Rip-off News round-up. Our pick of the last week's media (Thu 31st May)

Bankers' salaries up 37% over the last 4 years since the Banking Crisis.
To get around the regulation of their bonuses, they are switching the money from bonuses to salary. It looks like overall pay has dropped, but not as much as their share prices. FINANCIAL TIMES

Financial companies were forced to remove or amend more than 300 advertisements last year for breaching regulations, but details of the offending promotions have been kept secret. FSA more worried about protecting rippers-off than protecting you!

This leaves consumers with no way of knowing if they were misled. Which?

Shoppers can save 32% or more on fruit & veg by shunning supermarkets for street markets. 

It’s simply not true that supermarkets are cheaper. DAILY MAIL

MP’s report criticises staff cuts at HMRC. These staff could have enforced the collection of £1bn in tax avoided/evaded. 

For every £1 which has been saved in staff cuts, it has lost around £10 in tax revenue. DAILY MAIL

Inequality matters economically, not just politically. If poor families are hamstrung by low income and unpayable debts, spending and demand may be held back for years.

References work by National Institute of Economic and Social Research, and economist James Galbraith (son of the famous JK Galbraith). GUARDIAN

Inequality matters horticulturally with the hosepipe ban. If you put out a sprinkler or hold a hose to water your garden you are liable for a £1,000 fine. If you have invested in 'trickle irrigation', leaky pipes installed into your lawn, you can turn the taps on.
Thames Water rules for the hosepipe ban.

Firms that help fund people and small businesses to sue (whilst taking a cut of winnings) are growing. London is becoming the global litigation centre. 

Will it help the little guy take on big corporates and government, or just make the UK more wastefully litigious as people and businesses “try it on”? GUARDIAN

Christine Lagarde, scourge of tax evaders, pays no tax.
IMF boss who caused international outrage when she suggested that Greeks should pay their taxes earns a tax-free salary. DAILY MAIL

Gas rebranded as green energy by EU. 
You couldn't make it up! Victory for gas lobby as aims of €80bn EU renewable energy programme altered to channel money to 'low-carbon' fossil fuel.  GUARDIAN

Regulator accuses dentists of failing to tell patients of free or cheaper NHS care.
Office of Fair Trading says half a million patients a year may mistakenly pay for private dental care. GUARDIAN

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The government's new StartUp loan scheme for under-25s won't inspire young entrepreneurs

Forget whether we should be steering the young into setting up a business in the middle of a recession. A small loan makes no difference to most entrepreneurs, who are driven not by money but by emotional factors.

By Stefan Stern, visiting professor of management practice at the Cass Business School. 

You can't keep a good entrepreneur down. Take David Young, Lord Young of Graffham, who as a minister tried to rebrand the Department for Trade and Industry (as was) as the "Department for Enterprise" in the 1980s. In spite of a slight mishap 18 months ago, when he stepped down as a business adviser to David Cameron for talking insensitively about the recession, he has bounced back to speak up for entrepreneurship and the government's new StartUp loan scheme for under-25s. You can see what Margaret Thatcher saw in him, famously musing that "David brings me solutions" while other ministers merely whinged.

Young displays many of the characteristics that mark out a true entrepreneur. He is energetic, he is resilient, he is driven and he doesn't give up. These are the qualities that all business people need when the economy is as troubled as ours is today. The question is: can a new loan scheme for young people really help the economy by making entrepreneurialism more likely to flourish?

That is not at all clear. As Neil Lee, senior economist at the Work Foundation, points out, the failure rate for startups is high, and young people are less likely to be equipped for success than other more seasoned operators. "Successful entrepreneurship requires either a rare talent or skills, which most entrepreneurs only develop through time," Lee says.

While £2,500 may be enough to set up a modest office at home, it won't do anything to boost demand in the part of the economy you are trying to do business in. And while some mentoring is apparently going to be available, it will be a lonely task for a sole trader keeping a business going in this market.

Entrepreneurs are different. They don't take no for an answer. They pursue obsessions, beyond the point where other more conventional or conservative types would back down. They are also, crucially, often not really in it for the money. Their inner drive is emotional and may not have a rational basis. Sometimes entrepreneurs are trying to right a perceived wrong: they grew up in poverty and want to prove themselves, or perhaps they were bullied at school for being eccentric or a slow learner. Maybe a parent was unusually demanding, cruel or remote.

Whatever lies behind their ambition, true entrepreneurs will put up with a great deal of hardship and uncertainty in pursuit of their goals. So for many, while a small loan will be welcome, it is actually neither here nor there in terms of providing an incentive to start a business. They are going to do it anyway.

