Banking Made Difficult and Savings Rates Inadequate

Having a bank account into which you can pay money, or from which you can pay money out, is essential in the modern world. You can become a non-person if a bank closes your account. You can be cut off without notice and effectively instantly impoverished by a bank even if you have been a customer of theirs for many years and have a perfect credit record.

This has been happening to many people lately and not just to Nigel Farage. If you are judged to be a “Politically exposed person” (PEP) then you might have great difficulty opening a bank account and will certainly have to answer many questions about your activities and sources of funds. Just being related to a PEP is enough it seems to raise eyebrows and start an inquisition. Simply being involved in politics or having the wrong opinion on controversial subjects is enough it now seems to cause difficulties and result in a Kafkaesque proceeding.

In addition banks are closing accounts without giving clear reasons and without notice, although they dispute this. These problems have arisen recently because banks have become paranoid in adhering to FCA rules about “knowing your customer”.  

You may think this problem is not a common one. But it is. For example I am related to a Member of the House of Lords and she had this to say:

“Yes. Total nightmare with Nationwide, They just sent a rather ill spelt text about a year ago to say they were going to cut us off If we did not give them a huge amount of information in 24hrs. They wouldn’t say why, after to-ing and fro-ing for 6 weeks or so it was all sorted out and got profuse apology but meanwhile I removed all our cash immediately because of the threat to freeze the account. There’s been a great stink in the Lords because we’re all in the same position and finally the banks seem to have started to behave slightly better.

Nationwide had set up a new unit to pursue anybody with any likelihood of being a politically exposed person, It seems to be full of teenagers who couldn’t read or write so we thought it was spam. It wasn’t. Eventually sorted out but it was a year before I put any money in Nationwide again.

But it’s been dreadful for some people, totally unjustified”.

The other complaint about banks recently is that they raised mortgage rates in line with changes in interest rates but have not improved their savings rates on instant access accounts. The FCA have published a note on tackling this issue – see https://www.fca.org.uk/news/statements/fca-sets-out-expectation-fair-and-competitive-saving-rates.

It urges people to change banks to improve competition but will people do that if the process of opening an account is subject to tedious scrutiny and subsequent risk of closure?

The Treasury is apparently looking into this issue but bearing in mind this problem has been known about for many months, don’t expect any action soon.

Postscript: The latest news is that even Chancellor Jeremy Hunt was denied a Monzo account.

There surely needs to be some regulation of banks’ actions in this area.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Cutting Oil and Gas Production Could be Dangerous

The CEO of Shell has told the BBC that cutting oil and gas production would be “dangerous and irresponsible” because the switch to renewable energy is not happening fast enough. It would result in energy bills rocketing higher again.

The slow energy transition was also obvious from a recent report from the Energy Institute that notes that the consumption of crude oil continued in 2022. Although coal consumption fell in North America and Europe, overall global usage increased by 0.6% due to higher demand in India and China (see last week’s Investors Chronicle for more details).

It is very clear that demand for energy is still rising and that the alternative uses of oil/gas in industries such as plastics production and fertilizer production cannot be easily replaced.

The Just Stop Oil promoters are simply ignorant of the consequences of their campaign. See the book “How the World Really Works” which I reviewed for more explanation of the reality – see https://roliscon.blog/2022/02/14/how-the-world-really-works-book-review/ .

It is very clear that so far as investors are concerned, we should not be dashing headlong away from investment in major oil and gas companies. The world’s reliance on them is not disappearing and is actually growing regardless of the hectoring of politicians and environmental campaigners.  

Moving to alternative energy sources for some applications and sectors of the economy, or reducing energy consumption by improved building insulation, may make sense but they are only partial solutions and may only have a major impact in decades in the future, i.e. in longer time horizons than most investors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Reflections on the NHS, and Managing its Resources

Many people are celebrating the 75th anniversary of the founding of the National Health Service (NHS). As someone who has relied on it to keep me alive for the last 75 years, I am not however applauding it.

