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Bank rescues could cost state £11bn

July 13th, 2009 | No Comments

• UK Financial Investments says recovering taxpayers’ investment will be a challenge
• Fall in government stake is £6.2bn for Lloyds and £4.7bn for RBS

Bank share price performance (pdf)

The government admitted this morning that it was sitting on a loss of almost £11bn following the partial nationalisation of Royal Bank of Scotland and Lloyds Banking Group.

UK Financial Investments (UKFI), the body that manages the taxpayers’ stakes in the two banks, said this morning that recovering the taxpayers’ investment would be “challenging”.

“Every UK household will have more than £3,000 invested in shares in RBS and Lloyds,” said John Kingman, the UKFI chief executive.

The paper losses have been incurred because RBS and Lloyds shares are trading well below the value at which the government bought into the banks. The details emerged as UKFI set out its strategy to maximise the value of its investments for the taxpayer and to eventually return the banks as strengthened institutions to full private ownership.

UKFI said it would not set any fixed timetable for disposing of the shares and expected to undertake a number of capital markets transactions over a sustained period.

“Our investee banks face significant legacy losses and the inevitable effects of the recession. Nevertheless, we believe they now have the capital resources to weather these difficulties and to emerge from the current environment with their strong franchises and profitability intact,” UKFI said.

According to the report, the Lloyds stake is worth £6.2bn less than the taxpayer paid for it, while the RBS stake is worth £4.7bn less.

The taxpayer bought into Lloyds at an average of 121p a share and RBS at 51p, but shares are trading below those levels – Lloyds at 62p and RBS at 35p – making any sale before the next general election unlikely.

Today’s annual report is a rare opportunity to hear from UKFI and the City will be examining its report closely to look for any guidance on whether any shares will be sold soon.

The body is still being run by a temporary chairman, Glen Moreno, who stepped in six months ago after Sir Philip Hampton was poached to chair RBS.

In February, the chancellor, Alistair Darling, said he expected to make a decision on a permanent replacement “in the very near future”, but City sources believe the government is struggling to find a permanent replacement for Hampton.

Moreno ran into controversy because of his links to Liechtenstein Global Trust (LGT), a private bank accused of aiding tax evasion, and is not thought to have applied for the full-time position. Kingman is a civil servant, elevated from the Treasury to take on the role of UKFI chief executive.

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Darling rules out radical City changes

July 8th, 2009 | No Comments

• Chancellor rejects caps on pay or break-up of banks
• Lib Dems say plans mark return to business as usual

Alistair Darling stepped back today from a radical overhaul of Britain’s banks when he ruled out caps on bankers’ pay or breaking up the biggest City institutions.

Pointing to the importance of 1m jobs in financial services and the £250bn of tax generated by the sector in the past nine years, the chancellor’s much-anticipated response to the current “severe financial crisis” rejected demands for major reforms by opposition parties and the Bank of England governor Mervyn King.

But Darling told the Commons that “irresponsible pay practices made banks take too much risk” and that bank boardrooms “had little appreciation of what was going on inside their own businesses”. Proposals for boardroom reform will be announced in an interim report by the City grandee Sir David Walker next week.

While Darling outlined steps to give the Financial Services Authority (FSA) new powers for financial stability, the current “tripartite” system involving the FSA, the Bank of England and the Treasury will remain largely intact after today’s 176-page white paper on reforming financial markets. Banks will be have to hold more capital but it is not immediately clear how much, or what the impact of that will be.

On bankers’ bonuses, the chancellor wants the FSA’s code of conduct on pay, due to be finalised later this year, to be more transparent. The regulator will have to report annually on how banks are avoiding excessive risk-taking with their bonuses and announce how it will deal with firms that do not comply.

The City regulator has already warned the 45 biggest banks and financial firms that if their pay deals entice traders to take too much risk, they will be penalised by being forced to set aside more capital – or even face fines. “We need a change in culture in the banks and their boardrooms, with practices that are focused on long-term stability and not short-term profit,” Darling said. “The FSA has powers to penalise banks if their pay policies create unnecessary risk, and are not focused on long-term strength.” The first task of a new Council for Financial Stability – which is being set up to formalise the current tripartite system – will be to tackle bank remuneration policies.

But the chancellor’s programme for reform was criticised by shadow chancellor George Osborne – who wants to tear up the current system – and Vincent Cable, the Lib Dem Treasury spokesman, who said the plans would be welcomed by bankers. Cable said: “This paper will be greeted with a sigh of relief in the City since it marks a return to ‘business as usual’.”

The British Bankers’ Association welcomed the paper. Angela Knight, BBA chief executive, said: “Banking is a global business and reform needs to be thoughtfully handled so moves in the UK dovetail with those overseas, ensuring the UK sector remains competitive. Otherwise business could move again.”

The chancellor announced new legislation would be introduced:

• To create the new Council for Financial Stability.

• To force banks to pay a fee for a money advice service for consumers, and pre-fund the deposit protection scheme that pays out to savers when banks collapse – a reversal of current policy that will prove unpopular with banks.

• To give the FSA a new statutory objective of financial stability and tougher powers and penalties against misconduct, including regulation of “systemically” important hedge funds. The FSA will have wider powers to close down firms.

Darling risked inflaming the row with the Bank of England over whether banks were “too big to fail”, saying that breaking up banks was too simplistic an approach to the problem as both large and small banks could cause systemic meltdown.

He wants banks to have a pre-arranged plan to break themselves up easily in the event of collapse and set aside more capital. In a move that could ultimately lead banks to downsize through what has been described as a “regulatory tax”, banks will need to hold more capital depending on the cost of bailing them out. Darling said banks would need “to hold capital at a higher level that reflects not only the possibility, but also the cost, of failure”.

They will also be required to “lean against the cycle” and build up capital cushions in the good times, and also be prevented from over-extending themselves with loans during the boom years.

Darling also tried to tackle the reduced competition among banks and building societies since the crisis erupted – notably because the government allowed HBOS to be taken over by Lloyds TSB. He wanted to encourage “non-banking” institutions into the sector and indicated that when taxpayer stakes in banks were sold, competition issues would be borne in mind.

The stake in Northern Rock would be disposed of “as soon as appropriate in a manner that promotes competition”.

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Treasury to unveil financial reforms

July 8th, 2009 | No Comments

In a response to the financial crisis the chancellor will extend the highly visible risk alerts for tobacco and fatty foods to include mortgage and pension products

Alistair Darling will sketch out plans today for a health warning system for financial products as the government seeks to show that consumers will benefit from the Treasury’s wide-ranging revamp of the banking industry.

In a much-anticipated response to the financial crisis of the past two years, the chancellor will look at ways of extending the highly visible risk alerts for tobacco and fatty foods to include mortgage and pension products.

