Cable's Royal Mail sale failed to deliver

Posted on: 09 April 2014 by 50connect editorial

What chance do Independent Financial Advisers have when their lords and masters find themselves in hot water!

Vince Cable underfire for botched Royal Mail sell-off

Both Vince Cable, the Coalition’s business secretary, and the Financial Conduct Authority, the industry’s governing body, have endured a tough week after critics accused them of costing the country billions.

Cable was in the dock over the sell-off of Royal Mail. The National Audit Report claimed that “undervaluing the share sale had cost the taxpayer £750m in a single day.”

The Report went on to criticize the government’s “deep caution” and for ignoring repeated warnings that the share price of 330p was too low.

Cable refused to apologize during a fierce Commons debate - yet it’s clear that many of the institutions that advised the government over the privatization benefited from the low share price, as well as a larger allocation (which most sold very quickly) because of their privileged position.

The business secretary said: “The last thing I intend to do is apologize. The privatization has been a success and there was a real risk that the floatation could have failed if the shares had been priced higher.”

That was hardly likely as the NAO revealed that the demand for shares was 24 times the maximum available to investors, yet the banks that were overseeing the sale advised the government there was not sufficient demand to justify a significantly higher figure!

The verdict of many on the Royal Mail privatization is that, once again, the City ran rings around the politicians and the taxpayers lost out.

The FCA’s problems were more self-inflicted.

They started with a press briefing last Thursday that discussed a forthcoming inquiry into pension and insurance policies. After the recent annuity revolution in the Chancellor’s Budget, the last thing the insurance industry needed was another full-scale investigation into its behavior going back four decades.

But that was what the initial news reports claimed. “The City regulator (FCA) is to investigate about 30 million insurance company policies over concerns that customers are subject to ‘unfair’ conditions. The investigation will include pensions, endowments, investment bonds and life insurance policies sold in the UK between the 1970s and 2000.”

The announcement did little for the insurance companies’ shares, which had already taken a hit after the Budget’s annuity announcements. Some stocks went down by as much as 20% on this latest news.

The FCA had to issue a clarification on Friday, especially as the original announcement had been scheduled to appear in its annual business plan the following Monday. But, unfortunately, that clarification did not appear until 2.38pm on Friday.

The FCA’s boss, Martin Wheatley, admitted it was “not our finest hour” – while Andrew Tyrie, chairman of the Treasury Select committee, called the affair “an extraordinary blunder”.

Mr. Wheatley added that he had no intention of resigning, but the subsequent intervention of George Osborne, the chancellor, has raised the stakes.

The chancellor wrote to the FCA’s chairman, John Griffiths-Jones. As well as being “profoundly concerned” by the damage it had caused Britain, Osborne added: “I expect you and the FCA board to do everything possible to make good the damage.”

As the FCA had already ordered its own investigation into whether the information released was market-sensitive, Osborne has told the FCA to consult with his own officials at the Treasury and made it clear that he expects to discuss the “emerging conclusions” before publication.

Clearly, the information was market sensitive because of the way the insurance companies’ shares reacted. New technology also played its part. The FCA briefing was given for Friday’s newspapers, but those stories go online on Thursday night, so news of the FCA’s investigation was ready and waiting by the time the markets opened on Friday.

If the FCA were naive over the briefing, it was certainly sluggish in reacting and providing calming clarification. The markets and traders, including hedge funds, had over six hours of business before the FCA made its statement and the insurance shares were able to recover some of their losses late in the day.

An unnamed insurance company official summed it all up: “It was a complete and utter cock-up, but we are not calling for Wheatley’s head. We do believe there should be consequences and he should not escape this disaster unscathed.”

These two stories demonstrate just how sensitive the financial world is in the current economic environment with all the wonders of modern technology.

If those at the very top have trouble coping with the pressures, regulations and instant-reaction of the financial market place, appreciate just how carefully your independent financial adviser has to tread.

Rules and regulations are there to protect the customer, but occasionally commonsense gets lost in the mass of form filling and credit and computer scoring.

Hard-and-fast rules tend to create problems and increase frustration, especially in this technical age. Your IFA will do their best to find a way through - if it’s in your best interests and what you want. Never forget the old saying “Rules are for obedience of fools and the guidance of wise men.”


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