Young is right that today is not necessarily a terrible time to start a business. Some costs, such as office space, are low, and if you can keep revenue coming in at a time like this you should be well set for the moment (it must come, surely?) when the economy is more vigorous again. The growth in self-employment in recent times has kept official unemployment figures lower than they might have been. Clearly, many people are having to work hard and be "entrepreneurial" just to survive right now.

Still, we should be realistic about what this new loan scheme is likely to achieve. In an 80s TV commercial that trumpeted the then DTI as a "department for enterprise", a frustrated business leader declared that while his business was doing OK, it was "not doing great". In the summer of 2012 our problem is that the economy is not even doing OK, and there is not very much a new gang of enthusiastic wannabe entrepreneurs can really do about that.

The writer is visiting professor of management practice at the Cass Business School, London. He was a columnist for the FT, and now writes occasionally for the Guardian and the Independent.

This article was first published in the Guardian

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How much does the billions dodged by fat cats and corporates cost the average taxpayer?

KJ, Chris and Fee celebrate HMRC's launch of a new app that tells you... what, exactly?

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Liebrary - Beecroft Report claims sacking people in the UK is too difficult. But the OECD says we are already nearly the most easily fired of all people in the developed world.

 

It is well known that if you say something with sufficient confidence people will believe you. Facts become unimportant so long as they remain hidden. And you don't get to be a top politician or businessman by letting facts get in the way of your opinions and interests.

The Beecroft Report, written for the UK government by the venture capitalist Adrian Beecroft (whose investments include wonga.com, offering 4,000% payday loans to the hard-up), was completed in October 2011 and kept under wraps until it was leaked to the Daily Telegraph newspaper in May 2012. 

One of his recommendations is that “no fault dismissal” should be introduced into employment law. Beecroft strongly favours an “approach which allows an employer to dismiss anyone without giving a reason provided they make an enhanced leaving payment.” Beecroft goes on to say this approach would

“produce an instant improvement in performance in a significant part of the national workforce”.

In plain English, he reckons a significant part of the national workforce is slacking and could do with a bit more fear. To be fair, it was a British naval tradition every now and then execute an admiral to encourage the others, as happened to Admiral John Byng in 1757. Firing an occasional worker for no stated reason would surely encourage the others? And of course, those who have been sacked can always apply to wonga.com for a 4,000% loan (or perhaps not, as with no job and no payday would they actually qualify for a payday loan?).

Blathering politicians, sticking doggedly to their principle of ‘ignorance is bliss’, blissfully spout that excessive employment protection is disadvantaging British industry. The OECD, the club of high income countries, produces various economic measures and reports, including an index on employment protection. Far from having excessive protection, UK employment law provides the third weakest employment rights in the OECD’s survey of nations.

In a separate report by the OECD, we can see that far from being exceptionally uncooperative, British workers tend to take their dismissals with a stiff upper-lip. The scatter graphs from this report show Britons rarely contest or appeal against labour case decisions.

The 'specialisation index' on these graphs show that in the UK

• Specialised courts and lay judges mean the burden on the rest of the justice system is limited.
• There are simplified procedures for dismissal cases
• The burden of proof for a dismissal is on the employer, which is after all what the 'innocent until proven guilty' principle would expect.

Once again, the economic crisis is being used as cover for political changes. Chipping away at employment protection, pensions, wages, and other employee benefits. 

Even in the Tory party there are signs of exasperation at business bosses whining. We already have one of the weakest employment protection regimes. We already have about the lowest corporation taxes in the G20. The Tory cabinet minister William Hague commented, referring to Britain's bosses: 

"They should be getting on with the task of creating more of those jobs and more of those exports, rather than complaining about it."

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The Tobin Tax was meant for poor developing countries, not for the EU bailout!

British Prime Minister David Cameron is against the "Robin Hood" financial transaction tax. Fee and KJ are for it, but disagree on how it should be spent

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Rip-off News round-up. Our pick of the last week's media (Thu 24th May)

Signing up to an energy deal that offers ‘added extras’ (e.g. charitable donations, shopping vouchers, free gifts) could swell your gas and electricity bills by hundreds of pounds a year. 
Examples include SSE Energyplus Pulse, who will give £10 to the British Heart Foundation if you sign up with them, but it costs £87 more than their own cheapest deal, and £138 more than the cheapest deal on the market. WHICH?

