David Postings, CEO of Bibby Financial Services, considers the risk of forgetting SMEs in this year’s UK Budget and looks at how the Small Business Bill’s accession into law later this year could affect funding for SMEs and their general operating environment

At the start of last year, 99% of all private sector businesses in the UK were SMEs, accounting for 47% of private sector employment and 33% of private sector turnover.

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For many SMEs, business rates are a significant proportion of their monthly expenditure, while suppliers delaying their deliveries or customers paying later than agreed can tip the financial scales into the red. Against this finely balanced operating environment, political manoeuvrings are often watched closely by many SMEs and on the run up to the general election in May many will pay close attention to see how the winning party’s manifesto will affect them.

During an election year, however, it is easy to forget about the Budget and before this year’s electioneering fully takes hold, it is important that our gaze remains firmly on the Chancellor of the Exchequer’s announcement later this month.

The Budget

From the Autumn Statement in December, we know there will be some key changes for business. Measures proposed to make it cheaper to hire apprentices, and doubling small business rate relief for another year, will surely see operating costs reduce for many businesses.

A £45 million (€61 million) boost to help SMEs to export goods and services beyond the crisis-ridden Eurozone was announced, encouraging businesses to target fast-growing economies in Asia, Africa and South America. Though a welcome move, whether this will be enough for the Government to stay on track to meet its export target of £1 trillion by 2020, remains to be seen.

An extension to the Funding for Lending scheme – which will see the scheme continue until January 2016 – and additional support for the British Business Bank have both been proposed and these measures aim to provide greater access to funding for many SMEs.

But is this a case of too little too late for the current government?...

Read the full feature in the March 2015 edition of Finance Monthly Magazine

Laith Khalaf, Senior Analyst, Hargreaves Lansdown

The average UK fund has returned 90% since December 1999, this compares with a return of 68% from the FTSE 100, with dividends re-invested, according to UK investment management firm Hargreaves Lansdown.

With UK managers increasingly investing outside the big blue chips of the FTSE 100, Hargreaves Lansdown says it is more appropriate to compare them to the FTSE All Share, which includes medium and smaller companies.

Over this period the FTSE All Share has also returned 90%, so the average active manager has performed exactly in line with the market, on average.

“While the FTSE 100 has only just recovered its 1999 high, some funds have made serious amounts of money for investors. This tells us some active managers do significantly outperform the index, even if many don’t. If investors can spend a little time picking out the winners, they stand a good chance of making themselves much wealthier,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

Marlborough Special Situations was the best performing fund over this period. It has been run continuously by Giles Hargreave. A £10,000 investment on December 30. 1999 would today be worth £71,770.

Schroder Recovery was the best performing UK fund over this period, excluding funds in the UK smaller companies sector. A £10,000 investment on December 30, 1999, would today be worth £50,877.

The performance of these funds illustrates the long-term rewards on offer to investors who pick good quality active funds. By comparison a typical UK index tracker fund would have turned £10,000 invested in 1999 into £17,900 now.

The best sectors for investment since 1999 have generally been in the emerging markets. Among the UK sectors index-linked gilts led the way. UK Smaller Companies were the best performing UK equity sector, followed by UK Equity Income, with the UK All Companies sector bringing up the rear.

Lloyds Banking Group has announced it is to pay its first shareholder dividend in six years after posting a much improved financial performance for 2014.

The bank announced a statutory profit before tax of £1.8 billion, a considerable increase on 2013’s figure of £0.4 billion. As a result, it is recommending a dividend of 0.75 pence per share in respect of 2014, amounting to £535 million.

Lloyds recorded a 26% increase in underlying profit, to £7.8 billion (2013: £6.2 billion) while its return on risk-weighted assets increased to 3.02% (2013: 2.14%)

Income was up 1% to £18.4 billion, excluding St. James’s Place effects in 2013. Net interest income up 8%, driven by margin improvement to 2.45%.

“Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk, UK focused retail and commercial bank. This has been made possible by the hard work of everyone at the Group. Today’s results also demonstrate that our profitability and capital position have improved significantly, and this has enabled the Board, for the first time in over six years, to recommend we pay a dividend to our shareholders,” said António Horta-Osório, Group Chief Executive.

“While we recognise we have more to do, we enter the next phase of our strategy from a position of strength. We will remain focused on our customers, embrace the digital age throughout the whole Group, continue our support for the UK economy and aim to deliver strong and sustainable returns for our shareholders.”