The NHS was certainly an improvement on health care provision in the UK before 1948 which I recall my parents talking about, but it does not compare well against the systems in most countries now. This was made very clear in a recently published report by the Kings Fund – see  https://www.kingsfund.org.uk/blog/2023/06/comparing-nhs-health-care-systems-other-countries-five-charts

To quote from it: “The UK has less medical equipment and fewer beds. Spending on health care increased substantially in the UK during the Covid-19 pandemic. But despite this, spending per person remains lower than the average [of comparable countries]. This impacts on the patient experience. For example, although there is no objectively ‘ideal’ number of scanners, the UK has fewer CT and MRI scanners than any of the comparator countries, which could be a reason – alongside shortages of imaging staff – for why diagnostic waits in the UK are so high.

The UK also has fewer hospital beds; 2.5 beds per 1,000 people, compared to an average of 3.2 beds per 1,000 in our basket. Again, fewer beds are not necessarily bad – this could reflect shorter hospital stays – but the high occupancy rates of beds in the UK (88 per cent in 2022/23, above recommended levels, and third highest in our basket) implies there is a shortage”.

There are clearly shortages of staff and long waits for non-urgent treatment which is driving people to pay privately for treatment. The Government has recently announced a new “long-term” plan for NHS staffing – see https://www.england.nhs.uk/2023/06/record-recruitment-and-reform-to-boost-patient-care-under-first-nhs-long-term-workforce-plan/ which includes this statement: “For the first time the Plan sets out long term workforce projections. Staffing shortfalls have been an issue since the foundation of the NHS and vacancies now stand at 112,000. The growing and ageing population, coupled with new treatments and therapies, means that without action, the gap could grow up to 360,000 by 2037”. Is it not astonishing that there has been no long-term plan before to match recruitment and training of staff to match likely demand?

As someone who has been a big user of the NHS over the last 75 years I have seen the problems in person. I have had a long history of kidney disease and other problems and a visit this week seems to suggest that the NHS is managing demand in a new way.

I have been on kidney dialysis before and had a transplant 25 years ago. But I either need another transplant or need to go on dialysis again. A meeting with a consultant last week was somewhat disconcerting. He explained how tedious dialysis can be, which I already knew. Without spelling it out, he seemed to be suggesting that at the age of 77, did I really want to stay alive much longer?

Is this another way to manage demand on the NHS? Persuade patients to give up hope? Dialysis is an expensive process for the NHS – more expensive than a kidney transplant but I am allegedly not fit enough for that. I am not keen to give up living just yet but the NHS appears to be managing its resources in a new way.

There is one thing for certain. The NHS is very bad at planning and managing its capacity. Last year I spent two weeks in Farnborough hospital which was an absolute waste of my time and hospital resources when I could have been treated as an out-patient while the ward conditions in a heatwave were very uncomfortable. This is simply not good enough in the modern world.

The NHS needs much more substantial reform to make it fit for the future. More money alone is not the solution. It needs major management reforms.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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FCA’s Mistaken Policy over Long-term Asset Funds

The Financial Conduct Authority (FCA) have released a “policy statement” containing proposals for new long-term asset funds and their regulation. See PS23/7 (https://www.fca.org.uk/publications/policy-statements/ps23-7-broadening-retail-access-long-term-asset-fund ).

The plan is that distribution of these open-ended funds will be extended to mass market retail investors. Self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs) will be able to invest into an LTAF. 

The LTAF is a new category of authorised open-ended fund specifically designed to invest efficiently in long-term, illiquid assets. Illiquid assets include venture capital, private equity, private debt, real estate and infrastructure. The FCA claims that they can provide a useful alternative investment opportunity for consumers able to bear the risks of such investments. They also say that “an ability to invest in long-term illiquid assets, through appropriately designed and managed investment vehicles such as the LTAF, is also important in supporting economic growth and the transition to a low-carbon economy”. But don’t private equity investment trusts already provide this?

This is surely an accident waiting to happen, particularly as it is proposed to exclude such funds from the Financial Services Compensation Scheme (FSCS).