Dozens of civil servants were paid "off pay-roll" for over 10years, avoiding tax. Danny Alexander, the Chief Secretary to the Treasury, says they will not be named.
A Whitehall review found that 2,000 senior public officials on over £58,200 a year were found to be paid “off payroll”." TELEGRAPH

Landlords cash in on by renting to youngsters and families unable to get on the housing ladder due to banks’ tough lending checks.
Buy-to-let loans account for a record one in eight of all outstanding mortgages. Loans taken out by landlords increased by a third in the first three months of 2012, compared with the same period last year. DAILY MAIL

Small firms are victims of a potential mis-selling scandal which could equal the £9bn payout to victims of the payment protection insurance debacle.
Banks accused of misleading small firms on the risks of special Interest Rate Swap deals, driving many healthy businesses out of business. DAILY MAIL

HomeServe, one of the biggest home repair insurers, is under investigation by the Financial Services Authority for mis-selling: misleading scripts, automated silent calls, ignoring customer complaints.

CEO admits the brand has been damaged. They call themselves the "fifth emergency service" but wouldn’t it be nice if they got a visit from the first... GUARDIAN

Parents are being misled into paying top-up fees to get free nursery care, say MPs. Report says some families are being incorrectly told they are eligible for government-funded free nursery only if they pay for extra hours. 
The Commons public accounts committee (PAC) promises to “investigate and pursue” any such cases. GUARDIAN

Payday loan company Wonga has been sending threatening letters to customers accusing them of committing fraud, when no evidence of fraud exists.
The Office of Fair Trading (OFT) has told Wonga to cease these aggressive tactics.  GUARDIAN

Investors sue Facebook over misleading forecasts after share price plunge. Facebook and banks including Morgan Stanley are accused of hiding weak growth forecasts ahead of its $16bn flotation last Friday.
The writ comes after stock market watchdog the Financial Industry Regulatory Authority launched a probe. DAILY MAIL

Survey says children naively believe that they will be earning £56,000 a year by the time they reach 35, more than twice the average yearly wage.
Points to an urgent need for financial education for children. TELEGRAPH 

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Train guards get 5% cut of penalty fares

The gang ask whether ticketing is designed to confuse

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Passenger Focus takes on rail operators that fine and prosecute passengers who had no intention to defraud

Have you been stung with a £200+ penalty fare or court summons? The consumer watchdog Passenger Focus is challenging rail operators to change the way they deal with passengers who don't have the right ticket. They want consistency, discretion, fairness, accountability, and transparency.

They are also making a direct appeal for passengers to tell them of their experiences.

Ticket to ride?

By Anthony Smith, chief executive of Passenger Focus.

Passenger Focus published today a major investigation into the passenger experience of Unpaid Fares Notices.

No one is in favour of fare dodgers but innocent passengers are being swept up along with those who had no intention to pay.

We have found cases of passengers who left their railcard at home but could prove later they had one, passengers who could not find one of their tickets but had proof of purchase and a ticket for one leg of the journey, and passengers who could not pick up tickets from a machine at a station (because the machines were not working) so were told by staff it was OK to get on. The common factor? No intention to defraud but all these passengers were hit with substantial ‘fines’ and, in some cases, threats of prosecution.

We think the industry needs to start treating its passengers better by giving them a second chance and deal with these situations a bit more sensibly and flexibly.

So what’s happening?

Before boarding a train it is the passenger’s responsibility to ensure that they have with them a valid ticket (or other form of authority to travel) for that train. Unless there were no facilities to  buy a ticket or if a train company has put up notices saying you can buy one on board then you risk being pursued for ‘ticketless travel’ if you board without a valid ticket or authority. Train companies that wish to do so have three main options: they can charge the full-price single or return fare, they can, in certain areas, charge a ‘Penalty Fare’, or they can bring a criminal prosecution.

It is hard to put a sense of scale on the issue. In the 2011 calendar year we received just under 400 appeal complaints from passengers who were being pursued for ticketless travel – 13% of our overall total – but we suspect this is just the tip of an iceberg. What we do know is that these cases can have a big impact on passengers and staff. Passengers resent the ‘fines’ levied and the accusation they are cheats, while front-line staff are left to manage the conflict this brings.

At present we only have details of the cases we have received ourselves – there is no information from the industry as to how many fines are issued or prosecutions mounted. We think there should be. Not only will this provide a better sense of scale but, generally speaking, more transparency drives more accountability. Requiring train companies to set out how many penalties are issued, for what, and how many are subsequently overturned may impact on their behaviour.

Examples

Mr H selected the ‘Print-at-Home’ option for his tickets but forgot to print them. On the day

he took his email confirmation to the ticket office who told him to speak to the train conductor. He did so prior to boarding and was advised to get on. His details were taken later by a different member of staff. He subsequently received a court summons for not having a valid ticket.

Two elderly, disabled passengers had tickets for a specific train. One of the passengers fell over and was in pain. In a desire to get home they travelled on an earlier train. They acknowledged that their tickets were not valid but felt that the train company would understand the circumstances. Wrong assumption: they were issued with an Unpaid Fares Notice for £239.

