbury, Justin Welby – upon their task. Lloyds Banking Group was fined a record £28m for a bonus culture that saw staff mis-sell financial products, while Royal Bank of Scotland, which was also bailed out, was fined £60m for breaching US sanctions rules.

"The banks have discovered that the scale of the damage done by the revelations and the scale of the fines that are now being imposed are systemic in implication for their institutions and that has shaken them up a lot," Tyrie told MPs last week. "But I do think the culture at the top of our banks is changing. The task of our legislation is to entrench that change for a generation. We have had this crisis. The horse has bolted. What we have got to do now is devise a stable door that can keep the next horse in."

Stuart McWilliam, a campaigner for Global Witness, said changes to the rules facing top bankers were a sea change because the City regulator, the Financial Conduct Authority, would be better able to hold banks to account. "It gives the FCA the power to hold the most senior bankers personally responsible for failures at their banks – a pretty good incentive for changing bankers' behaviour for the better," he said.

Alan Bainbridge, a lawyer at Norton Rose Fulbright,described the changes to how top bankers are authorised to work in the City as groundbreaking.

The existing approved persons regime will be changed with a new system aimed at top bankers taking responsibility for their actions and a new licensing regime. There is scepticism about whether an offence of reckless misconduct, under which bankers can be tried if their institutions collapse, can be used in practice.

But Conservative MP Mark Garnier, who sits on the Treasury select committee and was on the parliamentary commission on banking standards, likened it to a "nuclear deterrent" in the Commons last week.

One of the most crucial measures is the "electrification" of the ringfence between high street and investment banks. Bainbridge said this was "tantamount" to the Glass-Steagall rules imposed after the Great Depression in the US in the 1930s and only dismantled 15 years ago.

Lord Sharkey, the Liberal Democrat peer whose amendment on capping payday loan rates forced the government to act to restrict high rates of interest, said the electrification was the "key action" from the legislation.

"Parliament will need to keep an eye on how this really works. Will Chinese walls really be sufficient? Will the culture of investment banks continue to dominate the management thinking of retail banks held in the same groups," said Sharkey.

The Policy Exchange thinktank is warning of rising costs to customers from the ringfence, which does not need to be erected until 2019. Omar Ali, UK head of banking and capital markets at accountancy group EY, said the legislation meant that the "fabric of banking is changing" and the UK will have the most stringent set of rules anywhere in the world. Banks could end up becoming too risk averse, which could result in restricted lending to the real economy, he warned.

Even as royal assent comes closer, questions are still being asked about whether legislation can change the culture of banking. Garnier told MPs last week that a new industry body monitoring banking standards and the emphasis on top bankers taking responsibility was significant.

"An organisation such as HSBC has 270,000 people working for it, so no matter how sincere the integrity of the individual at the top, we must work out a mechanism to drive integrity throughout the system. Personal accountability for the senior management of the banks is crucial in that.

"I keep coming back to this point: if [HSBC's chairman] Douglas Flint is waking up at 3 o'clock in the morning worrying that somebody in Kidderminster is getting something wrong, that is a good thing."

Sharkey is among those who think that increased competition on the high street is also needed. The big four – Lloyds, RBS, Barclays and HSBC – control over 75% of the market.

"The banking reform bill addresses the regulatory issues, as it should. Banking culture is less easy to fix. There are some who believe that there is still no real competition in our banking system," Sharkey said. "What [will] keep them honest is competition for customers."