The FCA also states that “While these investments can have a higher risk of loss than diversified portfolios of listed equities or bonds, they can also potentially deliver higher long-term returns in exchange for less liquidity”. Where is the evidence for this? Selling illiquid investments to retail investors via open-ended funds is a recipe for mis-selling claims and significant losses as we have seen with some property funds for example.

The AIC has come out strongly opposed to these proposals – see their press release here: https://www.theaic.co.uk/aic/news/press-releases/selling-ltafs-to-retail-investors-could-prove-to-be-a-mistake . To quote from it: “As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging”.

Has the FCA consulted experienced private investors before proposing these measures? Or is it being supported solely by financial institutions wanting to sell more such funds?

The proposed regulations of LTAFs are very complex and are unlikely to be understood by private investors while it is not even clear that they will qualify for ISAs.  

Private investors should respond to the FCA’s public consultation on these proposals – available from the first link above.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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City of London IT and Intercede Webinars

I have attended a couple of company webinars in the last 24 hours. These were from companies at two extremes – a large investment trust (City of London – CTY) mainly invested in large cap UK companies, and Intercede (IGP), a small AIM listed software company.

I have held CTY since 2011 and according to the Sharescope software my annual return to date is 11.2% per annum. I consider that a satisfactory outcome. At least they have been beating inflation which is not falling as expected and is now still at 8.7%.

The long-standing manager, Job Curtis, spoke well and is clearly very familiar with the portfolio. He is over 60 years old but does not intend to retire soon. This webinar was organised by ShareSoc. I do not know if a recording is available, but there were no great revelations.

The smaller company, Intercede, has been held since 2010 and I have been very patient with it. Overall annual return is 0.0% per annum with the share price ranging from 20p to 240p while I have held it (currently 52p). The company focussed on digital identities. A change of management took place 5 years ago which was well overdue but only now has that improved matters so far as results are concerned.

Revenue was up 22% last year and EPS up 83%.

They made their first acquisition last year (of Authlogics) which has expanded their product portfolio to cover additional security methods and they are clearly looking for others to cover the Zero Trust Standard.

I asked the following question: “You seem to be doing well with expanding your sales to US Government agencies and other government bodies but little news of commercial customers when surely organisations such as banks need the technology. Why is this?”. The answer was not exactly clear but the Authlogics acquisition should assist.

This webinar was on the Investor Meet Company platform and I recommend you watch the recording on there. It gives a clear picture of likely future progress.

I was positively impressed by that and the results. I think I will stick with this company and may buy some more shares, particularly if growth looks like it will continue.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Should Pension Funds Invest More In Equities?

This article was prompted by an item in Investors Chronicle entitled “Should pension funds be used to prop up UK markets? I think the simple answer is NO. But apparently City Minister Andrew Griffith said at a conference that “the Chancellor is spending a lot of time looking at how we can better unlock the billions of pounds held in UK pension schemes”.

Certainly one major concern is that the share of the stock market now owned by pension funds and insurance companies has fallen in the last 25 years from 53% to 6%.

Before the last war, pension funds invested almost exclusively in fixed income bonds and shares. But in the 1950s and 60s this situation was reversed as high inflation made fixed income securities less attractive. George Henry Ross Goobey, pension manager of the Imperial Tobacco pension fund, was one of the leaders of this revolution.  In 1955, Ross Goobey persuaded the trustees of Imperial Tobacco’s defined-benefit pension fund, one of the largest pension funds in the U.K., to adopt an idiosyncratic investment policy investing exclusively in equities. Due to the subsequently stellar performance of the pension fund, Ross Goobey acquired a reputation as “one of the most successful professional investors of all time” and, through his public advocacy of equity investment by pension funds, as the “father of the cult of equity – see Reference 1.

But company directors and pension fund trustees have become much more risk averse in the face of tougher regulations and such scandals as the collapse of the BHS pension fund where company directors tried to get rid of their pension liabilities.

