UK CPI data – comment

Commenting on today’s UK CPI data, Andy Scott, Associate Director at Chatham Financial, said: “Sterling recovered some of its early session losses following inflation data that showed consumer prices rose at a stronger than expected pace last month. The data adds weight to the argument against the Bank of England cutting interest rates, following a significant rebound in the monthly data on the economy since December’s election. While the jump higher in January’s CPI number doesn’t in itself mean an end to the two-year downtrend in the pace of inflation, there were signs of upwards pressure on future prices that will likely put an end to any discussions of an imminent rate.

“Sterling is trading close to its highest levels since the Brexit referendum result in 2016 against a number of its G10 counterparts, including the Euro, which is weakening due a recession in German manufacturing. The reduction in UK political instability and increased certainty over Brexit have driven renewed interest in the UK currency, along with an upturn in optimism over the UK economy. With the Eurozone economy bogged down by continued headwinds from the numerous challenges facing the manufacturing sector, there is a lot of potential for Sterling to gain further against the Euro in the months ahead, particularly if the Boris bounce translates into a meaningful economic rebound.”

Research reveals Brits bemoan stupid colleagues as biggest bugbear of office life

More than a third (35%) of UK office workers have said being forced to deal with unskilled and inefficient colleagues is the biggest bugbear in their daily life, according to a new survey of 1,000 office workers.

Women in particular appear to be fed up carrying their colleagues, with 40% claiming this is their biggest annoyance, compared to 30% of their male counterparts.

Spending long hours at work because their office doesn’t offer flexible working (30%) follows close behind, along with dealing with “out-of-touch” management (27%) and being forced to regularly work outside of “core working hours” (27%).

The results are part of a new independent survey commissioned by accounting automation software specialists, CaseWare UK looking at the attitudes of UK workers to office life and how they adapt to the introduction of new technology.

Given that unskilled colleagues are the biggest source of annoyance, it’s no surprise that improving staff training and development (31%) is in the top three priorities for workers wanting to improve their office environment, just behind introducing more reliable technology (34%) and removing unnecessary processes (32%).

One in five (20%) would urge their employer to introduce flexible and mobile working policies to make their workday more tolerable, while 18% want more focus of hiring qualified staff and improving recruitment.

Shez Hamill, Director at CaseWare UK, said: “There appears to be no shortage of annoyances in the workplace that get people’s blood pressure rising. Today’s workforce is increasingly demanding and business leaders need to wake up to issues their employees are facing, or they will see them heading for the door. Technology can be a great enabler within a business, but if the commitment to maintain and improve processes isn’t there, then it can be immensely frustrating for workers.”

Research by CaseWare UK in 2016 showed that 12% of workers said they were dealing with poor standards of technology. This figure has more than doubled to 26% who say their workplace features poor, out of date technology – including both software and hardware.

Top 10 office gripes
1. Dealing with unskilled co-workers
2. Keeping up with constantly changing industry regulations
3. Spending long hours in the office due to lack of mobile/ flexible working
4. Dealing with out of touch management
5. Working outside of core working hours (e.g. 9:00am to 5:30pm)
6. Poor standard of workplace technology
7. Inability to update systems and processes
8. Inability to attract new/ young talent
9. Non-responsive board of directors
10. An over reliance on manual processes

Value of UK exports to non-EU countries rises in 2019

The value of British goods sold to countries outside of the EU increased throughout 2019, according to Lloyds Bank Commercial Bank. The increase helped offset the falling value of UK exports to the continent.

While analysis of the latest trade figures from HMRC revealed that the EU is still the UK’s single largest trading partner, the value of British goods exported to the continent fell from £173.3 billion in the year ending Q1 2019 to £168.5 billion in the year ending Q3 2019, according to the Lloyds Bank International Trade Index.

Prior to this, the value of UK goods exported to the EU had grown consistently since 2016.

The Index, compiled in partnership with IHS Markit, showed that the UK sold £177.1 billion of goods to markets outside the EU in the year ending Q3 2019, up from £170.9 billion in the year ending Q1 2019.