The Treasury, braced for criticism that its lengthy document ducks some of the key reforms to prevent another systemic breakdown of the financial sector, will announce a three-pronged strategy. Darling wants improved regulation of the financial system, better management of banks and a better deal for consumers.

Darling has made it clear that he intends to implement all 27 recommendations made by Lord Turner, the chairman of the Financial Services Authority, in his April review of what went wrong in the City.

But the chancellor is likely to concede that it is impossible to implement all the changes at once, with some reforms pushed through immediately and others put off until the next parliament. Among the immediate changes are the requirements for banks to set aside more capital if they provide incentives for traders to take big risks, and for credit default swaps to be pushed through a central clearing system rather than traded in private.

The combined white and green paper will reflect Treasury opposition to a separation of high-street banks and investment banks, but will support the call from Mervyn King, governor of the Bank of England, that commercial banks have a “last will and testament” to make it easier to break them up in the event of collapse.

Consumer groups have been pressing hard for changes and the chancellor is expected to stress that the rebuilding trust in banks is a vital part of any reform package. Darling is concerned that the consolidation of the banking industry since 2007 has reduced the appetite for competition among the major players .

Mick McAteer, director of the Financial Inclusion Centre, said: “Competition in the UK banking sector has been weak due to the stranglehold the big players have on the high street. As a result of the financial crisis, there is a risk that they will consolidate this stranglehold and that competition will be further undermined.”

McAteer also called for bank boards to exert stronger controls on powerful chief executives, a subject that will form a central plank of the review by City grandee Sir David Walker, due next week. Darling is likely to say that the FSA already has considerable powers to influence the make-up and performance of bank boards but that a new code of practice will be crucial to prevent the excesses of the past.

The Treasury plans to expand a pilot scheme in the north-east and north-west, which has been helping bank customers get financial advice. Darling is also keen to build on recommendations from Lord Mandelson for tougher controls on overdraft charges levied on small businesses.

The chancellor will outline his plans at lunchtime while his City minister, Lord Myners, will field questions from the Commons Treasury select committee shortly afterwards.

Myners hit out at plans from Brussels for a crackdown on hedge funds, many of which are based in London.

Myners expressed concern at the “protectionist impact” of the plan, which he said would be costly for pension and investment funds. The City minister also said the hedge fund managers threatening to quit the UK would “make my job harder” in the negotiations with Europe.

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Cleaning up the City: a wishlist

July 7th, 2009 | No Comments

Alistair Darling’s white paper is unlikely to leave teeth marks on the City – but here are some measures that I think would help

It is hard to believe it has taken this long, but, nearly a year after the banking system imploded, the UK Treasury is about to suggest some new laws to make sure this never happens again.

My colleague Jill Treanor is producing a checklist of what to expect from Wednesday’s white paper – and, more importantly, how to judge whether the proposals have any bite. Given that much of the work is based on the disappointingly timid report from the Financial Services Authority in March, the chances of Alistair Darling leaving teeth marks on a newly emboldened City look slim.

This will please those who argue all such regulation is futile. But what about those who still believe in the power of democratic governments to rein in the worst excesses of the market? Are there conceivable measures that would make a real difference? I doubt you will find these in the white paper, but here is my wishlist:

1) Banks should legally separate their risky investment activities from anything deemed so important to the wider economy that it would require government support in the event of bankruptcy. In particular, this would force big banks to split the business of looking after ordinary depositors’ money from what Mervyn King has dubbed the “casino trading” of investment banks. This definition would also cover pure investment banks – such as Lehman Brothers – that become “too big to fail” and force them to break up into smaller bits that can safely be allowed to go bust.

2) Bank pay should be fully transparent and regulated. If we are to stop City bonuses getting out of control in future, we need to know exactly how much money is paid to the top tier of employees – not just the board. Names can be withheld in the interests of personal privacy, but there is no reason investors and regulators should not be given a rough breakdown. The oxymoronic “guaranteed bonus” should be outlawed and all variable pay should be linked to long-term performance.

3) Bank boardrooms should be filled with people prepared to say no to managers who pursue reckless strategies. In particular, the means forcing companies to appoint independent chairmen from outside the bank. Non-executive directors sitting on risk and remuneration committees should also report separately to the Financial Services Authority.

4) Financial “innovation” needs to be seen for what it often is: an attempt to side-step the rules with complexity. This means much stricter rules on credit derivatives, securitisation and structured finance. If this means it is more expensive to borrow in future, that is an acceptable price to pay to avoid future credit bubbles. Relying on credit rating agencies to police the traders who pay them will never be enough.

Anything less will not prevent all this from happening again.

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Taxpayer falls back in Rock queue

July 7th, 2009 | No Comments

• Contract breach obliges lender to pay £26bn bond debt first
• Stake exposes government to bigger share of losses

The government’s exposure to losses at Northern Rock could be increasing by the day after a contract breach by one of the lender’s subsidiaries put other creditors ahead of the taxpayer in the queue for payment.

Granite, the vehicle that packaged some of Northern Rock’s mortgages to sell them on to other investors in a process known as securitisation, is being forced to pay back holders of about £26bn of debt first.

The bondholders took priority among creditors following a breach of contract in November, when the government decided to wind down Granite to reduce its lending book. That reduced the flow of mortgages from Northern Rock to Granite, triggering the breach in Granite’s contract terms and forcing it to accelerate repayments of about £30bn of debts to noteholders. By May, the outstanding notes amounted to £26bn.

Granite is losing about £12m a month from loan defaults, delays or repossessed houses being sold below their expected value.

Any money that Granite receives from repayments or refinancings (when people pay off their mortgage or move to another lender) is now all destined for the noteholders, reducing their stake in Granite as they are paid off. This increases Northern Rock’s share in the unit, which is ultimately owned by the taxpayer, making the government more exposed to potential losses in the future, when it will own a bigger stake.

Francesca Zwolinsky, a director at the credit-rating agency Fitch, said: “This means that the taxpayer would get a bigger share of potential future losses, although bondholders would still be proportionately exposed.”

If losses come in quickly, taxpayers’ exposure would be limited, as they would be more equally distributed with the noteholders. Losses that occur once the bondholders have been paid off will have a bigger impact on Northern Rock – and the taxpayer – as its stake will be bigger.

The chancellor, Alistair Darling, is expected to clear the path on Wednesday, in a government white paper, for Northern Rock’s sale to a lender that does not currently have a presence in the mortgage-lending market.

Plans for the reform of bank regulation will reveal that the Treasury aims to reignite rivalry between banks after the consolidation and collapse of major players caused by the financial crisis.

Speculation that Tesco and Virgin are preparing bids for Northern Rock have circulated in the City for several weeks. However, neither is expected to make a move until later in the year, when the bank’s “toxic assets” are hived off into a “bad bank”.