We have now swung to the other extreme where pension fund managers are looking to have guarantees that they can match their future pension liabilities with no risk. That typically means buying gilts. But this has meant that investment firms have adopted leveraged Liability Driven Investment schemes (LDIs) which aim to produce higher returns than gilts. This came to a sticky end when interest rates rose sharply and pension funds had to dispose of holdings to match their collateral liabilities.

There is no way you can avoid risk if you wish to get a decent return. Investing in equities is more likely to give a good long-term return that is better than fixed interest, particularly in periods of high inflation which is where we are now.

The cult of the equity may have gone too far in the 1970s but the reversal is just as disconcerting and has led to the lack of investment in UK companies that we now have.

How do you fix the problem of lack of investment? Obviously you could do it by juggling the tax system to provide more returns on risk investments like equities. But the Government needs to look at why pension fund trustees and managers have become more risk averse which has resulted in lower returns. Excessive regulation is certainly one issue to look at.

More direct intervention in what pension funds can invest in is surely a mistake. Bureaucrats always fail to pick the commercial winners and forcing more investment in equities will undermine the market equilibrium.

Ref. 1 Cult of Equity https://www.pensionsarchive.org.uk/19/records/45/Cult%20of%20Equity%20-%20Yally%20Avrahampour.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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It’s Definitely the Silly Season

It’s that time in Summer when the sun has come out and media staff take their holidays. The stock market is just bouncing around with no clear direction of travel although large tech stocks are going up while small cap stocks remain in the doldrums.

Politics are just getting to be ridiculous while media stories have nothing better to talk about than what will Boris Johnson do next? Write for the Daily Mail is one new job apparently.

The hot weather encourages quick decisions but I think Boris would do best to ponder his future at some length. One commentator suggested Boris was trying to emulate Winston Churchill by becoming a famous writer until called back into politics when the country needed him but being in the wilderness for a while may be a good sabbatical for Boris I suggest.

As an example of how impulsive the current market is yesterday GB Group (GBG), in which I have a holding, fell about 10% but rose by 7% this morning. The fall was due to a large write down of goodwill apparently as a result of over-paying for a recent acquisition. This will be a non-cash charge in the accounts of course but it does not inspire confidence in the management while there are the usual several explanations for the poor results. Is this a temporary blip which is bound to happen when a company chooses to make a big acquisition for strategic reasons? Or is it a management failing?

Is this company faced with slower growth in what must be becoming a crowded sector for identity verification? Revenue still grew last year by 8.6% but free cash flow was down. I am beginning not to like the financial profile of this company and the share price chart over the last 5 years looks horrible but I will give them time to fix things. In the meantime, I suspect this is a sector where consolidation may soon be taking place.

Instead of spending money on holidays or putting it into the stock market I have bought a second-hand car and some other “mobility” aids. I got a surprisingly good trade-in value for my ten-year old Jaguar XF so I bought a newish Jaguar XE. Should last me as long as my life expectancy according to an optimistic doctor I saw recently.

But the vehicle is so complex you need to read a 130-page manual to figure out all the controls. As a former IT professional, I am not in the habit of reading the manual first for any new product but just like to dive in.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should Directors Get Index Linked Pay Rises?

Today I received notification of a General Meeting of Gresham House Energy Storage Fund (GRID). They are wanting to amend the previously agreed Remuneration Policy to give the directors an annual pay increase in line with the UK Consumer Price Index.

Is that reasonable? I don’t think so.

If everyone claimed such an increase then it would drive inflation higher as a matter of routine. The directors of this company should face up to the reality that we are all poorer as the result of high energy and other product prices from the war in Ukraine. They should not be protected against inflation as nobody else is.

In addition the wording of the resolution only refers to an “increase” but what if there is a general fall in prices. Are the directors going to take a pay cut?

This resolution is badly worded and is wrong in principle so I have voted against it. There may be some justification for reviewing the remuneration rate if inflation is high but it should be based on market circumstances not justification, and not be automatic.