Accounting for the trend, the report shows over the last three years, UK exports to Asia and the USA have grown at a compounded rate of 11.3% and 7.7% respectively, while new exports orders to the EU grew by just 6.9% per year.

The value of British exports to the UK’s top 10 markets in Asia grew over the same three-year period. Whisky and spirits exports grew rapidly, with sales to Vietnam and India increasing by 204% and 73% respectively.

The Lloyds Bank International Trade Index also found economic contraction in Europe contrasted with the performance of countries outside the EU in the final quarter of 2019, highlighting further opportunities for UK exporters in far-away markets in 2020.

According to IHS Markit PMI data, the economies of Germany and the Netherlands – two of the top five destinations for UK exports – softened for the first time in over six years.

Germany’s PMI for Q4 2019 was 49.7, down from 50.3 in Q3, while the Netherlands saw an index of 48.5 in Q4. Weaker economic conditions were also recorded in Italy, Austria, Poland and the Czech Republic (49.8, 46.8, 45.9, 44.8). A reading of above 50 indicates growth, while one below 50 signifies a decrease.

Meanwhile, economic growth was measured in the USA (51.9) and China (52.6), and across Asia (51.1) between October and December.

Gwynne Master, managing director and global head of trade for Lloyds Bank Global Transaction Banking, said: “It’s encouraging to see that UK exporters aren’t limiting themselves to markets close to home. The fluctuating economic environment could prompt more businesses to take advantage of a diverse range of overseas markets, which in turn will hopefully enable increased sales and revenue for UK exporters.

“Last year, tension between the world’s biggest economies undoubtably had an impact on global trade. Productive talks and a new deal between China and the US signed last month could represent the start of this tension dissipating, creating further opportunities for UK exporters.”

The Lloyds Bank International Trade Index brings together export growth and supply chain indicators to provide timely insights into the challenges and opportunities for UK exporters.

The Airbus settlement – the significant facts behind the figures

The deferred prosecution agreement (DPA) between Airbus and the Serious Fraud Office means the company will pay €991M – making it the UK’s largest DPA – as part of a €3.6 billion global settlement. But Aziz Rahman of corporate crime solicitors Rahman Ravelli believes it is not just the numbers that are important about the settlement.

 

While Airbus is probably relieved to have avoided prosecution over alleged bribery, the huge amount of money it is having to pay to settle such allegations has generated headlines. But the Airbus settlement is noteworthy for other reasons.

For a start, it marks the first time that the SFO has decided to use the wide territorial reach of the UK’s Bribery Act. Yes, the possibility has always been there but this is the first occasion where it has been fully utilised. Airbus has come under investigation in the UK – and effectively been penalised here – for activity that was not conducted in the UK. The counts on the indictment cover Airbus conduct in Malaysia, Sri Lanka, Taiwan, Indonesia and Ghana. There has been enforcement in the UK by the SFO, not to mention widespread mutual legal assistance between countries. The SFO has been emboldened by the collaboration effort and has shown it is well placed to co-ordinate with others in the investigative process. This accords with many of the soundings that have been growing ever louder from the SFO’s current regime.

Whether this case heralds a new era of post-Brexit cooperation – enquetes sans frontieres, for want of a better phrase – is something that will only become clear with time. But it would not be going too far to say that this is a case that sets the standard for future investigations – and raises the bar high for what is expected of corporations.

Significantly, the SFO examined the internal investigation documents – including interviews with Airbus employees – as Airbus waived legal professional privilege on a limited basis. The SFO also undertook its own independent investigation. This could be seen as an indicator that the SFO is looking to create a culture of companies under investigation waiving privilege.

If that is the case, it is an approach that is being taken in spite of, rather than as a result of, the 2018 Court of Appeal ENRC judgement; which overturned a controversial High Court decision that had narrowed the scope of legal professional privilege in internal investigations. This is arguably not a surprise. In its “Corporate Co-operation Guidance’’ issued last year, the SFO asserted that if an organisation claims privilege it will be expected to provide certification by independent counsel that the material in question is privileged. And before that guidance was issued, some senior SFO figures had talked of the possibility of companies being required to waive privilege in order to show co-operation.

