The Premier League and Football League in England both operate the so-called 'football creditors rule'. This rule has the effect of bringing what the league describes as football creditors, including other clubs, the manager and the players, to the front of the queue for payment when a football club becomes insolvent. It is a topical concern at the moment because of a spate of clubs going bust this summer including Southend, which is in court to answer a winding up petition for the third time in a year, and Portsmouth, the first Premiership club to go into administration.
The FA and the Football League attempt to justify their preference for football creditors by saying that they are trying to avoid a domino effect whereby the unpaid debts of one club, transfer moneys for instance, bring down another club and so on. There is some truth in this but football is by no means the only business where this is a likely scenario. Small builders are in constant danger of being let down by their debtors whilst, at the other end of the scale, one bank failure could bring down a whole banking house of cards. Why should there be one rule for football clubs and another rule for the rest of us?
The fact is that there is no such rule in law and HMRC, an unlikely hero in business, has brought a writ against the Premier League to prevent the Football Creditors Rule from being put into effect in the case of Portsmouth. Apparently the HMRC view is that the rule is 'unlawful'. It is bad enough when international sporting bodies such as FIFA and the IOC set themselves up as being above the law, and tax laws in particular, but it would be a disgrace if domestic associations could abuse their control of high profile sports to do the same.
The real injustice, of course, is that the main football creditor is usually the wages of the players. In the Premiership the payrolls are spectacularly out of proportion to ordinary life. Can anyone justify making those astronomical sums a special case whilst the taxes that the clubs and their players owe to the rest of us go unpaid?
Wednesday, 14 July 2010
Tuesday, 13 July 2010
No accounts, no mortgage
The FSA began its review of the mortgage market in the UK in 2005 and has now published its latest report on 'Responsible lending'. It recommends that anyone applying for a mortgage in future must be able to prove their income which will mean that self-employed people will need to produce accounts if they want to buy a home.
The alarming thing for anyone who is interested in the property market is the proportion of mortgages that have been self-certified; 45% over the period from 2005 - 2010 peaking at over 50% in 2008 and still at 43% in the first quarter of this year. If the FSA's proposals have the effect of excluding over 40% of buyers from the property market then we may see another drop in house prices as predicted by RICS for more immediate reasons.
The potential effect on the property market seems to be of less concern to the FSA than the need to ensure that there really is some substance behind the assessments that mortgage lenders carry out on borrowers. The report states that the sources of evidence for the assessment should be in writing, from an independent source and should be for a period long enough to cover fluctuations in income "and we would certainly not expect indirect evidence, such as providing headed paper or business cards, to be taken as verification of income". It may be possible that an annotated series of bank statements would meet these criteria but many borrowers will find that the only persuasive evidence will be properly prepared accounts, especially as the FSA report specifically excludes 'declarations of affordability' even if they are signed by an accountant. By inference the FSA is recommending that HMRC extends the pilot scheme which it ran last year that allowed lenders to check the details of a mortgage application against HMRC's own information. Anxious to close all loopholes the FSA also insists that 'fast-track' mortgage applications should have income verification.
The FSA believes that "it is possible for everyone to provide evidence of their income". There may be an element of judgement in that statement whereby 'everyone' actually means 'everyone who should be trusted with a mortgage' but it is true that everybody can learn to keep proper books of account if they do a simple course in bookkeeping like those available from the Accounting and Bookkeeping College.
The alarming thing for anyone who is interested in the property market is the proportion of mortgages that have been self-certified; 45% over the period from 2005 - 2010 peaking at over 50% in 2008 and still at 43% in the first quarter of this year. If the FSA's proposals have the effect of excluding over 40% of buyers from the property market then we may see another drop in house prices as predicted by RICS for more immediate reasons.