Miss A could not produce her ticket when asked. Despite having proof of purchase

and the return half of the ticket, she was threatened with prosecution unless she was

willing to pay £92 to ‘settle’.

Ms B could not produce her 16-25 Railcard when asked. The ticket inspector issued an Unpaid Fares Notice and told her that this was just a ‘reminder’ and that if she could provide the railcard then it would be alright. Despite providing proof of her railcard her appeal was declined.

Mrs C had her ticket checked on board the train. When she got off she left her ticket behind, believing that as it was an unstaffed station she would not need it again. A ticket check was in operation; she was subsequently offered an ‘out of court’ settlement if she paid £85 – the original ticket cost £2 and she had no prior record of ticketless travel.

Miss F bought an Advance ticket for a long-distance journey. She used her railcard – which reduced the fare from £14 to just under £10. She forgot her railcard and was issued a penalty fare for £260 (twice the most expensive peak fare for that journey). She was willing and able to prove that she had a railcard after the event but to no avail.

What we want

Introduce a code of practice for use in non-penalty fare areas which sets out clear and consistent guidelines on how passengers who board without a valid ticket should be dealt with. This must include areas where discretion should be shown and cover train companies and their agents. This includes:

• Clear rules for dealing with passengers with disabilities (including hidden disabilities), children and people for whom English is not a first language. 
• Rules for where a passenger has a ticket, but not for that particular train or has missed a booked train. 
• A formal right of appeal against any decision. Some train companies already operate ‘local’ guidelines and these can form a useful starting point when building a more consistent set of national criteria. 
• Passengers should not face a criminal prosecution without proof of intent to defraud. 
• Greater flexibility where a passenger can prove they bought a valid ticket but cannot produce the ticket when required. This could include:
  • a debit/credit card receipt• subsequently showing that you did have a railcard – ultimately we see no reason why this could not be automatically checked via a secure database.
• Greater transparency of how many penalties are issued, for what, and how many 

Has this happened to you? To help make the industry code as good as possible tell us your experiences at: 

http://www.facebook.com/#!PassengerFocus

Or post your thoughts on twitter: 

@passengerfocus

We need your help to get this right!

The full report "Ticket to Ride?" can be found at http://www.passengerfocus.org.uk/news-and-publications/document-search/document.asp?dsid=5549

Visit our website at www.passengerfocus.org.uk

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Liebrary: Is the top rate tax really paid by the wealthiest? In fact, the low paid have the highest marginal tax rate at 95%

Who do benefits really benefit? 


There is a general misconception that benefits are simply handouts to the poor. A misconception abused by drum banging politicians promising to starve the “work-shy” back into jobs. They hope to drum up votes by cutting benefit claimants' incomes and booting them out of the more desirable residential areas, with the collateral benefits of lower taxes and posher neighbours for the working man and woman.

The reality is benefits are just as much a subsidy to businesses:

a)      Businesses are able to pay lower wages, which are then topped up by the benefits system.

b)      Businesses are able to raise prices on the better paid majority of Ripped-Off Britons, knowing that the minority on benefits won’t be pushed into the disruptive behaviour of the desperate. It avoids untidy stuff like living on the streets, shop-lifting, and general misappropriation of unaffordable goods and services.

In short, the benefits system holds the heads of the poorest above water so the rest of us can get a soaking. It boosts profit margins with higher prices and lower wages, and in addition maintaining labour flexibility by keeping a pool of the willing but unemployed subsisting on the reserves bench. 

Sure, there are undoubtedly many benefits cheats. But the only people who get rich on benefits are employers paying lower wages and landlords charging higher rents.


The evidence for this can be seen in the marginal tax/deduction rates of those on benefits. In plain English – my ‘marginal tax/deduction rate’ is the percentage of the last pound I receive that is taken away by the government. It's taken either as taxes, or as deductions in the money I receive in the form of benefits and credits.

For example in 2012-13 tax year:

• For an individual earning the moderate salary of £25,000 per year, the tax on the 25,001th pound would be 20% (income tax) + 12% (NI Class1 contribution).
• A marginal tax/deduction rate of 32% means he pockets 68p in the pound.
• An individual earning £200,000 per year, the tax on the 200,001th pound would be 45% (income tax) + 2% (NI Class1 contribution, which is only 2% on the portion of salary above £42,475 per year).
• A marginal tax/deduction rate of 47% means she pockets 53p in the pound.

If that sounds a bit steep, consider a single parent with two children, working 30 hours a week earning the National Minimum Wage.

• National Minimum Wage pays about £9,120 per year (assuming 50 weeks work a year at £182 per week). For the 9,121th pound, taking into account withdrawal of benefits, she pays a marginal tax/deduction rate of 95.5%
• A marginal tax/deduction rate of 95% means she pockets 5p in the pound.