While this settlement emphasises the importance the SFO has come to attach to privilege, it also shows how the wider issue of co-operation carries huge weight in such an investigation. The DPA explains in great detail the lengths Airbus went to in order to assist the investigation. To name just some of its actions, Airbus confirmed the existence of corruption concerns, identified issues that investigators were unaware of, reported conduct that had happened largely overseas and collected more than 30 million documents. In addition, its new board cooperated fully with investigators and created a new company-wide approach to compliance.

There can be little doubt that if Airbus was to receive lenient treatment it had to show a major departure in its workplace culture from the ways it had previously set about obtaining business. The fact that it did this is a feather in its cap. As for individuals, given the sheer amount of documentation it is hard to see how a smoking gun will be found in the arsenal which has been inventoried. It will be a brave decision by the SFO to once again test the strength of its convictions about individuals under investigation, when so far their efforts have led to no convictions at all. And a potential further defeat could take the shine of what is, on the face of it, a stunning victory.

Airbus can, therefore, pat itself on the back, having engineered that all-important escape from prosecution. But this is a case that shows the stringent demands now placed on any corporation that wants to have any chance of avoiding a trial.

On paper, the SFO seems to have secured the silver medal on the podium in terms of the penalty values. However it will perhaps come as no surprise that the US has again raised the stakes with the value of the penalty it has imposed but has graciously allowed the French to take the credit. After all, this is their domain, and therefore their problem. And the fact that Boeing may have issues may have had some bearing on this.

 

Small business growth forecasts hit 18-month high

Two in five small business leaders (39%) predict growth by 31 March – the highest level for 18 months, according to new research from Hitachi Capital Business Finance. By industry sector, this quarter sees a rise in growth outlook registered across the board in all but two sectors, with a significant upturn of growth projections in real estate (49%), IT and telecoms (49%), legal (47%) and media (46%).

In recent weeks, there has been widespread speculation on the likely impact of Brexit on the UK business community. The new data suggests smaller businesses are more likely to see uncertainty as an opportunity. Seasonal businesses, those that live with change and the need to adapt on a regular basis, are more likely to predict growth for the months ahead (40%). Also, small firms that invest in their technology assets are more likely to foresee opportunities to adapt and grow (47%).

Regionally, small businesses in the East (43%) join London (47%) and the North West (45%) as having the most businesses with a positive outlook for the months ahead. Over the last 12-months, there has been a significant upturn in growth predictions in London (rising from 36% to 47%), the South West (from 29% to 38%) East (28% to 43%). In contrast, small enterprises in Wales and Scotland were the least likely to predict growth.

Interestingly, older businesses (those that have been trading the longest) demonstrate the biggest surge in growth outlook, suggesting a willingness to adapt to change. The ‘confidence gap’ between younger and mature businesses shows clear signs of closing.

Gavin Wraith-Carter, Managing Director at Hitachi Capital Business Finance said: “As the UK economy enters a new chapter, the latest findings from our quarterly tracking research suggest that UK small businesses are starting a new year, a new decade and a new economic era with a positive outlook. What is heartening is the diversity of this confidence, which spans regions, sectors and older businesses modernising.

“At Hitachi Capital Business Finance we are producing a new series of training and support guides to help small business manage their enterprises through the Brexit transition period. In addition, our smart funding solutions give small businesses greater flexibility in the way they manage their cashflow and help their enterprises through seasonal highs and lows. The UK economy is going through a period of uncertainty – at Hitachi Capital Business Finance we are helping small businesses to live with uncertainty and to see it as an opportunity to innovate and grow.”

Comment: Why Healthy Teams Deliver Better Returns

Sports and business breed fiercely competitive environments where success is determined by dedication, discipline and heart. In my experience, the thrill of a rain-lashed rugby pitch in West London is similar to an oak-panelled boardroom above Manhattan. Both attract competitors who are committed to being best-in-class.

You may think victory in sports and business are determined primarily by individual talent. I disagree. As with sports, entrepreneurs and companies succeed only when they have the right people and culture. Even a talented player cannot deliver wins on a dysfunctional team.

