Archives For Economy

Off the hook

aksaroya —  17 May 2013 — Leave a comment

Peter Williams, accountant and journalist, explores the contrast between the impassioned scapegoating of the ratings agencies during the onset of the financial crisis with the meek acceptance of the recent UK sovereign downgrade.

credit-rating

Credit-rating agencies have proven remarkably capable of withstanding the opprobrium of politicians. At the start of the financial crisis, politicians pilloried the agencies, and warned of dire consequences for their part in the crisis. But the tough talk has barely touched the work and the output of the rating agencies.

Perhaps inevitably, the discomfort of a UK sovereign downgrade from its coveted AAA status by the rating agencies has been seen partly through the prism of the political damage inflicted on UK chancellor George Osborne. But he is not alone: the UK has merely followed in the footsteps of the US and France in 2011 and 2012. A few weeks before Moody’s delivered its ratings verdict on the UK economy – and some would say on the chancellor’s stewardship – European politicians delivered theirs on how rating agencies should act in future. Those judgements could hardly have been more different.

The new EU rating agency rules amount to little more than an invitation to carry on as before. The final package aims to reduce the over reliance on ratings and make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt. In particular, the agencies will have to be more transparent when they are rating sovereigns, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt. The politicians’ stance softened markedly during negotiations with the agencies. The proposal for a state-funded agency was quietly shelved. It is a far cry from the blood and thunder that politicians were threatening back when the financial crisis was still raw and unfolding. The mood then was summed up by US politician Henry Waxman, who declared: ‘The story of the credit-rating agency is a story of colossal failure.’ The agencies’ failure to spot the problem with securities had broken the bond of trust and put the entire global financial system at risk. They were told to expect a radical overhaul, perhaps an entirely new system. The House of Lords report into the agencies in July 2011 was tellingly entitled Sovereign Credit Ratings:shooting the messenger?

Shooting the Messenger?

The four-month inquiry criticised the agencies’ role in the 2008 banking collapse but concluded its EU sovereign downgrades ‘merely reflected the seriousness of the problems in some member states’. The politicians’ overall view on the agencies? They should learn from their past failure to spot emerging risks. Well, yes. A little later, at the height of the Eurozone crisis in August 2011, one leading politician agreed with the Lords’ stance: ‘Credit-rating agencies, however imperfect, are trying to give market investors some idea of the creditworthiness of economies and businesses. They did not cause this.’ Such a view is perfectly reflected in the light-touch ratings agency regulatory regime now swinging into operation. The politician who struck the conciliatory note of reality? Yes, you guessed it: he of the recent credit downgrade, UK chancellor George Osborne.

This article first appeared in Accounting and Business magazine, UK edition, April 2013

In Economy, Uncategorized
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Through a glass darkly

aksaroya —  1 May 2013 — Leave a comment

The weaknesses of the credit ratings system are only too clear, but finding a way to address the conflict of interest issues without generating new problems is anything but straightforward, says Ramona Dzinkowski, economist and business journalist

share-prices

Since the Dodd-Frank Act of 2010, the US Securities and Exchange Commission (SEC) has had a multitude of objectives aimed at improving investor security in the US. One of the most important is to recommend a better system for rating securities to eliminate the potential conflict of interest between issuers and agencies while also taking measures to possibly eliminate investor reliance on the agencies altogether.

The crux of the matter is the issuer pays model, which is used by the vast majority of credit rating agencies. An agency is paid by an issuer for rating its security and the issuer generally then makes its credit rating publicly available for free. According to many observers, this creates an incentive on the part of the agencies to issue favourable ratings or delay possible downgrades. Ultimately, it’s seen as one of the many related problems underlying the financial crises of 2008.

In its December 2012 report to Congress on assigned credit ratings, the SEC reviewed a series of possible payment options for the agencies, including a model proposed by Congress whereby the SEC acts as middleman between issuer and agency. In other words, securities issuers will no longer be able to select their own rating agencies. The possible outcome of such a system has been the subject of much debate. For some, removing the choice of agency is a simple solution to the conflict of interest problem. However, others see it as a much more complicated issue, an affront to the free enterprise system as we know it, and a possible violation of the First and Fifth Amendments.

Meanwhile, the SEC is a long way down the road of removing requirements and references to rating agencies in its rules in an effort to eliminate the reliance on external agencies. The December 2012 SEC report declares: ‘Reducing reliance on credit ratings could mitigate conflicts of interest to the extent that it causes investors to use factors other than credit ratings to make investment decisions. If credit ratings are no longer used in statutes and regulations to confer benefits or relief, the incentive to obtain credit ratings that meet these requirements should be eliminated.’

For me, taken together, this presents an intellectual dilemma. On the one hand, Congress has taken measures to minimise the reliance on rating agencies by requiring the SEC to remove references to them in its rules; on the other, it proposes to increase their perceived or ‘endorsed’ credibility by having the SEC independently assign agencies to rate new issues. What is the policy direction here?