This graph, provided by the Excel spreadsheet wizards at the Department for Work and Pensions, is an excellent depiction of how benefits are withdrawn as employment income increases. Benefits are withdrawn at close to the rate employment earnings increase, leaving the individual little better off by getting a job.

In terms of marginal tax/deduction rate, the graph looks like this:

Spiking at times above 100%, this low paid person has to earn about £40,000 before his marginal rate drops below 47%, the amount paid by the earnings elite who earn above £200,000 per year.


It all makes one wonder why governments of all complexions are convinced that to incentivise the wealthy they need to be given more, and to incentivise the poor they need to be given less.


And by the way, government figures reveal that the number of benefits cheats is wildly exceeded by the number of those who don't claim the benefits they are entitled to. DWP figures published in 2010 indicate £1 billion of benefits pinched due to fraud, and upto £12.7 billion saved because those entitled did not make claims.

“Taking all six income-related benefits together, [Income Support, Pension Credit, Housing Benefit, Council Tax Benefit, Jobseeker’s Allowance (Income-Based) and Employment and Support Allowance (Income-Related)] there was between £6,930 million and £12,700 million left unclaimed in 2008-09; this compared to £38,110 million that was claimed and represents take-up by expenditure of between about 75 per cent and 85 per cent.”

Department of Works and Pensions, research published in June 2010.

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Worried about the global crisis? Watch the Alternative Austerity Olympics instead!

Why the London 2012 Olympic Games will be just a sideshow this summer

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Rip-off News round-up. Our pick of the last week's media (Thu 17th May)

Major UK-based firms cut secret tax deals with authorities in Luxembourg to avoid millions in corporation tax in Britain.
The BBC's Panorama focuses on GlaxoSmithKline and media company Northern & Shell (owners of Channel 5, the Express, OK! Magazine and others). The secret tax deals were devised by accountancy firm PriceWaterhouseCoopers. BBC

It's the same train at the same time, the difference is you've four tickets covering the journey rather than one and the total price drops from £264 to £40, says Moneysavingexpert.
According to Moneysavingexpert.com instead of buying a single ticket from departure to destination, you can save by buying tickets for parts of your journey. "To show how this works, we unearthed this cracking example. For a London to Penzance return, the cheapest ticket was an anytime return at £264. Yet the train stopped in Plymouth, so instead we found four singles. The total cost for those tickets was just £40, a saving of £224:

Phil Clarke, Tesco's chief executive, wrote to 5,000 middle managers warning them annual performance-based rewards would be cut by 80%. Workers are waiting to see if there will be a similar cut in boardroom pay. 

Clarke had his base salary pruned to £1.1m last year, but can still receive a maximum total pay package of £6.9m. DAILY MAIL

Government 'failing to get enough homes built,' leading to rising rental levels, growing homelessness, overcrowding, and a sustained property bubble. Number of completed homes in 2011 less than half what government admits is required annually to meet demand.

A building programme would also be a much-needed and powerful stimulus to economic growth GUARDIAN

Axa Sun Life sell their Over-50s Plan to cover funeral expenses, fronted by TV's Michael Parkinson: guaranteed fixed lump sum on death, no medical required, free Parker Pen! But millions will find it'll pay out less than you paid in. DAILY TELEGRAPH

Care home providers pocket millions as they continue to charge sick residents £700 a week when they are in hospital.  DAILY MAIL

New child benefit plan will be a disaster, says Institute of Chartered Accountants.
Ian Duncan Smith's attempts to simplify the benefits system will make it more complex, and unfair. DAILY TELEGRAPH

Ministers accuse business of not doing enough to revive the economy. Business accuse the government of the same thing, which is why they're holding back. Who will blink first?
Reports in April said large corporates were sitting on a cash pile of £750bn, afraid to spend it because of  all the uncertainty. DAILY TELEGRAPH

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Holidaying in Greece? Better go before they exit the Euro!

Fee tells KJ why she's hot-footing it to Greece

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OFGEM misses another opportunity to control rip-off energy bills by improving energy price transparency

Many companies duck and dive to avoid accusations that their charges are too high and their profits excessive. From plumbers to car repairmen to bankers, they all have a perfectly incomprehensible reason why they charge so much. Few do this more than the Big Six energy companies (British Gas, SSE, EDF, Scottish Power, Npower and EON). 

To expose the degree of profiteering that may be happening the energy companies would have to be transparent about both their operating costs and the profits they make on their wholesale energy sales. Something that has as much chance of happening as a snowball surviving in a working gas-fired boiler. The energy companies know keeping their businesses incomprehensible provides them with most excellent protective insulation from the chill wind of the free market. A mantle they weren't going to shed without a struggle.