Granite remains profitable, but as the economy deteriorates, its high-risk customers, many of whom were on 125% loan-to-value mortgages, could find difficulties keeping up their repayments. So future losses depend on the speed of an economic recovery and on the amount of mortgage arrears.

According to data from Fitch, about one-third of Granite’s mortgage portfolio could be above the value of the property, since additional loans were offered along with the mortgage.

A Treasury spokesman said: “Northern Rock’s – and therefore the taxpayers’ – share in Granite has been subordinated to the repayment of bondholders, but in economic terms the taxpayer will not lose out.

“Northern Rock will get its cash, after the bondholders have been fully repaid, and it continues to have the asset of the seller’s share.”

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Darling to clamp down on bonuses

July 5th, 2009 | No Comments

High-paying City banks forced to hold more capital

City banks that pay out lavish bonuses for short-term profits will be forced to set aside a bigger cash cushion against losses, Alistair Darling will announce this week, as he sets out the government’s plans to crack down on the practices that led to the credit crunch.

With the darkest days of the financial crisis apparently over, bankers in the Square Mile have quietly begun to use the phrase “BAB”, or “bonuses are back,” to signal their hope that the era of outsize pay packets is returning. US bank Goldman Sachs is expected to pay out the biggest bonuses in its history this year, on the back of bumper profits.

But government ministers have stepped up their rhetoric against the City’s bonus culture in recent days, with Lord Myners railing against “weak and lazy” remuneration committees that wave through generous payouts.

As part of measures to re-regulate the banking sector, due to be announced on Wednesday, the chancellor will tell the Financial Services Authority that it must treat banks that pay out large cash bonuses on the basis of short-term targets as riskier than their rivals, and force them to hold more capital.

The FSA has already announced a code of practice for remuneration in financial firms, but Treasury sources said the regulator will be urged to give the new rules teeth, by cracking down on firms that fail to comply. The chancellor would also like to see more use of “clawback” clauses, which allow banks to call in bonuses if a trader’s bets turn sour.

Darling is keen to strike a tough pose on bankers’ pay, after it was revealed that the boss of part-nationalised RBS, Stephen Hester, could take home up to £15m if he meets share-price targets. Hester agreed to defer part of the payout for another two years, to 2014, after the deal sparked public outrage.

Vince Cable, the Liberal Democrat Treasury spokesman, said that insisting bonuses are paid in shares instead of cash was not enough. “Traders are doing that anyway, because the shares are cheap, and capital gains tax is only 18%,” he said.

The chancellor’s plans for cleaning up the City have already sparked a turf war between the government and the Bank of England, with governor Mervyn King complaining last month that, without more powers to intervene in risky financial institutions, “the Bank finds itself in a position like that of a church whose congregation attends weddings and burials but ignores the sermons in between”.

Instead of handing King more control, however, the chancellor will suggest beefing up the Bank’s quarterly Financial Stability Review, which identified some of the weaknesses in the banking sector before the credit crunch.

Whitehall officials have been discussing whether the Bank should in future publish recommendations alongside its analysis, and the FSA and the Treasury then be forced to adopt them or explain why they have decided not to.

This week’s white paper is expected to reject some of the most radical proposals for preventing a future banking crisis, such as splitting large international banks into riskier “casino” arms and standard high street lenders, with only the latter carrying a state guarantee.

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Government plans credit crackdown

July 2nd, 2009 | No Comments

Consumer white paper proposes ban on credit card companies raising borrowing limits or sending out cheques without consultation

Credit card companies could be banned from raising borrowers’ credit limits without consultation or sending out unsolicited credit cheques in a bid to prevent people running up unaffordable debt, the government said today.

The moves are part of a consumer white paper, A better deal for consumers – delivering real help now and change for the future, unveiled today by the business secretary, Lord Mandelson, and the consumer minister, Kevin Brennan.

Credit card cheques would not face an outright ban, but companies will only be able to send them out on request by cardholders. The cheques, which can be used like personal cheques with the value of the transaction added to the borrower’s card balance, are controversial because interest charged on purchases is usually much higher than if a credit card had been used to make the same purchase.

Handling fees of about 2% of the value of the transaction are also often charged, and there is no interest free period. Consumers who receive the cheques unexpectedly are often unaware of the costs of using them.

The raising of credit limits without consent has also concerned consumer groups, who say lenders have made it too easy for some borrowers to run up huge debts.

Although some card firms have cut credit limits in the wake of the credit crunch, research published today by price comparison website uSwitch suggests that over the past 12 months millions of consumers have had their credit limits increased without requesting the extra cash.

The survey showed a third of consumers had their limits changed, with 90% of those reporting their lender had upped their limit by an average of £1,538.

As part of a review of the credit and store card industry, restrictions could also be placed on card companies increasing interest rates on existing debt.

New requirements will also be introduced for all lenders to check consumers’ credit worthiness before they advance money to them and to explain financial products fully.

The review will also consider whether minimum monthly repayments should be increased to help people repay debt quicker, and whether card companies should be forced to put repayments towards clearing the cardholder’s most expensive debts first.

Many lenders use repayments to clear money borrowed through interest free balance transfer and purchase deals, while new debts attract a higher rate of interest.

The government has also asked the Office of Fair Trading (OFT) to carry out a review of the market for high cost credit, such as pay day loans and door step lending, which typically charge interest of more than 50% on an APR basis.

The review of the industry, which could be worth up to £35bn a year, will look at competition in the sector and at whether consumers have enough information and protection when deciding to take on short-term debt. The OFT said it expected to report in spring 2010.

Another key proposal set out in the white paper is the appointment of a consumer advocate to lobby against bad practise by retailers and lenders. This is part of a range of measures designed to crack down on rogue traders and help consumers get their money back if they encounter problems.

Decisive action

Kevin Brennan said: “Consumers have been seriously affected by the past two years of turmoil in the financial markets, as well as by the longer term changes in the way that goods and services are bought and sold. We are taking decisive action now to prepare for the future.

“We are delivering a new approach to consumer credit with a review of the regulation of credit card and store cards. We are imposing requirements on lenders to explain their products and to check creditworthiness before they lend, and revised OFT guidance to tackle irresponsible lending.

“There will also be tougher action against rogue traders and fraudsters who look for ways to fleece consumers out of their hard-earned cash, and a new emphasis on consumer rights spearheaded by the consumer advocate.”

Mandelson said the government was determined to help consumers during the current downturn when family budgets were under “unprecedented strain”.

“We’re already providing targeted help to protect people from falling into debt and to support those who get into difficulty,” he said. “But we need to do more. Our aim is to help consumers make better informed borrowing decisions.”

To this end the government also plans to introduce a self-help tool kit, which will be developed by the Money Advice Trust, and a new Debtor’s Guide produced by the Insolvency Service for those struggling with their borrowings.

The Financial Services Authority‘s website will also be updated to make it easier for people to compare the cost of different credit cards according to the way they use them.