Also, there’s the lingering question of how these assignments would be made, given the annual SEC review of the agencies. Would the best agency win, all the time, resulting in a preferred agency with better compliance results being assigned a greater number of new issues, on average? Would this ultimately improve agency performance, or boost the market power of one of them in an already monopolistic industry? In addition, how many new SEC personnel would be required to administer the new system with its potential thousands of new complex releases every year?

There are still more questions than answers here. The SEC is currently organising a public roundtable to invite discussion from supporters and critics of the possible alternatives.

This article first appeared in Accounting and Business, International Edition, April 2013

In ACCA, Economy
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Employee ownership still blazing a trail

accapr —  22 March 2013 — 1 Comment

 

By Iain Hasdell, chief executive of the Employee Ownership Association

IASB

The current level of UK fascination with, and enthusiasm for, employee ownership is unprecedented.

It is now the most prominent alternative to conventional forms of business ownership in the UK. Interest in it within business communities is increasing daily. The number of employee-owned businesses is currently growing at an annual rate of 10 per cent. And there is a growing realisation that employee ownership in its many forms drives economic growth, innovation and quality whilst spreading wealth and optimising the fulfilment of employees. It already contributes, according to figures from the Employee Ownership Association (EOA), more than £30 billion each year to UK GDP.

The fact that it is a growing economic force in the UK is partly a reaction to our economic context. This context has called into question the short-termism of conventional forms of business ownership and the consequences of that on the economy and our communities. But the emerging popularity of employee ownership is also a response to the compelling evidence of its economic benefits, particularly the high levels of productivity and innovation it delivers. The Deputy Prime Minister will be discussing this when he launches a key EOA report on the economic business case for more employee ownership at the inaugural Oakeshott lecture on 27 March. The Coalition has confirmed a capital gains tax break for employers who sell their company to their employees in the Budget.

Despite the current momentum there remains much to do to create the kind of future for employee ownership that the EOA, with our members and a range of partners, have consistently sought. A future in which there is far greater awareness of employee ownership, its benefits and implementation options; there is a simplification of those options; and there is better access to finance and advice for organisations that want to create and/or fund employee ownership.

Work on all of those strands continues apace, mainly under the auspices of the Government sponsored Employee Ownership Implementation Group Chaired by Jo Swinson, the Minister with responsibility for employee ownership. After the Budget the Group will start to execute a significant awareness programme that will include a specific focus on accountants and financial advisors.

The majority of accountants and financial advisors, with some brilliant exceptions, do not yet fully understand employee ownership, the various models that are available, how to finance transitions to employee ownership and how corporate financial governance needs to work in businesses that are owned by their employees. Consequently they do not introduce the option of an employee buy out often enough and are sometimes found wanting when it comes to serving the needs of clients who are pursuing employee ownership. The awareness programme will really help to overcome this issue. There are encouraging signs that the accountancy profession is picking up the gauntlet of employee ownership in a very positive way. As the profession does this it will be making a vital contribution to the future growth of employee ownership in the UK.

The Implementation Group will also soon be launching a series of standard legal documents that will make it far easier to implement employee ownership. This is the simplification agenda in action.  And the Group is making progress on the development of an asset class of patient capital and social investment that aligns with the financial requirements of employee ownership.

So employee ownership continues to blaze a trail. We really are in the decade of employee ownership. It is now becoming a core component of the UK’s economic growth agenda. It is a successful business model in every sector of the economy that constantly challenges the conventional wisdom of those who suggest business ownership always needs external investors. And a range of measures are being put in place for the longer term to support the current growth in the number of employee-owned businesses in the UK.

Businesses, professional bodies and a host of others need to put their shoulders to the wheel to keep up this momentum – indeed to increase it. I am sure they will.

Let us all grab this great opportunity whilst we have it!

In Budget, Economy, Employee Ownership, Guest , , , ,
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‘Bland Budget’ will not kick-start the British economy

accapr —  20 March 2013 — Leave a comment

Chas Roy-Chowdhury-14

 

By Chas Roy-Chowdhury, head of taxation, ACCA

Well that’s it for the fourth Budget of the Coalition Government, and what a bore it was.

There wasn’t really any surprises, partly down to the leak from the Evening Standard less than one hour before George Osborne began his Budget speech.

I can’t help but feel that this Budget was very bland and that more could have been done to boost the economy.

The Chancellor of the Exchequer should have considered a temporary cut to the basic rate of income tax to 15 per cent for one year, instead of leaving it at 20 per cent, as people would have more money to spend and it would help revive the economy.

At a time when the economy is stalling, it needs a genuine boost. Cutting the basic rate to 15 per cent until 5 April 2014 would have been a brave move, but would help working families across the UK. Under today’s proposals they, and many others, will not notice any difference. A temporary tax cut seems drastic but these are exceptional circumstances.

The other “highlights” of the Budget was the personal allowance increase. On the face of it, looks good, but it will only benefit the population who are currently 20 per cent taxpayers, of which there are fewer and fewer. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will not just lose the benefits of the increased personal allowance they will actually need to pay additional tax on such things as savings and dividends because of the way the UK system taxes the top slice of income.