In a rare show of courage OFGEM, in August 2011, decided to do something about all the obfuscation. OFGEM commissioned BDO, the accountancy firm, to conduct a forensic investigation and make recommendations on how to improve transparency. BDO duly made a set of eight proposals (see table on right).

Regrettably, by January 2011 OFGEM's courage was wavering. By May 2012 OFGEM had reverted to the same old obsequious poodle. This act of rank surrender by OFGEM was in spite of the Hills Report on fuel poverty, published by the Department of Energy and Climate Change in March 2012, which stated

"From a health and well-being perspective: living at low temperatures as a result of fuel poverty is likely to be a significant contributor not just to the excess winter deaths that occur each year (a total of 27,000 each year over the last decade in England and Wales), but to a much larger number of incidents of ill-health and demands on the National Health Service and a wider range of problems of social isolation and poor outcomes for young people."
Final report of the Fuel Poverty Review, Professor John Hills

OFGEM dropped six out of the eight BDO recommendations, and 'varied' the remaining two.

Profits are hidden by the vertically integrated energy suppliers by splitting themselves into two businesses. The Wholesale Business generates electricity, and the Retail Business sells it to domestic and business customers. The Retail Business uses high Wholesale prices to justify high prices to its customers. When buying electricity from itself, a vertically integrated company has every reason to keep Wholesale prices high, so they can claim their Retail profit margin is low and sometimes can even pretend to sell at a loss (and earn a little sympathy). 

This is all equivalent to a baker, whose cost per loaf of bread is 50p, selling it to customers for £1, and claiming a margin of 2p. How is this done? The bakery splits itself into two businesses - the baking business at the ovens and the retail business at the counter. The baking business, run by Mr Baker, 'sells' the bread to the counter business, run by Mrs Baker, for 98p - giving Mr Baker a markup of 48p. Mrs Baker then takes £1 from the customer, claiming to have a markup of just 2p. Mr & Mrs Baker then go home with a tidy 100% markup between them - bonuses and cream buns all round!

This dodgy story is supported by OFGEM, which publishes the energy companies' "net margin" - by which they mean net retail margin - without disclosing what their wholesale margin is (because the companies won't say, and OFGEM is too shy to ask).

OFGEM's methodology document for producing this graph admits the wholesale margin is left invisible, stating: 

1.17. Gross margin is calculated as the difference between the average customer bill and the sum of wholesale costs and other supply costs.

1.18. The net margin is calculated as the difference between gross margin and operating costs. Operating costs include customer service staffing, IT, sales and marketing, billing and bad debt costs.

Consumer Focus' commented, after OFGEM's initial response to BDO in January 2012

"In our view, the failure to take forward BDO’s recommendations for the reporting of  trading activities will mean that the CSS continue to give a misleading picture of the value of generation assets....

There still appears considerable scope for companies to under-report profitability, principally due to the continued opaqueness of trading arms, which represent something of an information black hole....

There is a risk that CSSs could introduce misleading information into the public sphere, which will ultimately serve to erode, rather than rebuild, consumer confidence in energy companies."

[CSS=Consolidated Segmental Statements]

The energy companies are famed for tricking and misleading their customers, most of whom are unable to see through the smoke and mirrors of the various deals they are offered. Richard Lloyd, executive director of Which? responded after SSE Plc was fined for mis-selling:

As SSE Plc is fined of £1.25M after being found guilty of using doorstep sellers to trick people into switching energy supplier, Which? executive director, Richard Lloyd, says:

“It’s right that SSE has been punished for this bad practice, but this fine will not help all those customers who may have been signed up with their misleading script."

“SSE should waste no time in contacting all those customers who were affected, and compensate them for any financial loss they may have suffered.”

At the end of April 2012 SSE promised to offer all its generated electricity on the open market - available to any wholesale purchaser. The idea is to encourage competition from smaller retail-only companies selling to end consumers. Of course this is a further burst of obscurantist hot air. In the open market the goods go to the highest bidder. The Big Six vertically integrated energy companies have every reason to bid high to buy their own electricity because the high price goes into their own pockets and disguises their retail margins.

It is disappointing, though characteristic, that OFGEM seems unwilling to clear away all the smoke being puffed around by the Big Six to provide cover for continuing price hikes.