Credit card companies said they would continue to work with the government on changes to help consumers. Paul Rodford, head of card payments for the trade body the UK Cards Association said card providers would co-operate fully with a ban on credit cards “while also attempting to avoid negatively impacting customers who may wish to continue using them in certain circumstances such as for balance transfers on promotional rates”.

He added: “In the past few years we have made lots of changes to help provide better transparency on our products and to make sure we uphold stringent lending practices.

“The need to make responsible lending decisions and to support customers to make responsible borrowing decisions can never be more important than it is right now. It’s in nobody’s interests to lend to someone who can’t afford it or to have customers who are unable to pay back what they’ve borrowed.”

The consumer group Which? said it was glad to see the government addressing some of the issues it had been campaigning on for years, but the moves were overdue.

Its chief executive, Peter Vicary-Smith, added: “The important thing is that no time is wasted in turning these proposals into tangible benefits for consumers.

“The jury is out on the creation of the role of consumer advocate, for the devil is in the detail. It will be interesting to see how the role will fit in with the organisations and roles that already exist.”

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From Royal Mail to Post Bank

July 2nd, 2009 | No Comments

Instead of selling off parts of Royal Mail, why not seize the opportunity to create a new national, locally based bank?

Lord Mandelson has announced that the market will not support the part-privatisation of Royal Mail and the bill has been dropped. But this should not be a decision based on the temporary fluctuations of markets. The idea being floated that Tesco should take over Northern Rock reinforces the suspicion that the government has a one-size-fits-all approach to public service reform; the market can take it or leave it. We know every little helps, but can’t we be more imaginative than just resorting to privatisation? Why not, in the case of Royal Mail, try a not-for-profit enterprise that lets in private-sector management and funding but locks out private shareholders who are only interested in the profits they can squeeze out of postal deliveries?

If the Labour government are serious about building Britain’s future, they cannot just walk away from Royal Mail. It’s not the financial basket case it’s been painted as, but it does need to be modernised to meet future challenges. The government, the management and the unions are going to have to think long and hard about a different vision for the service; not least to pin down its place as a valued public entity before the Conservatives get any kind of chance to sell off all of it.

The brilliant aphorism of Rahm Emanuel – that this crisis is too good an opportunity to waste – is almost a cliché by now. But it’s true, and Number 10 should ponder it again. There are two points here. We still have a crisis – rises in property prices are not the point – and we still have an opportunity. The crisis is financial, economic and social. It is as much to do with the ongoing drive of turbo-capitalism to consume and commodify anything that is still vaguely public in the pursuit of profit, as it is to do with its present catastrophic banking and finance failures and the knock-on effect on public expenditure. We have to work out priorities in the face of falling tax revenues and rising benefit claims as unemployment rises, and put in place the strong communitarian structures that the people I meet in the country are longing for. I believe the Labour government is the only one that can take these decisions fairly and for all the people – but it has to recognise this opportunity.

So what should the government be doing? Let’s start with a concrete example. They should boldly say that they have listened to public opinion and have thrown away any idea of selling off bits of the 300-year-old Royal Mail. Instead they will build it up, support it, recognise it for what it is – a national network, a bloodstream, a resource that will keep us in touch over the next 300 years.

Then they should say: we are conscious of how the banks have performed so disastrously. We are finding it difficult to regulate them but alongside regulation we want to break the market mould and set up a large national bank owned by the people. We will call it Post Bank – and we’re going to do it fast and to that end, we are integrating Northern Rock, which you already own, into the infrastructure. We are doing this for long-term value and we know you will understand that short-term profit will not benefit the country as much as a locally based bank that can support local businesses, maintain a community presence through the strengthened Post Office network, and start giving people the financial products and management skills and advice that high-street banks have largely retreated from.

Post Bank will link with credit unions, will offer schemes to help the poor manage their money, will be safe and might even offer the British people a chance to have some share in it. Post Bank offers the prospect of capitalising on a rich but neglected history within British banking, that of mutual banks and not-for-profit models such as the original Trustee Savings Bank (TSB). The modern evolution of banking has bred a myth – that to be a normal and effective institution a bank has to be shareholder-owned and motivated solely by private profit. This belief has led to another commonly-held myth: the only alternative to such a bank is for the public sector to step in and take direct control. Both beliefs ignore the UK’s pioneering history of co-operative and mutual structures.

Labour needs to take responsibility – not just for firefighting to save the banking system, but to proactively building an alternative, more resilient financial framework. There is no status quo. We must be bold. Following the 1929 financial crisis and the collapse of the Labour government, the great Labour figure RH Tawney lamented “In spite of the dramatic episodes which heralded its collapse, the government did not fall with a crash, in a tornado from the blue. It crawled slowly to its doom, deflated by inches, partly by its opponents, partly by circumstances beyond its control, but partly also by itself.” A new Post Bank offers the government, some 75 years on, the opportunity to ensure it does not have the same legacy.

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Banks system ‘like South Sea bubble’

July 1st, 2009 | No Comments

‘Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,’ says executive director for financial stability, Andy Haldane

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely “resorted to the roulette wheel” to keep up with each other.

The Bank’s executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

“Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,” he said.

He said bankers and policymakers became seduced by the excess returns available: “Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

“One of the South Sea stocks was memorably ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Banking became the 21st-century equivalent.”

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

“During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks’ only means of keeping up with the Jones’s. Management resorted to the roulette wheel.”

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

“We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties.”

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

“Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole.”

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system.

“For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics,” he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic.

“Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these ‘super-spreaders’ of financial contagion. Historically, financial regulation has tended not to heed that message.”

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. “This is a bold measure and one which deserves international support.”

Haldane’s speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.

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RBS: the sustainable bank?

June 30th, 2009 | No Comments

Sustainable Development Commission launches 275 ‘breakthrough’ ideas to ‘inspire and motivate policy makers’

The Royal Bank of Scotland, which is 70% owned by the public, should be transformed into the Royal Bank of Sustainability with a brief to back renewable energy, improve public transport, and to raise money to resolve Britain’s housing crisis.

The suggestion is one of 275 potential “breakthrough” ideas submitted by members of the public to the Sustainable Development Commission (SDC) to improve the quality of people’s lives, increase community involvement and make Britain a fairer society.

Other suggestions include a radical switching of 20% of all health spending towards preventing illness rather than treatments by 2020, getting young people more connected to the natural world by holding more classes outdoors, and turning under-used city land into urban farms.

“Compared to the combined governments’ response to the implosion in the capital markets the response to civilisation-threatening crises [has been] stumbling and uninspired… We seem bogged down on so many fronts. We wanted to bring together a dynamic portfolio of ideas that could really inspire and motivate policy makers and others to set the UK much more decisively on the path to becoming a sustainable society,” says the report entitled Breakthroughs for the Twenty-First Century, which is published tomorrow.

