Weekly Financial News Roundup
The week opened with the unwelcome news that the beleaguered Royal Bank of Scotland (RBS) is to shed 20% of its workforce in its so-called "Group Manufacturing" division, which deals with information technology, bank property, etc., over the next two years. The division employs 45,000 people worldwide, at a cost of £1.2 billion per annum, and 9,000 jobs will be lost – half of them in the U.K. – in back office operations, as the bank implements a plan to save £2.5 billion over the next three years. RBS would not say where in the U.K. the job losses would have most impact, but was keen to point out that the actual number was likely to be "significantly lower" than 9,000, as the result of natural wastage and voluntary redundancy. Trade unions, on the other hand, described the announcement as "truly devastating", according to the BBC website. RBS, which is 70% owned by the British taxpayer as the result of its record corporate loss of £24.1 billion in 2008, has been widely criticised recently, not least for its £703,000 per annum pension award to former Chief Executive, Sir Fred Goodwin.
In related news, figures obtained by the Financial Services Authority (FSA) under the Freedom of Information Act revealed that almost one million people are waiting for legal process regarding bank charges to take its course, and have been since July, 2007. The jurisdiction of the Office of Fair Trading (OFT) to decide if – under the Unfair Terms in Consumer Contracts Regulations, 1999 – the charges imposed by banks for unauthorised overdrafts, unpaid Direct Debit payments, etc. are unfair has already been confirmed in the High Court, and the Appeal Court, but the banks intend to appeal to the House of Lords later in the year. This means that the next stage of the process, which will decide whether the charges are, in fact, unfair, or not, is unlikely to start before 2010.
On Tuesday, a report from the National Institute of Economic and Social Research stated that the current recession is "very similar" to that in the early Eighties, and may continue for another 12 months, before the economy recovers slowly over the next two years. The latest estimate is for a further 1.5% in the U.K. GDP ("Gross Domestic Product") in the first three months of 2009. There was also speculation regarding the latest meeting of the Bank of England's Monetary Policy Committee (MPC) due to start on Wednesday. The MPC was expected to leave the Bank Rate of 0.5%, following six successive cuts since October, 2008, when it announced its decision on Thursday. Shadow Chancellor, George Osborne, added his voice to the mounting criticism of the banking sector, warning that British banks may need to be broken up to prevent them from threatening the stability of the economy in future. He was quoted on the Telegraph website, saying, "We cannot allow one part of our economy to behave in a way that puts the rest of the economy at risk when it fails. We need to think deeply about whether we can sustain banks that are not only too big to fail, but potentially too big to bail."
On Wednesday, the British Retail Consortium Neilsen Shop Price Index revealed that the annual rate of inflation for food remained at 9%, as the weakness in Sterling not only increased the cost of ingredients from abroad, but made domestic produce more attractive to overseas buyers. Sterling has fallen significantly against the U.S. dollar in recent months, reaching its lowest level since 1985, at $1.35, January. Perhaps more importantly, insurance broker Aon announced that it would be cutting its pension contributions to most of its 5,000 workers in the U.K., in an effort to reduce costs without cutting salaries or working hours. The move was widely seen as heralding a reduction in employers' pension contributions across the board, and was described by Unite, the biggest trade union in the U.K., as a backdoor attack on pay that would not be tolerated.
The Bank of England did, as widely anticipated, keep interest rates at 0.5% when it announced its latest decision on Thursday, and voted to continue, "the programme, announced on 5th March, of asset purchases totalling £75bn financed by the issuance of central bank reserves", according to the BBC website. Having made six successive cuts in the Bank Rate, from 5% in October, 2008, to an all-time low of 0.5%, in an effort to lift the economy out of recession, the Bank of England has left itself with little room for manoeuvre, and has been forced to examine other policies. The programme of so-called "quantitative easing", for example, has so far injected £26.4 billion into the wider economy.
The week ended with the announcement that Barclays had sold its iShares subsidiary – part of Barclays Global Investors – to the Luxembourg-based private equity firm CVC Capital Partners in a deal worth around £3 billion. Barclays is to finance 70% of the deal, effectively offering CVC Partners a loan of £2.1 billion to facilitate the purchase of the ETF ("Exchange Traded Fund") business, and its share price was up 12%, at 177.5p, following the announcement. The deal may result in Barclays' President, Bob Diamond – already one of the highest paid bankers in the City, with an income of £22 million in 2007 – receiving £4.7 million as a windfall. Elsewhere, the Equality and Human Rights Commission (EHRC) revealed a huge disparity between the average earnings of men and women working in the financial services industry. Annual earnings in the financial services sector may be twice the national average, but women earn, on average, 60% less than men, are less likely to work in the City of London itself, and less likely to fill senior or managerial roles. Women working in funding management, stockbroking and futures trading are worst off, according to the Commission, and, in the sector as a whole, 70% of men earned over £295,000 last year, while 70% of women earned less than that figure.