The potential effect on the property market seems to be of less concern to the FSA than the need to ensure that there really is some substance behind the assessments that mortgage lenders carry out on borrowers. The report states that the sources of evidence for the assessment should be in writing, from an independent source and should be for a period long enough to cover fluctuations in income "and we would certainly not expect indirect evidence, such as providing headed paper or business cards, to be taken as verification of income". It may be possible that an annotated series of bank statements would meet these criteria but many borrowers will find that the only persuasive evidence will be properly prepared accounts, especially as the FSA report specifically excludes 'declarations of affordability' even if they are signed by an accountant. By inference the FSA is recommending that HMRC extends the pilot scheme which it ran last year that allowed lenders to check the details of a mortgage application against HMRC's own information. Anxious to close all loopholes the FSA also insists that 'fast-track' mortgage applications should have income verification.
The FSA believes that "it is possible for everyone to provide evidence of their income". There may be an element of judgement in that statement whereby 'everyone' actually means 'everyone who should be trusted with a mortgage' but it is true that everybody can learn to keep proper books of account if they do a simple course in bookkeeping like those available from the Accounting and Bookkeeping College.
Wednesday, 7 July 2010
Accounting for failure of Bradford & Bingley
The BBC and other parts of the news media (including Accountancy Age!) have reported that the shareholders of Bradford & Bingley will receive no compensation for the forced nationalisation of the failed bank but they have made no attempt to account for the difference between the shareholders' claim and the assessed value of the business.
Fortunately for us, the information behind these somewhat limited news reports is readily available in the form of the Assessment Notice from the independent valuer, Peter Clokey. Like many other official insolvency documents this not only describes what the financial outcome is likely to be for the creditors and shareholders but also tells the story of how the business failed so catastrophically.
Bradford & Bingley had a tier 1 capital ratio (the key measure of financial security for a bank) of 7.6% in June 2008 and equity of £1.144bn. Both the ratio and the total capital had fallen during the preceding year due to trading losses but the capital ratio compared favourably with other UK banks and it would take many years of losses to use up more than a billion pounds of shareholders' funds. As such Bradford & Bingley shouldn't have been an early casualty of the September 2008 financial meltdown. Unfortunately, although it hadn't traded as recklessly as Northern Rock, for instance, it had been expanding and had financed that expansion by borrowing on the money market moving away from retail deposits as its main source of finance. The directors had assumed that money market funds would be available indefinitely and had no contingency plans. When interbank lending suddenly dried up in 2008 Bradford & Bingley was forced to resort to the Bank of England's Special Liquidity Scheme (SLS) borrowing £4.9bn from the UK taxpayer by 16 September 2008. The Bank of England restricted participation in the SLS to institutions that had the very highest borrowing credentials but the ratings agencies, Moody's and Fitch, had identified Bradford & Bingley as a bank that would need help to survive and were in the process of downgrading its credit rating. Unable to borrow from the money market or the Bank of England, Bradford & Bingley stood on the edge and, when retail depositors began to withdraw their savings, could no longer satisfy the FSA's funding conditions for taking deposits so, on Saturday 27 September, the FSA told the bank to close its doors on Monday morning.
The options open to the directors that weekend were administration or "a transfer of Bradford & Bingley into public ownership or the brokering of a deal with one or more third parties to sell all or part of Bradford & Bingley". The solicitors went ahead, drafted the administration papers and put the appropriate people on notice for Monday morning. Before Monday morning part of Bradford & Bingley, the deposit business part, was sold to Abbey but only with billions of pounds of support from HM Treasury. There had never been any other interested parties when banks around the world were rushing to shelter their precious cash resources.
In the end an administration was not the best option for the creditors and shareholders of Bradford & Bingley. The bank had sold its soul in the months leading up to September 2008. If Bradford & Bingley went into administration many of its debts, including the SLS funds, would need to be settled immediately and for the bank in administration to borrow money instantly on the open market would be prohibitively expensive. So expensive that it would absorb all the shareholders' funds leaving them with nothing. Public ownership hasn't proved any more rewarding for the shareholders but it was better than the alternative which would have been chaos.
Fortunately for us, the information behind these somewhat limited news reports is readily available in the form of the Assessment Notice from the independent valuer, Peter Clokey. Like many other official insolvency documents this not only describes what the financial outcome is likely to be for the creditors and shareholders but also tells the story of how the business failed so catastrophically.