Many of the ideas, like making cycling mainstream and setting up low carbon zones to reduce emissions and combat health problems, are not new but need invigorating, says the report. Others, like using algae to capture emissions, are controversial. But together, said outgoing SDC chief Jonathon Porritt, the 275 ideas could reinvigorate the political process.

One suggestion, known to be gaining ground in the Treasury, aims to raise billions of pounds to reduce carbon emissions by releasing “green bonds’ which would be issued and backed by government. Like standard government bonds (known as gilts) these would be super-safe investments that guaranteed a fixed interest rate, but the money would be ring-fenced for environmental spending by government.

Another suggestion, from the Yorkshire village of Todmorden, would set up a national competition to inspire towns and communities to grow more food grown in both public and private spaces. “Food is the trigger for greater involvement with the big issues such as climate change and health,” said Pam Warhurst of Todmorden.

In addition to inviting people from every walk of life to contribute ideas, the authors of the report surveyed groups of young people who told them that what mattered most was the quality of their environment, better transport, fairness, education, sustainable food and farming and the need for leadership.

But some ideas are very unlikely to go down well with the present or even the next government. “What I truly honestly believe would improve the lives of every single person in this country is an end to the capitalist free-market system. If the human race is ever going to progress then it will only be done by a socialist alternative to materialism,” said a youth, identified only as “Fred, from the SW”.

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Lloyds cuts another 2,100 jobs

June 30th, 2009 | No Comments

Axe falls at group and wholesale divisions, taking total losses from merger of Lloyds TSB and HBOS to around 7,000

Another 2,100 jobs are being cut at Lloyds Banking Group as the merger of Lloyds TSB and HBOS claims more casualties.

Unions reacted with anger today after staff at Lloyds’s group and wholesale banking divisions were told that the cuts are being made.

It takes total number of job losses since Lloyds rescued HBOS last autumn to around 7,000. The process of integrating the two banks is expected to take three years, with predictions that up to 25,000 roles could eventually be eliminated.

The Unite union again criticised Lloyds for its policy of announcing job cuts in a piecemeal fashion.

“As a taxpayer-supported organisation, real questions need to be asked as to how far this bank can be allowed to go in this systematic slashing of staff. This loss of over 2,000 jobs marks the largest single job loss announcement since the formation of Lloyds Banking Group in January,” said Rob MacGregor, Unite national officer.

MacGregor claimed that morale at Lloyds had been badly hit by the series of job cuts, leaving staff in “a permanent state of anxiety”.

Three weeks ago Lloyds announced the closure of all its Cheltenham & Gloucester branches with the loss of more than 1,600 staff. It is also dropping the Clerical Medical brand it acquired via HBOS, which will cost 300 jobs, and announced cuts in retail banking and car finance.

Lloyds said that today’s job cuts were caused by the merging of various operational support functions, resulting in 700 job losses within group operations. It is also combining its Lloyds TSB and Bank of Scotland businesses in England and Wales into an “integrated relationship bank” for small and large businesses, with another 730 job cuts.

A further 700 jobs are being cut through voluntary redundancies, and less use of agency staff and contractors.

“By bringing the businesses together, we will be better placed for the future. Regrettably however, some of our colleagues will be affected by our plans. We understand that this difficult news will be unsettling and we will be working closely with those colleagues affected,” said Mark Fisher, director of group operations at Lloyds.

Lloyds also said it is creating 350 new roles in commercial, corporate, finance and risk departments, and has also pledged to try to keep jobs in the UK by stopping the practice of off-shoring permanent operational roles.

“The creation of Lloyds Banking Group has meant the group has more than doubled its operational presence in the UK. The group believes this increase provides sufficient scale to deliver its business plans. The group will continue to utilise resources from its offshore suppliers to meet additional short-term peaks in demand, such as to process Isa applications around the tax year end. Where work is currently managed effectively and efficiently offshore, it will remain offshore,” it said.

It added that it would continue to use offshore technology firms for certain IT projects.

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Nationalised banks must go green

June 30th, 2009 | No Comments

Environmental groups are suing the Treasury in an effort to ensure that RBS invests only in sustainable and ethical projects

Since the banking crisis last year, RBS has remained firmly in the public eye as the most controversial bank in the UK. Beyond the populist pillorying of Fred Goodwin’s undeserved pension bonanza and the most recent wave of outrage over the size of the new boss’s pay packet, lay more fundamental questions over the relationship between public money, climate change and the role of finance in fuelling the expansion of coal, oil and gas around the world. Because the Treasury didn’t provide any satisfactory answers when we asked them these questions, Platform, the World Development Movement and People & Planet are today filing an application for a judicial review over the lack of environmental and human rights considerations in the recapitalisation of RBS.

For some years, RBS has been targeted by NGOs and climate activists as being the UK high-street bank most associated with pumping billions into fossil fuel projects across the globe. Until it recently wised up to the need for a greener public image, it even went as far as promoting itself on the www.oilandgasbank.com website that it set up. Before the recapitalisation, it had financed companies that were not only disastrous in terms of spewing out countless tonnes of carbon into the atmosphere, but that were also accused of human rights abuses – companies such as Lundin Petroleum, which is active in Sudan and listed by the Sudan Divestment Task Force in its “Top Five Highest Offenders”.

Before the recapitalisation, such instances of questionable finance were a scandal because they helped trash the climate and often human rights too. Since November last year, they are even more outrageous because RBS is now using public money to do it. In March the Guardian reported that in the six months following the initial bailout of the banks, RBS had been involved in financing loans to coal, oil and gas companies worth nearly £10bn (£9,941m) – over a quarter the amount the bank had received from taxpayers at that point. These companies included finance (or assistance in obtaining finance) to oil companies to expand their operations in controversial or politically sensitive regions (such as Tullow Oil in Uganda, and Cairn Energy in arctic Greenland) as well as to energy giant E.ON, which has received a great deal of bad press over its efforts to construct a new coal-fired plant in Kingsnorth, Kent.

The Green Book requires “central government to undertake a comprehensive and proportionate assessment of all new policies, programme and projects so as to best promote the public interest when using government resources”. We felt that using public money to finance new fossil fuel in the face of the threat of climate change flies in the face of public interest. In a letter that was sent in April from the Treasury to our legal council, we were told that “the environmental and human rights records of the individual banks were of no relevance to the decision and therefore the appraisal of the decision that was carried out did not consider the environmental or human rights records or policies of the individual banks”.

We think that if the increasingly climate-conscious UK taxpayer was aware of the type of projects that their money was financing, they would beg to differ. We are not suggesting that the banking bailout shouldn’t have happened. We are saying that now that it has happened, the government has a responsibility, especially given its posturing in the international political arena as being a “global leader on climate change”, to ensure that the public isn’t paying to expand further fossil fuel developments.