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Rip-off News round-up. Our pick of the last week's media (Thu 10th May)

Water bills rise above inflation, yet almost a quarter of all water supply is still lost in leaks. Are water firms actually using that extra money to fix the leaks, or make profits? The regulator Ofwat seems incapable of finding out. DAILY MAIL

Paying a living wage is affordable for big companies in UK banking, construction, computing and food production sectors, according to a new report by the think tanks Resolution Foundation and IPPR. The average increase in the wage bill for listed companies in these sectors would be about 1 per cent or less. The living wage is currently set at £8.30 an hour in London and £7.20 outside London. More than 6 million people earn less than the Living Wage - around one in four UK workers.  GUARDIAN

High cost "payday" lender Wonga launches business loans service. Loans of up to £10,000 will be available for up to a year but critics say costly borrowing for small firms is 'irresponsible.' GUARDIAN

Almost all fund management companies refuse to disclose which way they vote in shareholder ballots e.g. CEO pay, strategy. Yet that's our money they're investing (pensions, ISAs, etc)! DAILY MAIL

Summary of shareholder revolts against fat cat pay. Mentions Aviva, Trinity Mirror and Astrazeneca (where the CEOs subsequently resigned) and UBS, Barclays, Inmarsat, Man Group, Citigroup, the New York Stock Exchange, Goldman Sachs (where the CEOs didn't!) DAILY TELEGRAPH

People die from hunger while speculators make a killing on trading in food commodities. Traders include Goldman Sachs, JP Morgan Chase, Barclays and Deutsche Bank, but it's nearly impossible to figure out who is betting how much.  GUARDIAN 

Shaming rogue lawyers: List of Britain's worst solicitors to be published for the first time this July. The most common complaint is about cost (a quarter of all cases), while the most commonly complained area of law is family law (18 per cent), residential conveyancing (17 per cent), probate (14 per cent) and then personal injury and litigation (both 9 per cent). DAILY MAIL

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Interest Rates Swaps being mis-sold to SMEs: a layman's guide to a textbook banking rip-off

To understand a rip-off of this scale, designed to be incomprehensible to customers, regulators and lawmakers, you need an insider's insight. Provided by our guest author Honestly Banking, the undercover banker.

At Honestly Banking we wanted to have a look inside the workings of Swaps, Hedging, Caps and Collars and throw some light into this obscure and complicated world. There has been a remarkable amount of media interest around the Swap mis-selling scandal. Inevitably it is hard to capture the real complexities of this involved area without over simplifying matters or getting highly technical.

A brief background: Banks have been selling Interest Rate Derivatives under the guise of ‘risk management’ for many years, firstly to big corporates, then to smaller companies and then when the greed got the better of them to anyone they could. You may think this sounds a lot like the sub-prime mortgages. Back then banks sold mortgages to unsuitable clients. Now they are selling swaps to unsuitable clients. Different product, same motivation – a quick profit.

With lower Interest Rates many people are discovering that they have been sold something that actually increases their risk. Additionally the banks have not been sticking to the rules and have been profiteering at the expense of small businesses and individuals. This is a completely different order of magnitude to PPI mis-selling. Homes, businesses, farms and livelihoods are being lost. Families are being ripped apart. Barclays have tried to gag their clients from even talking to the regulator, the FSA, about it.

Banks have developed this area into a highly profitable multi-million pound industry. It’s so profitable they have set up many regional sales centres to peddle their wares. They are staffed typically by smooth talking ‘risk advisors’ who bamboozle the unsuspecting client into something that will possibly be the worst decision of their lives.

Interest Rate Hedges (we will call them Hedges for brevity) fall into two main sorts. Those made of barriers and Swaps. They are all constructed out of Derivatives called Interest Rate Options. We will concentrate on the barrier type in this article as Swaps are really a series of barriers.

The simplest and most effective ‘Hedge’ is the Interest Rate Cap.  Here the client never pays more than the Cap level that they can choose to match their needs best. They get the full benefit from any falls in Interest Rates and there’s no break (penalty for ending the contract) cost as the premium is paid straight away up front. It’s a bit like  having a cap on your mortgage interest rate. Remember, no SME buys a hedge to make a profit – they just want to get protection from surprise interest rate hikes. It’s also the one banks sell the least of and are mostly likely not to mention to you. The simple reason is they make the smallest profit on them.

A development of the Cap is the Collar where the bank makes the client agree to a floor (below which the interest rate won’t fall whatever happens to the base rate), ostensibly to reduce the premium. In reality the value of the Floor far outweighs the cost of the Cap and the bank slyly pockets the difference. This also introduces new risks to the business of falling Interest Rates and means that the client is now speculating on Interest Rates - they are becoming Derivative Traders. If the interest rate falls beneath the floor then the client doesn’t benefit from the lower rate.

In reality they are often far more complex than this. A real life example: Mr Paul Adcock, of Adcock’s Electrical, who has been widely covered in the media, was sold a ‘Structured Collar’ by Barclays. In a Collar your Interest Rates float between two barriers. They have their risks, but the ‘structured’ bit is a nasty twist of the Investment Banker’s knife. In Mr Adcock’s case, this can mean as Interest Rates drop, the rate he pays actually goes up! More of a ‘Structured Noose’ really – the trouble starts when the floor drops!