The UK’s RBS Group announced an attributable loss of £3,470 million (€4.7 billion) in 2014, compared with a loss of £8,995 million (€12.3 billion) in 2013, when it posted its 2014 financial report today.

However, the beleaguered banking group said it was making further progress towards a stronger, safer and more sustainable business.

“Last year we identified the areas we needed to improve in order to deliver our strategy - cost, complexity, capital and trust from our customers. The energy and resolve of our people have resulted in significant progress on each, and we have delivered on the goals we set for 2014,” said Ross McEwan, Chief Executive, RBS.

The 2014 results included a loss from discontinued operations of £3,445 million (€4.7 billion), which reflected a £3,994 million (€5.5 billion) fair value write-down in relation to the reclassification of Citizens to disposal groups, and a tax charge of £1.9 billion (€2.6 billion) which included a £1.5 billion (€2 billion) write-off of deferred tax assets.

Operating profit totalled £3,503 million (€4.8 billion) for 2014, compared with an operating loss of £7,500 million (€10.3 million) in 2013. This reflected improved operating results from the core domestic businesses together with significant impairment releases in Ulster Bank and RBS Capital Resolution (RCR).

Following its results release, RBS announced the following changes to its management team:

• Rory Cullinan will become Executive Chairman of CIB & Capital Resolution. He is currently CEO of RBS Capital Resolution Group (CRG).
• Donald Workman has been appointed as Executive Chairman, Private Banking.
• Rory Tapner, Chief Executive of Coutts, will step down and leave the bank, with immediate effect.

Within the overall strategic shape outlined for Corporate & Institutional Banking (CIB) in 2014, RBS said it is making further changes to improve its medium-term returns, building a stronger, safer and more sustainable business, focused mainly on UK and Western European customers, both corporates and financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.

Yesterday the FTSE 100 recorded its highest closing price ever, finishing at 6,949.63, higher than its previous best of 6,930.2, recorded on December 30, 1999, when the dot come boom was at its height.

In the same day, the FTSE also broke its previous highest intraday price, also achieved on that same day, of 6,950, with 6,958.89 reported yesterday.

However, while the FTSE may be reporting record figures, analysts warn that now might not be the best time to sell.

“It’s a red letter day for pension funds and stock market investors as the FTSE finally returns to the level it reached in December 1999. At the time the dot com party was in full swing, interest rates were at 5.5% and the average house cost just £75,000 (€102,000),” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

“Fast forward to today via the tech crash and the financial crisis, and the UK stock market has been propelled through its previous high by the global economic recovery and the vast money printing programmes of central banks.

“But that doesn’t automatically make it a good time to sell. The current level of the FTSE is underpinned by company profits to a much greater extent than it was in 1999. The economic backdrop is also encouraging for UK companies, with low interest rates, low inflation, and growth forecasts rising,” he added.

However, according to Khalaf, risks still lurk in the background as the market waits to see how the Eurozone agreement with Greece pans out, while the outcome of the UK’s General Election is bound to have market implications.

Balfour Beatty, the international infrastructure group, has announced that it has agreed heads of terms with the Trustee of the Balfour Beatty Pension Fund to re-profile the £85 million (€116 million) pension deficit payment, agreed at the time of the Parsons Brinckerhoff disposal, over eight years.

As stated in the trading update on 22 January, and following the decision to cancel the £200 million (€272 million) share buyback, the company entered into negotiations with the pension fund Trustee to re-profile the £85 million (€116 million) pension deficit payment, originally due in 2015. Under the heads of terms it is intended that the pension fund will participate in a Scottish Limited Partnership into which the company will be transferring PFI assets worth £85 million (€116 million). The £85 million (€116 million) pension deficit payment will then be made over an eight year period, starting with a £4 million (€5.5 million) cash payment in 2016 and increasing annually thereafter.

Leo Quinn, Balfour Beatty Group Chief Executive said: “We are pleased that the pension fund Trustee has worked with us to re-profile the pension payments, in light of the cancelled share buy-back. This gives a clear plan on how the pension deficit will be reduced over time, whilst maintaining balance sheet flexibility as we drive the required organisational change and performance improvement, as set out in the Build to Last programme we announced last week.”