Healthy Cultures Yield Better Client Outcomes

Over time, any group of people will develop a set of behavioural norms that dictate how they interact, set priorities, make decisions, share feedback and process information. Peter Drucker, the father of modern management theory, calls the residual of these collective norms and interactions “firm culture”.

Firm culture in the finance industry is often caricatured by the media. Financial firms are presented as profit-driven boiler rooms where financial success is everything. Its employees are usually portrayed as driven go getters, ruthlessly pursuing money and power; or sometimes they’re brilliant but eccentric number-crunchers using mathematical wizardry to divine investing secrets. If you entered finance with Hollywood cinema as your guide, you would prepare by taking self-defence and pre-booking a monthly hilltop retreat.

This view is clearly an exaggeration. However, like most caricatures, it contains a kernel of truth. While other industries have steadily adopted progressive practices that emphasize firm culture and employee engagement, investment managers have clung doggedly to outdated norms. This is beginning to change – but why has it taken so long for investment managers to move forward?

It is partly because investors have been slow to hold their managers accountable for firm culture. A common client refrain is, “All we care about are returns!”. Perhaps more troubling is that some clients even correlate a negative culture with a quality manager. These clients believe the outdated Hollywood caricature of a star manager – the ruthless, big-spending, pin-striped egomaniac – will deliver better results.

They are wrong.

The truth is that investment managers with unhealthy cultures deliver demonstrably worse client outcomes. This is supported by the research. In 2015, the Journal of Portfolio Management published a paper by Jason Hsu, the CIO of Rayliant Global Advisors, demonstrating that investment firms with unhealthy cultures deliver worse results for their clients. Stated differently, firms with good cultures put more money in clients’ pockets (and they also present less investment operations risk). This is why the Financial Conduct Authority has taken such an interest in firm culture, including by publishing the FCA Culture and Governance Handbook in late 2015.

So, do you care about investment performance? I might safely assume the answer is “yes”. If so, then you should also care about the culture of the firm managing your investment.

Why Unhealthy Cultures Can’t Win

Why do firms with healthy cultures outperform for their clients? It is because unhealthy cultures are a breeding ground for misaligned incentives, ill-informed decisions, and rash actions. These cultures undermine collaboration and feedback; they stifle diversity and meritocracy; they reward money and power; and they promote fear and blame. As Hsu writes, “Blame has many brothers, including fear, defensiveness and self-righteousness. When the four horsemen are present, personal accountability, creativity, openness and learning go into exile.” Managers working in this environment are poorly positioned to act in the best interests of their clients.

Over time, these managers will lose.

Today, UK managers with unhealthy cultures are struggling with asset outflows. They try to staunch the bleeding by poaching “star managers” from other firms – but this strategy is misguided. In both business and sports, a star’s talent will never manifest if it is undermined by a culture of blame. This is well-understood in the academic literature, but retail managers have been slow to adapt. They continue spending millions on star talent only to see it flame out.

By way of analogy, the most winning team in major international sports is the New Zealand All Blacks. Despite having star players, they attribute their sustained, century-long success to team culture. This talented team eschews arrogance and blame. Instead, they adopt 15 clear principles that include “Create a Learning Environment”, “Follow the Whanau (Family)”, and “Know Thyself”. Talented players who cannot adapt to the culture do not remain on the team. For the All Blacks, healthy culture is deliberate and fundamental – and as a result, they are universally recognized as the most creative, dynamic and effective rugby team that has ever played the game.

FIRM CULTURE AT HENDERSON ROWE

There is robust academic research on the importance of firm culture and its impact on performance. But my views are also based on my personal experience at Henderson Rowe.

I have the unique privilege of having spent most of my entire career in finance working for the same firm. Over its 20-year history, Henderson Rowe has been the rare boutique investment manager in a ruthlessly competitive UK market. Its in-house investment research has always been strong – it was an early innovator in smart beta, ETFs, and other low-cost investment products. I remain proud of the work we did and continue to do at Henderson Rowe.

But prior to Henderson Rowe’s acquisition by Rayliant Global Advisors in 2018, firm culture was a secondary consideration. Collaboration was limited and there was little appreciation for how broader firm culture meaningful impacts performance. Learning about the relationship between culture and performance – and seeing the positive effect on our business – has been a revelation. Jason Hsu’s vision for a new kind of investment manager has transformed my professional experience and reinvigorated our purpose at Henderson Rowe.