On the issue of tax avoidance – while it is no surprise the Chancellor went after it, he will always be treading a fine line between collecting tax and denting the UK’s appeal as a business-friendly economy – an essential requirement for our recovery.

A tougher looking tax avoidance regime might look good to the public, but while the Chancellor has been making noises about a global effort to crackdown on tax avoidance, unilateral measures such as GAAR, risk diverting businesses currently in or looking to move to the UK into the arms of other markets. The question will be whether other business-friendly tax initiatives, such as the patent box and the lower corporation tax rate will help the UK remain appealing. Some evidence would suggest the rot is already setting in.

The Chancellor mentioned that those who actively promote tax avoidance will be named and shamed. ACCA has always said that a ‘loose’ name and shame approach to tax avoidance is counterproductive. Tax avoidance is not illegal. Naming and shaming can penalise individuals and business reputations when they have not broken the law. There is also an issue over where you draw the line There isn’t a clear cliff edge between what you could say is acceptable tax planning and what is unacceptable tax avoidance. There is difficulty in terms of when name and shame becomes appropriate. Is it something that is linked to the amount of tax that isn’t paid, or the way tax is avoided?

There is always the risk with any name and shame approach that it becomes disproportionate and that companies promoting perfectly acceptable financial planning initiatives are severely punished when they have operated within the mainstream rules.

We hope that the Government has looked in more detail at the PAC’s proposals and will consider naming and shaming only when there is repeated, heavy use by individuals of tax avoidance initiatives. A quicker and wider review of the tax system needs to be considered, than what the Office of Tax Simplification (OTS) is currently resourced to implement, with a view to radical simplification.

On families and tax credit – the downside of this initiative is that it is a 20 per cent tax credit, when a full payment subsidy of £1,200 would be a much more beneficial vehicle for many young families struggling to meet childcare costs, which are notoriously expensive. The nature of a tax credit means that where a family is forking out thousands of pounds a year, it is the “carer” that will receive the complicated tax credit. If the Government is prepared to pay up to £2,400 for two children there is no reason why they cannot give it to families as a subsidy, irrespective of the amount they actually pay for the care. A one-child family with two working parents would hugely benefit from the extra funds.

Should one parent lose their job or decide for the benefit of their child or children that they wish to stay at home, the loss of this credit will be felt.

And then we turn to fuel duty – ACCA predicted the rise in fuel duty would be scrapped. That will be welcomed by households as well as businesses in the UK. ACCA’s Drivers for Change survey report showed that UK businesses identified fuel costs as a major short term challenge, so this may give them respite.

So is this a Budget for an “aspiration nation”, and for hardworking families? Time will tell…

Don’t forget to have a look at our coverage of the Budget as it happened here

In ACCA, Budget, Chas Roy-Chowdhury, Economy, Public Sector, Small business, Tax , , , , , , ,
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Allowance threshold change in Budget will be a blow to struggling majority

accapr —  15 March 2013 — Leave a comment

Chas Roy-Chowdhury-14

By Chas Roy-Chowdhury, head of taxation, ACCA

As the 2013 UK Budget approaches next week, ACCA called for the Chancellor of the Exchequer to use the Budget to increase the personal allowance threshold further than planned, without decreasing the level at which the 40 per cent tax band bites.

From 6 April this year, those turning 65 years old will no longer benefit from the higher personal allowance pensioners receive, which means some pensioners, who fall into the new 40 per cent tax bracket because of income from savings, dividends and part-time work, will be bitten by their tax bill.

This is a classic example of giving with one hand and taking with the other. It looks good for the Government to say that they are extending the personal allowance, but it is only true for the ever-shrinking population of 20 per cent taxpayers. By dropping the threshold for the 40 per cent income tax bracket, many hardworking people who will begin paying 40 per cent for the first time will lose the benefits of the increased personal allowance and they will need to pay additional tax on such things as savings and dividend income.

This is no longer the 1980s where only a small number paid the 40 per cent income tax. Many people who are working but struggling at the lower end of that bracket will not get much respite from an increase in the personal allowance. The Chancellor of the Exchequer should use the Budget on 20 March to give taxpayers a much-needed boost and raise the personal allowance for all income tax rates otherwise it is being less than honest.

Thirty years ago only five per cent of workers paid the 40 per cent tax rate – this has now more than doubled to more than 15 per cent today, which means more people will be affected by this change, even if their salaries do not sit comfortably in that threshold i.e. are on the borderline.

Is it fair to do this to pensioners who have paid their taxes throughout their working lives, only to penalise them for saving some of their pay for later in life?

It will be interesting to see how the Budget pans out and how the general public react to it as I believe it will be challenging times ahead.

Don’t forget to follow our Twitterfeeds for live coverage and comment on the Budget as it is announced on Wednesday 20 March from 12.30pm.

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In ACCA, Budget, Chas Roy-Chowdhury, Economy, Tax , , , ,
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