Adrian Mathias, Chairman of the pension fund Trustee said: “We are pleased to have reached agreement with the company on this matter. We recognise the importance of a strong balance sheet to the company and welcome the opportunity to participate in the proposed Scottish Limited Partnership.”

The Financial Conduct Authority (FCA) has fined Aviva Investors Global Services Limited (Aviva Investors) £17,607,000 (€24 million) for systems and controls failings that meant it failed to manage conflicts of interest fairly. These weaknesses led to compensation of £132 million (€180 million) being paid to ensure that none of the funds Aviva Investors managed was adversely impacted.

“Ensuring that conflicts of interest are properly managed is central to the relationship of trust that must exist between asset managers and their customers. It is also a fundamental regulatory requirement. This case serves as an important reminder to firms of the importance of managing conflicts of interest effectively by implementing a robust control environment with effective systems to manage the risks. Not doing so risks customers’ interests being overlooked in favour of commercial or personal interests,” said Georgina Philippou, Acting Director of Enforcement and Market Oversight at the FCA.

“While Aviva Investors’ failings were serious, the FCA has recognised that its actions since reporting its failings were exceptional. The level of co-operation during the investigation and commitment to ensuring no customers were adversely impacted meant it qualified for a substantial reduction in the penalty.”

From 20 August 2005 to 30 June 2013, Aviva Investors employed a side-by-side management strategy on certain desks within its Fixed Income area whereby funds that paid differing levels of performance fees were managed by the same desk.

A proportion of these performance fees were paid to traders in Aviva Investors Fixed Income area who managed funds on a side-by-side basis. This type of incentive structure created conflicts of interest as these traders had an incentive to favour one fund over another. This risk was particularly acute on desks where funds traded in the same instruments.

Aviva Investors agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (Stage 1) discount under the FCA's executive settlement procedure. Were it not for this discount, the FCA would have imposed a financial penalty of £25.2 million (€34.2 million) on Aviva Investors.

Non-Executive Directors (NEDs) with specific responsibilities, such as Chairman, will come under the new Senior Managers Regime (SMR), the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have confirmed.

Following a detailed consultation across industry and with stakeholders it was also decided the regime would not apply to those NEDs who do not perform delegated responsibilities.

Martin Wheatley, Chief Executive of the FCA, explained: “Our approach is driven by wanting to ensure firms are managed in a way that reflects good governance and promotes the right culture and behaviours. Having a narrow SMR will also allow the FCA to focus regulatory resources on those responsible for key business areas and board committees. We want those senior individuals to be held accountable for the decisions they make and oversee. This is what people inside and outside the banking sector expect.

“NEDs play a vital role in providing challenge to and an independent oversight of the executive directors. Including all NEDs in the new regime would risk the unintended consequence of changing the whole nature of this vital role.”

The NED roles that will be in scope of the SMR are:

• Chairman;
• Senior Independent Director;
• and the Chairs of the Risk, Audit, Remuneration and Nominations Committees.
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The individuals performing these roles will be subject to all aspects of the Senior Managers Regime, including regulatory pre-approval, the FCA's and PRA's new conduct rules and the presumption of responsibility. Those NEDs who fall outside of the SMR will no longer be subject to regulatory pre-approval, will not be subject to the conduct rules nor the presumption of responsibility.

HSBC’s Group Chief Executive Stuart Gulliver blamed a ‘challenging year’ for the banking group’s 17% drop in profit before tax (PBT), as the financial giant posted its full year 2014 results today. The results follow allegations earlier this month that HSBC’s Swiss unit has assisted people to avoid and evade tax using hidden accounts in Geneva.

The beleaguered bank filed a PBT of $18.7 billion (€16.5 billion), down from US$22.6 billion (€19.9 billion) in 2013. The banking group said this primarily reflected lower business disposal and reclassification gains and the negative effect, on both revenue and costs, of significant items including fines, settlements, UK customer redress and associated provisions.

Adjusted PBT was broadly unchanged in 2014 at $22.8 billion (€20.1 billion) and excludes the year-on-year effects of foreign currency translation and significant items, compared with $23 billion (€20.3 billion) in 2013. Return on equity was lower at 7.3%, compared with 9.2% in 2013.

However, HSBC did report stable revenue, with 2014 adjusted revenue of $62 billion (€54.8 billion) compared with $61.8 billion (€54.6 billion) in 2013, underpinned by growth in Commercial Banking, notably in its home markets of Hong Kong and the UK.