On 2 March, 2008, the Treasury established the framework for the management of public investment in recapitalised banks via UK Financial Investments. The framework sets out the basis for how the board of UKFI should manage government shares in the banks, but makes no reference to the need to consider social and environmental criteria, nor to support or even be consistent with other public policy objectives. This is what we are applying to challenge in court.

This isn’t a particularly radical demand, it’s just common sense. The cross-party environmental audit committee has already made the recommendation that the Treasury should “look at the benefits and practicalities of imposing some form of environmental criteria on the investment strategies of those banks in which the state had a controlling stake” while an early day motion tabled by Lib Dem shadow environment minister Martin Horwood proposes the same.

The Treasury has claimed it needs to take an “arm’s-length” approach to the management of RBS to maximise the financial return for the taxpayer. In reality, it already showed that it could get more “hands on” when it intervened over the issue of capping executive bonuses. We need to ask if the interests of the taxpayer would be better served by ensuring that RBS was not actively involved in making huge carbon emissions increases all over the world. This important decision should be made in a transparent and accountable fashion, rather than left to the whims of individuals in the banking sector, especially given the appalling mess that these individuals have already left us in.

With enough political will, RBS could even go further by not only committing to stop financing the “bad stuff” but also taking on an investment mandate of providing much-needed capital to Britain’s cash-starved renewables industry, providing microloans for households to install proper insulation and providing career development loans for the retraining of workers involved in carbon-intensive industries. There are numerous possibilities for transforming a beleaguered financial institution whose name has been dragged through the mud into the Royal Bank of Sustainability.

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Quantitative easing plan failing

June 29th, 2009 | No Comments

Mortgage and business lending slump in May despite Bank’s £125bn injection

Britain’s banking system remains largely frozen, according to figures released today. They showed that mortgage lending has slumped to a record low and business lending has also dropped.

Economists said the figures showed the Bank of England’s £125bn “quantitative easing” scheme was not yet delivering any real boost to the economy.

The Bank’s own figures showed that net mortgage lending fell to just £324m in May, the weakest figure since the current series of data began in 1993. And new mortgage approvals – seen as a reliable guide to where house prices may be heading in the coming months – remained steady at about 43,000 in May, breaking the rising trend of recent months. The figures are at only about half the average level of the past 15 years.

The Bank also said that lending to companies fell by £300m in May, following another drop in April.

“Although quantitative easing only started in early March, one might have hoped for more positive signs and the figures show that the extra liquidity pumped into the banking sector is not yet filtering through to households and company bank balances,” said Philip Shaw, chief economist at Investec bank. “It is difficult to see a sustained recovery unless credit conditions improve.”

Other indicators

Other figures showed that the construction sector remains on its knees as the latest activity barometer from the Construction Products Association fell to zero for the first time ever.

“The sale of construction products continues to decline despite talk of ‘green shoots’ in other parts of the economy,” said CPA’s spokesman, Noble Francis.

“It is estimated that within construction product manufacturing, more than 70,000 jobs have been lost and 12,000 placed on short-time working over the past 18 months. With the barometer anticipating further falls in sales during 2009, additional job losses across the industry appear to be unavoidable.”

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Missing banker found dead with gun wounds

June 29th, 2009 | No Comments

Body of financier who disappeared a week ago with guns is discovered in Berkshire woodland

A wealthy City financier who left his high-powered post at a banking group after a disastrous buyout has been found dead with gunshot wounds, it emerged today.

Huibert Boumeester, 49, vanished at the start of last week on the day he was to meet a headhunter in London.

Police said the father-of-three had been feeling down and fears for his safety grew when it was noticed that two of his shotguns were missing. His body was discovered in woodland in Berkshire yesterday morning.

A Thames Valley police spokesman said: “He is believed to have died from gunshot wounds. At the moment it is being treated as an unexplained death.”

Boumeester, a Dutch citizen, was chief financial officer at ABN Amro and at the heart of its buyout by the Royal Bank of Scotland in 2007. He remained in his post until March last year and left as part of a prearranged deal.

Friends said Boumeester had no financial worries. He had two homes in London, land in Scotland where he went shooting, and a wealthy family and had made around £600,000 a year in the City, with bonuses on top.

He was said to be considering offers of a number of non-executive boardroom positions when he disappeared.

One friend said: “I think it would be wrong to leap to the conclusion that this came about directly because of the credit crunch. Obviously he had been under pressure in the last few years but it’s not as if he didn’t know where his next penny was coming from. He had enough money never to have to work again.”

Boumeester joined ABN Amro as a management trainee in 1987 and held positions including country manager in Malaysia and global head of integrated energy. He became chief financial officer in 2007 and played a key role in trying to fend off the Royal Bank of Scotland takeover.

Friends said Boumeester was talented and popular. One, who worked closely with him, said: “He was a very charismatic and colourful individual, very professional and very driven. He was the consummate deal-maker. Making deals was what gave him great fun and amusement. Making money was not his main motivation. He loved the thrill of the deal.”

The friend said Boumeester had been involved in the Royal Bank of Scotland take-over from start to finish. “He had such energy. He kept going when much younger men were flagging. It couldn’t be true that he was depressed because he lost his job. He did not have any financial worries. There must be some personal trauma behind this.”

Boumeester had travelled widely during his career and he set up the Boumeester Foundation to conserve cultures in countries such as Vietnam, China and Bhutan. The foundation’s website says: “Living and working in Asia has stirred the interest of Huibert Boumeester in Asian cultures and has made him more aware of the dangers these cultures are facing.”

He was also keen on country pursuits, especially shooting. “Though he was Dutch, he came over as quite the English gentleman,” said a friend.

The financier was found in woodland in Drift Road, Winkfield, near Bracknell, Berkshire. Police had been contacted when he did not appear for a meeting with a headhunter in London last Monday.

Boumeester’s family said today that they did not wish to comment.

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Recovery threatened by toxic assets

June 29th, 2009 | No Comments

• Governments too slow to act, warn central bankers
• CBI sounds warning over ‘worrying’ bad debt levels

Taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks, the world’s leading central bankers warn today.

Despite months of co-ordinated action around the globe to stabilise the banking system, hidden perils still lurk in the world’s financial institutions according to the Basle-based Bank of International Settlements.

“Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS says in its annual report. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”

It comes as the CBI employers’ organisation reports that the British banking system remains under pressure, despite tentative signs of green shoots in the financial sector.

In their latest quarterly financial services survey, the CBI and PricewaterhouseCoopers (PwC) say many parts of the sector expect business volumes to rise in the next quarter after 21 months of falls. But despite these early signs of optimism, Ian McCafferty, the CBI’s chief economic adviser, cautioned that banking remains “under pressure”.