Like the New Zealand All Blacks, Henderson Rowe today is a principles-driven organization that puts the team before the individual. Our culture is both deliberate and fundamental, which means that talented employees who cannot adapt do not stay on the team. I’m pleased to report that, as with the All Blacks, our unrelenting focus on culture is delivering results: better performance for our clients and a happier workplace for our team.

The results of Henderson Rowe’s focus on culture are not abstract. In addition to a year of excellent investment performance, over the past year we have delivered:

  • global, institutional-quality investment strategies that are based on robust, institutional-quality research;
  • a new pricing model that is among the most transparent in the industry;
  • increased diversity at both the management and governance levels (four of our Directors are racial or ethnic minorities in the UK (with two women and two men), as are its Head of Research, Head of Investment Operations, Head of Compliance, and Finance Manager;
  • new culture-related practices that are advocated by industry regulators and activists;
  • improved culture and employee engagement through automated pulse surveys and human resources data analytics;
  • strengthened compliance and investment operations infrastructure to reduce transaction costs and improve operational controls;
  • transparent, institutional quality strategies that are delivering better net-of-fee performance for its clients;
  • a robust communications program built around client education and financial literacy;
  • regular team-building, conflict resolution, and other culture-related trainings; and
  • an active role in the community through several charitable initiatives, including direct volunteering, as well as promoting key charities at client and investor events.

Although I was a seasoned finance professional with well-established working norms, the cultural transformation at Henderson Rowe has given me renewed energy and purpose. As clients and others see the results of this transformation, I am convinced it will ultimately extend to the broader finance industry.’

By John Whick, Senior Investment Manager at Henderson Rowe

Banks risk losing access to major talent pool

Against a backdrop of intense skill shortages, the financial services sector risks losing access to a major talent pool because of a knee-jerk reaction to IR35 legislation. That is according to specialist insurer, Kingsbridge.

From April this year, businesses engaging independent workers will become responsible for setting the tax status of these individuals. As part of this reform, the tax liability will also transfer from the contractor to the fee-paying party in the supply chain, which is typically the recruiter or the company that directly engages the worker.

In response to these changes, a number of high-profile banks – including HSBC, Morgan Stanley, Barclays and Lloyds – have revealed that they will no longer engage with contractors who work through personal services companies, instead employing individuals on pay-as-you-earn (PAYE) terms or via an umbrella company.

“While at first sight this may seem like a risk mitigation exercise, it’s actually a wholly unnecessary knee jerk reaction” says Nicola Hayman, Legal Manager at Kingsbridge. “Even by HMRC’s own calculations, the vast majority of PSC contractors are genuinely self-employed – and by placing blanket bans on professionals who choose to work in this way, banks are missing out on access to a valuable pool of talent.”

“According to data released last month by the Office for National Statistics, the number of self-employed workers in the UK has now reached a record five million people, representing 15.2% of Britain’s workforce. It is clear that highly skilled workers increasingly crave autonomy. Any business which presumes that PSC contractors will automatically move across to PAYE – rather than looking for opportunities elsewhere – may be in for an unwelcome surprise. However, with the right processes in place to protect against risk, there is no reason why organisations should not continue to engage genuine PSC contractors.”

The Money Stats – January 2020 – UK 2019 Household Debt Closely Parallels Government’s

In the year up to November 2019, UK households borrowed almost as much as the Government, demonstrating that debt remains both a private and public sector issue, according to the January 2020 Money Statistics, produced by The Money Charity.

The latest data available from the Bank of England and ONS shows that UK households borrowed almost as much as the UK Government in the year to November 2019. In that period, households borrowed an additional £46.2 billion, taking total household debt to £1,669 billion. Over the same time, the UK Government increased its net debt by £48 billion, putting the country’s total net debt at £1,644 billion.