Stuart Gulliver, Group Chief Executive said: “2014 was a challenging year in which we continued to work hard to improve business performance while managing the impact of a higher operating cost base. Profits disappointed, although a tough fourth quarter masked some of the progress made over the preceding three quarters Air Maniax. Many of the challenging aspects of the fourth quarter results were common to the industry as a whole. In spite of this, there were a number of encouraging signs, particularly in Commercial Banking, Payments & Cash Management and renminbi products and services. We were also able to continue to grow the dividend.”

Legal & General Group has announced its intention to acquire 100% of New Life Home Finance Limited for a consideration of £5 million (€6.7 million). Newlife is a privately owned UK-based provider of lifetime mortgage products. The acquisition by Legal & General's Retirement division is expected to complete during H1 2015, subject to FCA approval.

Newlife was founded in 2003 to manufacture and provide lifetime mortgages. These products are designed to assist homeowners to raise cash against the security of their property while continuing to own and live in their homes.

Legal & General has also entered into a funding agreement to be the sole funder of new lifetime mortgages originated by Newlife.

Bernie Hickman, Managing Director of Legal & General's Individual Retirement business said: “We are delighted to announce our acquisition of Newlife and our entry into the lifetime mortgage market. Over 60s in the UK have nearly £1.3 trillion (€1.75 trillion) in housing equity and we believe lifetime mortgages will become an increasingly popular way for many people to supplement their retirement income (www.airmaniax.com).

“Legal & General's acquisition of Newlife allows us to participate fully in this market, which we believe has huge potential. With close to £40 billion (€54 billion) of annuity assets, we have considerable capacity to provide future funding in this growing market.”

Peter Lucas, Executive Director and Co-founder, Newlife Group said: “We are looking forward to being part of Legal & General and to continue to build on the successful base we've established in the lifetime mortgage market. With Legal & General's reputation as a highly regarded customer focused brand and access to their distribution networks, we will be able to help meet the needs of more customers and so become a leader in this growing market.”

Investors expect a buoyant UK IPO market in the next 12 months despite the uncertainty caused by the approaching election, last year's IPO woes and a fall in oil prices, according to the first Investor Sentiment Index from BDO's Capital Markets team.

The global research, which questioned institutional investors investing in UK equities with a combined $10 trillion (€880 billion) under management, found that 76% of respondents expected the numbers of IPOs on the Alternative Investment Market (AIM) to increase or at least remain unchanged. At the same time, 77% expected the same for the number of IPOs on the Main List.

Chris Searle, Capital Markets Partner, said: "Despite all the uncertainty, global investors continue to rank the UK as a key place to do business. This positive sentiment is particularly welcome given the number of floats that failed to make it to the market last year."

A lack of UK bank funding was identified by 71% as the overwhelming reason why companies had to seek a listing in order to raise new funds, with technology companies singled out by 51% as particularly attractive for investors over the next 12 months. This was by far the most cited sector, followed by Consumer Goods (36%), Financials (33%) and Healthcare (30%).

In terms of company size, some 67% selected large companies of over £300 million (€400 million) market cap as the more attractive to investors in 2015.

New layers of regulation are forcing banks and other top financial institutions to raise salaries for specialist professionals in the UK, a new survey reveals, despite pressure to cut costs.

According to the Robert Walters Salary Survey, professionals across regulatory reporting, product control and internal audit sectors have been securing double digit pay rises in return for accepting a new job.

Many banks are also offering a range of non-financial incentives to retain other sought-after staff – most notably newly qualified accountants - including flexible working hours and improved work-life balance.

With an increasing number of institutions relocating away from London to cut costs, demand for regulatory specialists is also exacerbating talent shortages in the regions, particularly for managers and leaders with strong strategic management skills.

“Although muted salary growth remains the norm for most banking professionals, the weight of regulatory scrutiny means that experienced specialists are still able to command significant rises,” said Peter Milne, Director of Banking & Financial Services Recruitment at Robert Walters (www.dubaidesignweek.ae).

“Greater competition for the best candidates is also contributing to a number of other trends, including steeper contractor day rates and an increased level of hiring from regulatory bodies.

“While competitive remuneration is important, so too is cutting down on delays between interviewing and making an offer – many regulatory professionals are receiving multiple offers, so any delays put hiring managers at risk of missing out on preferred candidates.