But I had to vote via post because the on-line voting system did not recognise the Control Number.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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AGM Formats – Online Only?

This morning I received notification of the forthcoming AGM of ShareSoc. This will be an on-line only meeting via Zoom which surely contradicts the recommended format for AGMs even if I personally would only attend on-line due to current disabilities.

This morning I did attend the AGM of Kings Arms Yard VCT (KAY) which was also an on-line only meeting via the Lumi platform. It was well managed and all questions were answered. There were no significant issues raised and all votes were passed with large majorities. One point that was raised however was the increasing director remuneration and I voted against the Remuneration Report for that reason.

I do feel however that AGMs should be hybrid meetings not solely on-line unless there are good reasons to do otherwise. Meeting the directors in person and being able to ask questions in an informal setting gives you a lot more information and enables one to better judge whether they are competent.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should I Invest in Oil and/or Buy a New Car?

The stock market is quiescent and it is time to ponder questions such as should I buy more BP shares and should I buy an electric or hybrid car? There is an article in the FT today on the rejection of resolutions focussed on climate change at the ExxonMobil and Chevron annual meetings. It said: “shareholders solidly rejected climate change proposals at the US oil majors’ annual meetings on Wednesday, scaling back support from last year and splitting with results at peers in Europe where resolutions related to global warming have won stronger support. Only 11 per cent of Exxon shareholders supported a petition calling for the company to set emissions reduction targets that would be consistent with the goals of the 2015 Paris climate agreement. A similar proposal at Chevron received less than 10 per cent support”. See FT article here: https://www.ft.com/content/7faccadc-beef-4b10-be53-ae7aceaeafce

Resolutions on this subject at the BP and Shell AGMs were similarly defeated even though many institutional holders like to promote their green credentials.

Individual shareholders need to make up their own minds on how to vote on whether to put companies like BP and Shell out of business by stopping their oil development activities. Both BP and Shell argue for a transition to renewable energy at a pace acceptable to their customers and which does not impose unreasonable short-term costs and I agree with them. The transition to renewable energy for many purposes may make sense but for transportation carbon fuels have a very high energy intensity and the infrastructure to support electric vehicles means a high loss in the transmission system.

I have a pressing personal decision to make on this issue. My diesel-powered Jaguar XF is almost ten years old now and I like to buy a new car when they have done more than 60,000 miles as they get more unreliable and expensive to maintain after that. I don’t do many miles now so a somewhat smaller car might make some sense. But should it be an electric vehicle, a hybrid or a petrol/diesel one?

I think a hybrid is the best bet and have booked a test drive of a Toyota Corolla. They are self-charging hybrids but can only run a short distance on battery power so I am betting that petrol will be readily available for at least the next ten years.

I am surprised that Jaguar are still selling XF models but they do now have a petrol option and a “sportbrake” version which probably shows how well liked the car is but I fear that diesel will be discouraged by regulation soon.

They do sell all-electric models now but they are expensive and are bulky SUV style cars when I prefer smaller vehicles. Note that the environmental benefits of electric cars over petrol ones are quite marginal if you take the all-in lifetime environmental impact costs into account and the latest scare is that the heavier weight of electric vehicles is causing damage to our roads – thus explaining why there are so many potholes in our roads of late. The weight of current electric batteries is becoming a major problem while the production and recycling of batteries is a negative aspect not yet confronted.

Electric cars are cheaper than they used to be but they either have limited range or are expensive (£43,000 to £58,000 for a Tesla Model 3 for example, or over £70,000 for a Jaguar I-Pace).

Readers of this article can suggest alternatives for me to look at. Use the comment box below.

I could of course hold on to my current vehicle for another few years in the hope that Sadiq Khan changes his mind on the ULEZ expansion (my Jaguar XF is not compliant) or is not elected again next May. There are several strong contenders lining up to take him on. But I do so few miles within the ULEZ area (current and future) that it does not bother me much what the Mayor decides to do. Whatever he decides he is bound to be wrong based on his past decision record.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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