Bradford & Bingley had a tier 1 capital ratio (the key measure of financial security for a bank) of 7.6% in June 2008 and equity of £1.144bn. Both the ratio and the total capital had fallen during the preceding year due to trading losses but the capital ratio compared favourably with other UK banks and it would take many years of losses to use up more than a billion pounds of shareholders' funds. As such Bradford & Bingley shouldn't have been an early casualty of the September 2008 financial meltdown. Unfortunately, although it hadn't traded as recklessly as Northern Rock, for instance, it had been expanding and had financed that expansion by borrowing on the money market moving away from retail deposits as its main source of finance. The directors had assumed that money market funds would be available indefinitely and had no contingency plans. When interbank lending suddenly dried up in 2008 Bradford & Bingley was forced to resort to the Bank of England's Special Liquidity Scheme (SLS) borrowing £4.9bn from the UK taxpayer by 16 September 2008. The Bank of England restricted participation in the SLS to institutions that had the very highest borrowing credentials but the ratings agencies, Moody's and Fitch, had identified Bradford & Bingley as a bank that would need help to survive and were in the process of downgrading its credit rating. Unable to borrow from the money market or the Bank of England, Bradford & Bingley stood on the edge and, when retail depositors began to withdraw their savings, could no longer satisfy the FSA's funding conditions for taking deposits so, on Saturday 27 September, the FSA told the bank to close its doors on Monday morning.
The options open to the directors that weekend were administration or "a transfer of Bradford & Bingley into public ownership or the brokering of a deal with one or more third parties to sell all or part of Bradford & Bingley". The solicitors went ahead, drafted the administration papers and put the appropriate people on notice for Monday morning. Before Monday morning part of Bradford & Bingley, the deposit business part, was sold to Abbey but only with billions of pounds of support from HM Treasury. There had never been any other interested parties when banks around the world were rushing to shelter their precious cash resources.
In the end an administration was not the best option for the creditors and shareholders of Bradford & Bingley. The bank had sold its soul in the months leading up to September 2008. If Bradford & Bingley went into administration many of its debts, including the SLS funds, would need to be settled immediately and for the bank in administration to borrow money instantly on the open market would be prohibitively expensive. So expensive that it would absorb all the shareholders' funds leaving them with nothing. Public ownership hasn't proved any more rewarding for the shareholders but it was better than the alternative which would have been chaos.
Tuesday, 6 July 2010
Driving the Economy
It may be property prices that drive the UK economy but one of the most reliable indicators of British economic confidence has always been the level of car sales. It seems that UK consumers immediately shelve their plans to buy a new car whenever the outlook seems less than rosy and can't wait to start driving new wheels when things start to look up.
Recognising this phenomenon makes last week's announcement from the Business Secretary, Vince Cable, that the government will no longer be providing financial support to the car industry seem especially inauspicious. This comes after the end of the car scrappage scheme which did so much to sustain the car industry in its darkest hour.
Yet that confidence sometimes takes on a life of its own as it did last month when, according to the Society of Motor Manufacturers and Traders, car sales were significantly higher than in June 2009 even without the scrappage subsidy. No doubt a number of different factors affected car sales in June but the overall picture must be one of increasing rather than declining confidence.
Does the effect work the other way, we wonder? If we buy more cars do we then admire our fancy new motor whilst thinking that things must be on the up? Perhaps we do, in which case we can expect even more buoyant consumer figures to come, at least until VAT rises next January.
Recognising this phenomenon makes last week's announcement from the Business Secretary, Vince Cable, that the government will no longer be providing financial support to the car industry seem especially inauspicious. This comes after the end of the car scrappage scheme which did so much to sustain the car industry in its darkest hour.
Yet that confidence sometimes takes on a life of its own as it did last month when, according to the Society of Motor Manufacturers and Traders, car sales were significantly higher than in June 2009 even without the scrappage subsidy. No doubt a number of different factors affected car sales in June but the overall picture must be one of increasing rather than declining confidence.
Does the effect work the other way, we wonder? If we buy more cars do we then admire our fancy new motor whilst thinking that things must be on the up? Perhaps we do, in which case we can expect even more buoyant consumer figures to come, at least until VAT rises next January.
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