The similarity in these figures helps give an important reminder that, in looking at the wider issue of debt for the economy, and indeed across society, private sector debt can be as important, or even more important, than public sector debt. Prior to the 2008 crash, public sector debt grew gradually to around £500 billion, while household debt increased rapidly from £600 billion in 1999 up to £1,400 billion in 2008, according to Bank of England data.

The majority of this additional household debt went into the housing market, which in turn raised house prices. Similarly, in the year to November 2019, most additional household debt, £39.6 billion, went into the housing market. Overall consumer debt increased by £6.5 billion, while within this total, credit card debt shrank by £359 million, continuing the trend we reported on previously in last month’s report.

With the Office for Budget Responsibility’s March 2019 forecast projecting that, by 2023-24, household debt will reach £2.425 trillion, an average household debt of £86,388 (assuming household numbers track ONS population projections), there appears to be no immediate likelihood of this upward trend stopping.

Paul Frost, Interim Chief Executive of The Money Charity says: “At The Money Charity, we fully accept that debt is the necessary reality for nearly all of us. When taken on from a well-planned-out and considered position, it can be an effective means of achieving our financial goals and increasing our financial wellbeing. However, when debt is taken on in an unmanageable or unsustainable way, it becomes a pressing problem.

“Clearly like any ‘average’ figure, these headline numbers are inclusive of a wide range of sustainable and unsustainable debts, but the concern remains that the ever-increasing debt levels are indicative of more and more people taking on debt which they simply cannot manage. We would urge anyone facing this sort of situation to urgently seek out one of the many sources of available support.”

Other striking numbers from the January Money Statistics:

  • The number of UK mortgages with arrears of over 2.5% of the remaining balance fell by 20 a day. (P13.)
  • On average, a UK household spends £3.92 a day on water, electricity and gas. (P14.)
  • 14 properties were repossessed every day in Q2 2019 in England and Wales, or one every 1 hour and 40 minutes. (P13.)

Just Mortgages expands onsite New Build proposition

Just Mortgages has given the green light to further expansion of its specialist New Build division. The team is set to reach 23 brokers by the end of Q1 2020 – up from eight at the start of 2019. On the back of a successful year, there are now plans for the broker force to more than double in size over the next two years.

The Just Mortgages New Build division works directly with developers to ensure prospective purchasers have access to face-to-face advice from a fully-qualified broker. This differs from other leading broker firms, whose offering is predominantly telephone-based.

A Just Mortgages broker will meet with buyers to discuss their circumstances, help them identify their mortgage and protection needs, and work with them to find the most suitable financial solution on an individual basis.

This ensures that customers are getting the advice they need. Through brokers’ relationships with developers, it also gives them peace of mind that purchases are moving to completion as quickly as possible.

There is no contract and no obligation to use Just Mortgages brokers. Liability remains with Just Mortgages and an introduction fee is available.

The further growth of its New Build division will enable Just Mortgages to offer this service to a wider range of developers and prospective purchasers.

Alongside the growth in broker numbers, the division has also taken on new business development and managerial staff. Most recently, Rebecca Ferguson has joined the team and will be supporting developers in the north-west of England, working closely with divisional sales director Ciaran Wilkinson.

John Doughty, financial services director for Just Mortgages New Build, commented: “There is strong demand for new housing but it’s important that would-be buyers get the right mortgage deal.

“We’re committed to working with developers to help purchasers access the finance they need.

“It’s important that Just Mortgages brokers deliver our service in person. This enables us to build a strong relationship with developers, estate agents and with potential purchasers.”

FCA money laundering prosecutions – comment

Commenting on the news that the FCA has so far brought no criminal prosecutions under the 2017 Money Laundering Regulations, John Dobson, chief executive of SmartSearch, said:

“It’s vital that firms comply with money laundering regulations – not just for compliance reasons but to help stop dangerous criminals in their tracks. But regulators need to show they’ve got teeth and are taking their responsibilities seriously too.

“Where there have been serious breaches, the FCA needs to act fast to make it crystal-clear that this will not be tolerated.

“Further changes to anti-money-laundering rules are due to come into force at the end of the year that will widen the definition of money laundering, and increase jail terms for those found guilty of criminal offences. The FCA needs to up its game or risk lulling firms into a false sense of security.”