“Conditions remain challenging, particularly for the banks. Although demand looks like it is beginning to recover, it is doing so from a very low base. We can still expect lower profitability, significant job losses and cuts to investment in the coming months. The rising levels of bad debt are a further worry for the industry,” he said.

His note of caution chimed with the warning from the BIS. As one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis, the BIS’s assessment will carry weight with governments. It says: “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.”

It also expresses concern about the dilemma facing policymakers on when to start reining in the recovery. “Tightening too early could thwart the recovery, whereas tightening too late may result in inflationary pressures from the stimulus in place, or contribute to yet another cycle of increasing leverage and bubbling asset prices. Identifying when to tighten is difficult even at the best of times, but even more so at the current stage,” it says.

The CBI survey confirms there are still problems beneath the surface, despite growing optimism. Respondents said the value of non-performing loans, or “bad debt”, increased at its fastest rate since the survey began in 1989 in the second quarter of the year and a similar rise is expected in the next quarter.

The survey also found that banks widened lending spreads to a record degree in the three months to June. That provides some support to banks’ profitability, which was broadly flat after six consecutive quarters of decline, but could choke off demand for loans from borrowers and weigh on recovery.

While optimism regarding the overall business situation remained firmly negative, according to the CBI, the rate of decline had slowed on that in recent quarters. However, business volumes fell at the fastest rate since March 1991, but are expected to start to rise over the next three months.

John Hitchins, UK banking leader at PwC, said: “The UK banking industry has seen a further decline in confidence but the rate of decline is slowing.” McCafferty warned the overall optimism in the financial services sector “masks” the fact that some sub-sectors, such as building societies, are still having a very tough time.

About 15,000 jobs were slashed in the financial services sector in the three months to June, compared with 17,000 in the first quarter of the year. The CBI expects a further 13,000 jobs to be chopped over the next three months. A total of 34,000 jobs were lost in the financial services sector in 2008.

Nearly all respondents agreed that it will take longer than six months for normal market conditions to resume.

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One small step forward

June 28th, 2009 | No Comments

An agreement by all 192 UN states on the financial crisis acknowledges our global interdependence

Last week, something unusual happened: the international community, coming together at the UN to discuss the global financial crisis and its impact on the developing world, reached a consensus on an agreement. This spelled out the issues to be addressed and laid out the way forward. Many had said it would be difficult for 192 countries to reach consensus, and that was why discussions should be limited to a self-selected group of 20. In fact, the UN agreement was stronger and more forceful than the G20 communique.

It also demonstrated why it was important to have an inclusive process: the G192 were willing to raise key issues that the internal politics of the G20 may have made too sensitive. For instance, while the G20 focused attention on the role of bank secrecy in tax evasion, the UN agreement highlights corruption.

The G20 recognised the need for a global response to the global downturn. But responses are framed at the national level, and often take insufficient account of the effect on others. As a result they have been too small and they are structured to maximise domestic impacts, not global ones. Moreover, developing countries do not have adequate resources for coping with the crisis. The G20 committed themselves to providing generous support, mostly through the IMF. But they did not take adequate note of the risk of poor countries undertaking more debt, and the reluctance of many to turn to the IMF for support – partly because of its history of demanding borrowers undertake counterproductive procyclical policies.

Participants at the UN conference emphasised the importance of more grant funding. The hundreds of billions (perhaps trillions) of dollars spent on bailing out the banks has put a new perspective on government expenditures. It makes claims that there are insufficient funds to finance development assistance ring hollow. But developing countries are constrained not just by a lack of money, but a lack of “policy space”. The meeting concluded that: “Countries must have the necessary flexibility to implement countercyclical measures and to pursue tailored and targeted responses to the crisis.”

One of the factors contributing to the crisis was longstanding global imbalances, and one of the sources of these was the dollar-based global reserve system. This contributes to an insufficiency of global aggregate demand, as countries divert purchasing power into precautionary savings – and such an insufficiency may impede the world’s ability to regain robust growth. While the UN meeting was not the occasion to devise a new system, it acknowledged calls for “further study of the feasibility and advisability of a more efficient reserve system”. Unsurprisingly, some countries with large dollar reserves were concerned about the current system, the low returns and high risk – increasing with America’s rising debt and the Federal Reserve’s ballooning balance sheet.

The UN meeting reinforced the need for reforms in the governance of the international economic institutions – some of which pushed policies of financial market and capital market liberalisation that were in part responsible for the crisis and its rapid spread. But it also delved into controversial issues of enormous importance to developing countries, such as migration.

The UN meeting reflected what is now a global consensus: “The current crisis has been compounded by an initial failure to appreciate the full scope of the risks accumulating in the financial markets and their potential to destabilise the international financial system and the global economy …” But discussion highlighted the shortfalls in the proposed regulatory reforms – for instance, the reluctance in some countries to do enough about the too-big-to-fail banks. While everyone talks about the need for transparency, some participants raised concern about changes in accounting in the US that have made matters worse.

Perhaps the most important conclusion was the most obvious: “The ongoing crisis has highlighted the extent to which our economies are integrated, the indivisibility of our collective well-being, and the unsustainability of a narrow focus on short-term gains.” We have allowed economic globalisation to outpace political globalisation – we do not have the institutions or the mindset to respond collectively in ways that advance the wellbeing of all. The UN meeting represented a small, but important, step forward.

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Debt chasers accused of bullying

June 28th, 2009 | No Comments

Companies hired by banks stand accused of using bullying methods, as well as failing to check the identity of their targets, reports Tracy McVeigh

Debt agencies use unethical or even illegal methods to hound debtors, and are increasingly targeting the wrong people, according to consumer groups and the Office of Fair Trading.

This year debt collection agencies are chasing more than £20bn of consumer debts. Consumer debt in Britain stands at more than £1.4 trillion, but banks, building societies and credit card companies are increasingly reluctant to chase bad debts themselves and are selling them to agencies. In 2007, £7bn of debts were sold; this year, that could rise to £10bn.

When Paula Johns received a letter from a debt collection agency, her first thought was to ignore it. The same day she was telephoned by a man at home. “He just kept asking me over and over for my credit card details. He didn’t listen to a word I said. It was so frustrating that I began to actually feel scared and I was shaking.”

She hung up. Within an hour her mobile rang, it was someone else from the same agency. “I had no idea what the debt was for. I asked, but it was like speaking to a robot, they kept telling me not to get aggressive. It was truly awful. I ended up sticking it on my credit card to get rid of them. I’ve been made redundant, and it was £100 I couldn’t afford.” Johns, 27, is still mystified about what the money was for, but the risk of finding herself credit blacklisted was too much.

Chris Ball had letters sent to his neighbour after his business collapsed, leaving him unemployed. “It was all part of their intimidation. I lost everything when my business went bust. I lost my house, my car, [but] I don’t own anything any more and that meant they had nothing to take off me, so I wasn’t scared. People are being harassed and bullied, a lot of the time totally illegally, and at a time which is already hellish for them.”