In the example below, which is similar to Mr Adcocks’ toxic hedge, the floor is 4.7%. However much the Interest Rate falls beneath Floor Barrier, the client pays the bank the difference between the Interest Rate and the Floor, plus an equal amount above the Floor. This means as Interest Rates go down, the rate the Client pays actually increases. This isn’t risk management – it’s gambling. That’s what banks do, not SMEs.

As we can see in the example below, when Interest Rates drop to 2% the client is paying 2.7% below the floor and 2.7% above the floor giving the client an Interest Rate of 7.4%!

The effect on Mr Adcock is that he has had to lose 2 members of staff and this toxic structure has cost him over £175,000, in addition to the original £970,000 loan. Of course Barclays have made a fat profit out of Mr Adcock’s misfortune.

As can be seen in this example, a Structured Collar is a very poor Hedge against Interest Rate movements as there is only a narrow benefit within the collar; thereafter it increases the risk to the client. There are many other toxic Hedges being sold, often including the bank (only) having the option to cancel or extend the structure. These are Hedges, they are roulette.

The banks are not explaining all the risks and clients are pressurised into agreeing to these Hedges without fully understanding them. The banks know that they are required by legislation not to trade these products if the client doesn’t understand them – this is breached on a daily basis.

There is another hidden feature of Interest Rate Hedges that the banks have liked to keep quiet, and that is the cost of getting out of them. These are known as the exit or break costs. Banks like to use jargon to confuse their customers so they call this ‘mark to market’. Banks typically tell clients that there may be a cost or indeed a benefit when you exit your Hedge, but normally don’t give you any idea of how big this can be.

The break costs depends on market conditions and is a real cost to the bank as it goes and incurs this cost in the Interest Rate market. On a typical fixed rate loan this is a pre-agreed amount, often a percentage of the loan from 1-5%. On a Hedge it will fluctuate, but currently exit costs are varying from 25%-50% of the loan. This is because the Hedges are made up of Derivatives that derive their value from an underlying market. A small movement in this market can be magnified many times over, creating a huge liability. The way many of these trades are structured means that low interest rates have caused these high exit costs which the clients are stuck with if they want to exit. This is in addition to the loan repayment, the interest, and the fees. If you are confused by this, then you are in good company: not only the ripped-off SME businesses, but also many bankers. This is precisely why complex products like this are not permitted to be sold to unsophisticated customers. What this means is a business that borrows £1,000,000 may have to find another £500,000 to get out of the Hedge. As many clients are now saying, ‘if they told me that up-front I never would have agreed to it’.

Inside the bank’s Swap Sweat Shops there are legions of sales people, all getting bonuses, and they all have targets. It’s in their interests to sell the clients the most complex and costly Hedge possible. One rule is clear from the world of Hedging, that we would advise clients to keep in mind next time the sales man comes to call. The more complex the name of the Hedge, the more profitable it is for the bank and the worse it is for the client.

Despite the esoteric nature of the Hedging world, there’s been a notable up swell of activity by those affected. Probably the best known is Bully-Banks, which orchestrated a meeting of MPs on the issue. The FSA are slowly looking at the area and there have been some court cases settled already. The other concerning development is the plethora of claims management firms advertising in this area. This is a far more complex area than PPI and most of these claims companies do not have the relevant experience or required regulatory licences to advise on these Hedges. We may be selling another scandal developing in the claims management world.

Warren Buffet famously described Derivatives as being ‘weapons of financial mass destruction’ in 2003, some 5 years before the current financial crisis started. He also warned that Derivatives can push companies into a "spiral that can lead to a corporate meltdown". This is now happening across the nation of shopkeepers that is Britain. Why did the banks push people into unsuitable and dangerous contracts that will destroy their lives? It wasn’t banks providing prudent risk management, it was avarice.

[Authors Note: Interest Rate Hedges, Swaps, Caps, Collars and Derivatives are a very complex area. This article inevitability over-simplifies some of the issues. For more in-depth discussion, please visit www.HonestlyBanking.co.uk]

[Note from Jake: in June 2012 the FSA completed its investigation and instructed the banks to compensate their "unsophisticated" customers, stating the "sophisticated" customers are not covered. The FSA, in the judgement, defined "sophisticated" as being a customer who met "at least two of the following: (i) a turnover of more than £6.5 million; or (ii) a balance sheet total of more than £3.26 million; or (iii) more than 50 employees." This is the EU definition of a 'small business', letting the banks off compensating any medium sized businesses. So the battle is still on.]

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