Now running a website to help people in similar situations, Ball has calls from people being unfairly pursued by debt agencies all the time. “A friend of mine lost someone to suicide over it,” he said.

Citizens Advice is being swamped by calls from people suffering debt problems and many are complaining of harassment from agencies. Its policy officer, Alex MacDermott, said: “There are a lot more problems with debt collecting agencies than there used to be because more and more debt is being passed on. A lot more banks and other firms use collectors to keep aggressive tactics at arm’s-length from their own reputations – it’s not them being tough and mean.

“They send people constant automated text messages and letters and threats and people pay up, but they pay on their credit card so they are just moving their debt around. In terms of strategy, it works great for the agencies, but badly for people struggling with debt. But people’s instinct is to pay whoever shouts the loudest – and that’s the collecting agencies.

“They are using bullying practices a lot more than we would like to see. People need to get advice and to get in touch with the agency the minute they get the first letter.”

The growing problem was not unexpected. Professor Nick Wilson, of Leeds university’s business school, said: “There were big signs that household debt was rising in 2000 and the signs of stress from 2003. Now we’re seeing a big rise in personal bankruptcies and a massive shift from the big lenders collecting debts themselves. It used to be a last resort to call in a debt collecting agency, but now there’s a trend to sell the debt off quickly. At the moment, they are selling on debts for about 10% of the face value. Agencies will do some scary things to collect that money and the volume of debt is increasing so we’ll expect to see a big wave of households running into trouble soon.

“The debt collecting agency is quite sophisticated – it’s basically a big call centre with a lot of technology, a lot of automation which means a lot of automated letters being sent which can be hard to stop. The lack of contact with a real person adds a lot of extra stress.”

The Samaritans reports that one in 10 of its callers is under financial stress. “Anecdotally lots of our volunteers are reporting more and more people calling up with recession- and debt-related issues,” said a spokeswoman.

The OFT has the power to remove the licence of companies that are acting illegally and this year it has already moved against two agencies. A spokeswoman said there were many more firms under investigation, but not at a stage where they could be “named and shamed”.

“There is a lot goes on behind the scenes and the threat that a company could lose its licence is usually enough to bring it back into line,” she added.

But many believe the OFT is toothless in regulating these companies. “The OFT is a complete waste of space,” said Mike Thompson, a company director. He has just won a case against a debt collecting agency called Aktiv Kapital which had been threatening him with court for two years and even put a default notice on his credit record. The company wanted £640 from him, but it was owed by someone with the same name.

“I was irritated by it and irritated by the way the law lets these companies ride roughshod over people,” he said. “A lot of people I know in my circumstances would just pay up, just to stop the hassle even if they know it’s not their debt. Being powerless to stop court proceedings scares people, especially older people. Frankly, I’m sure these companies know and bank on that.

“I have become aware of so many people being chased wrongly by these immoral companies and leant on heavily, near violently. The fact is that I am a professional, I’m a director of three companies and I know how to stand up to these people and I won in the end. These people are rogues.”

Kurt Obermaier is executive director of the Credit Services Association, the industry body representing 300 debt collecting agencies that will be chasing £20bn of debt this year. He insists agencies do an essential job: “Debt is an asset and an asset you can dispose of, and that’s what happens. We have guidelines for our members and if we can help clear debt then that is a positive thing.

“Nobody comes round and smashes your window in. All our members try to come to an agreement with debtors wherever possible. Not everyone is whiter-than-white, but the majority of agencies have a strict code of conduct and complaints of aggressive behaviour are exaggerated.

“And we are far from prospering while others suffer. When times are bad, things are bad for us too. It may sound perverse, but when the economy takes a downturn we do get more to collect, but the recovery rate is considerably lower.”

He admitted that the wrong people being chased for debts was a growing problem: “If you are trying to trace someone, you are cross-referencing all sorts of data sources and it can be confusing. The voters’ roll used to be a good source but now access to that is being restricted.”

He denied that companies sent out lots of letters in the hope that one of the addressees would be the right one.

Simon Cook, a partner at law firm Ormerods, represented Mike Thompson. “Our perception is that it’s a credit crunch problem that’s getting worse and worse,” he said. You wonder whether the people who buy these cases to chase debts take sufficient care in what they are buying. It leaves people in the position where they have to prove they are not who the debt collectors say they are, and these companies have the power to affect their credit references. Taking legal action has many obstacles, there certainly isn’t legal aid available and it’s not something most people do lightly. Mr Thompson is an extremely strong-minded person with the will, the time and the money to fight back; not many people are in that position.”

CCTV evidence is false, but they don’t listen

If a stranger accosted me in the street and asked for £95, the answer would be “no chance”. So when a letter arrived from a debt collection agency demanding nearly £100 for a parking “offence” that I had not committed, I felt equally adamant I wouldn’t hand over the money.

“This is a formal notice of intended court action,” the letter from Commercial Collection Services (CCS) said. “We may take action if you fail to PAY THE FULL AMOUNT YOU OWE WITHIN SEVEN DAYS.”

If a court order was obtained, my property could be taken and sold, deductions could be made from my wages and I might find it impossible to get credit, it threatened.

Then came: “THIS PROBLEM WILL NOT GO AWAY AND WE INTEND TO RECOVER THE FULL AMOUNT YOU OWE WITHOUT FURTHER DELAY.”

I was innocent, yet felt bullied and intimidated – and furious. I rang to tell them I was in dispute with the parking company, G24, and would not be paying. G24 claimed I had exceeded the time limit at a leisure centre car park. In fact, I had left within the limit and returned to pick up my mother-in-law and two-year-old daughter. Its claim was based on “evidence”, using CCTV footage of my first arrival and second departure.

I have written to G24 four times explaining its mistake. It runs its own appeals service, which is like appointing the prosecuting counsel as the judge. There is no independent adjudicator to sort out disputes between drivers and private companies that run car parks in leisure and shopping centres. Needless to say, my appeal was unsuccessful.

Finally, I asked G24 to issue court proceedings. It would surely have to produce the CCTV footage in court and I could prove my innocence. A lawyer said he would be astonished if they took me to the small claims court, because it costs around £30 to issue proceedings. He said they would pass the claim on to a debt collection agency. The letter from CCS duly arrived.

In my conversation with CCS, I was told that, if I didn’t pay, I could be taken to court. “Bring it on,” I said. “Don’t be aggressive, madam,” came the reply, along with the threat of doorstep collectors.

“Just pay it,” my husband said, perhaps because the car is registered in his name and the letters are addressed to him. “It’s taking up time and making you stressed.”

This is what these companies rely on. The lawyer said most people pay up by letter three. But I’ve done nothing wrong. I am determined not to give in to threats and bullying, but how many others do?

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