It's the poor who suffer most

THE FAREPAK DISASTER

NOT AN ISOLATED INCIDENT - JUST BIG BUSINESS AS USUAL

The disgrace of Farepak has captured the national headlines. And so it should, over 150,000 of Britain's poorer and more vulnerable people used Farepak's savings voucher scheme to put money aside to buy something extra at Christmas. The 'missing' sums of money amount to somewhere between £40million and £60 million. This means that Farepak, its parent company and a bank seem to have expropriated over £40 million pounds from some of the least well-off people in the country. And apparently all without breaking the law.
Such savings schemes have a long and honourable history - and despite the fact that Farepak disgracefully didn't pay any interest on the money advanced by savers, the firm seemed to be solid and reliable - a much better bet than loan sharks, the bane of the poor.

A swindle perpetrated by backstreet crooks?

The first instinct is to conclude that this is perhaps another swindle cooked up by crooked operators from the murky fringes of the black economy - after all, the poorer people of our nation are constantly beset by such rogues - from loan sharks to dodgy salesmen. But this story points as straight as an arrow right to the heart of the mainstream UK financial/industrial system.
As the story of Farepak unfolds, it encompasses an ever-widening cast of actors, principal amongst them being HBOS, a giant bank, which has recouped most of its loans to Farepak's parent company, European Home Retail (previously the door-to door selling company Kleeneze), apparently by the stratagem of ensuring that Farepak continued to receive savers' cash despite the fact that it was known that the parent was in trouble. So Farepak savers' money seems to have been used to prop up a dodgy EHR group for many months enabling HBOS to get its money out.
Another prime actor in the disaster is Sir Clive Thompson, chairman of EHR, an erstwhile hero of the City, once known by his admiring following of analysts and investors as 'Mr Twenty Percent', by virtue of the remarkable returns generated by Rentokil Initial plc under his leadership. Sir Clive was well rewarded for his company's performance - a rough ratio of his pay to that of the average employee in Rentokil was about 155:1. In the good old days before executive pay really took off, Sir Clive was a trailblazer for the burgeoning top executive pay boom that followed. Alas, the average Rentokil employee didn't share Sir Clive's bonanza.
Sir Clive's hero status didn't last as after several years of stratospheric profits, Rentokil's performance suddenly plunged over a precipice, and has not recovered since.
Straws in the wind as to what might have happened are the description of the roots of Rentokil's problems by one of his successors, Mr. Doug Flynn, recently appointed CEO, reported in the Guardian of August 26^th 2005:

Reporting a 40% slump in pre-tax profits to £93.2m for the first half of the year, the Rentokil boss said that the firm's performance had been in decline since 1998, when the '20% era' of continual earnings growth ended.
Sir Clive was shown the door as chairman in May last year.
James Wilde, his relatively new appointment as chief executive, followed last summer.
New CEO, Mr. Doug. Flynn, who joined from Aegis this spring, has been assessing the state of the business:
"Our review has shown how the pressures - both internal and external - to meet (City) expectations led to management prioritisation of very short-term goals", he said.
The new bosses, including chairman Brian McGowan, added: "Prices were pushed to unsustainable levels. Costs were relentlessly taken out - often to the detriment of growing the business. Service quality was sacrificed. Sales efforts were impeded. As budgets became ever more unrealistic, so morale dropped
"Since service quality is the single most important matter for our customers, declining service has resulted in a high level of terminations", the management statement added.
Rentokil had also suffered in being deficient in customer data analysis, partly due to insufficient IT spending, while its organisation and structure were ineffective.
"It has been based on a 'command-and-control' approach and has impeded rather than ensured good decision-making. It has encouraged a silo mentality and has resulted in the organisation becoming overly centralised and inward looking", said the statement.

Students of management could probably not find a better description of exploitation and underinvestment undermining a company's future for the sake of short term results.

In addition to his service as CEO and Chairman of Rentokil Initial, Sir Clive is past President of the Confederation of British Industry and a past director of J. Sainsbury, Wellcome plc, British American Tobacco plc, Seeboard and Caradon, and has since been the recipient of several lucrative directorships in addition to EHR.

A story straight from the commanding heights of British finance and industry.

The point of identifying Sir Clive and HBOS as key actors in the Farepak tragedy is that they connect an apparently isolated incident with the heart of British industry and especially the banking and financial services industries. Here's how, according to the Daily Telegraph business section:

Farepak's Thompson: 'HBOS hung us out to dry'

You might call it the Digby defence. Once again we have the unedifying spectacle of one of Britain's top businessmen shrugging his shoulders and refusing to take the blame for a train wreck on his watch.
Last week's defiant defendant was Sir Digby Jones, the former director general of the CBI and non-executive director of troubled software supplier iSoft. He argued it was wrong to expect independent board members to police the actions of their fellow managers.
Ask tough questions? Yes, of course. But check the answers? Simply not practical.
This week another business knight, Sir Clive Thompson, takes the less than chivalrous line that as chairman of European Home Retail, he was there to lead the board, not the company. The fact that the board led EHR into receivership while continuing to receive cash from Christmas club savers at Farepak was unfortunate, he says, but largely the fault of the company's bankers.
Since this newspaper first revealed last month financial details of how the Farepak piggybank was raided, most media coverage of the scandal has generated more heat than light. Customers are understandably furious to discover that the money they thought they were diligently saving has disappeared. Politicians have been quick to depict anyone associated with the company as the Grinch who stole Christmas. But Thompson's exclusive testimony today - however unconvincing it may be on matters of corporate governance - sheds vital new light on exactly who deserves blame for what.
One emerging Grinch character is Halifax/Bank of Scotland, the bank that declined to give a little extra when EHR came looking for a bigger overdraft to tide it over until after Christmas.
At first HBOS looked to be just another victim of Farepak's mismanagement. Unlike the Christmas savers, it did receive most of its cash back, but it could hardly be blamed for refusing to pour good money after bad by propping up a fatally flawed business.
Yet it is now suggested that HBOS went out of its way to prevent Farepak from protecting the savers' money once the company got into financial difficulties last August. Thomson claims the bank not only blocked several attempted rescue deals but specifically wrote to prevent directors from ringfencing the Christmas club money which was used as security for its loan.
One lesson from this sorry saga is that savings club money should never again be allowed to support other corporate finances without adequate protection.
Halifax would never dream of doing this to its own customers - indeed there are strict banking rules to make sure it always has enough money in reserve to pay them. It has yet to offer a convincing explanation for why it chose to push to the front of the queue at Farepak.
The story has wider implications too. As the Financial Services Authority warned last week, there is a serious risk of other British businesses getting into difficulty over the coming months as a result of a recent explosion in leveraged buy-outs by private equity firms.
In each of these cases, banks and other lenders will be asked to make difficult decisions on when to pull the plug and how much to help customers, employers and pensioners before they do so. Not all cases will be as emotive as Farepak, but lenders would be well advised to think of their reputation as well as their legal rights before pushing to the front too aggressively.

Sir Clive, like Sir Digby, is not a peripheral figure on the British industrial scene - he has been a director of six FTSE 100 companies and still earns well over £1m a year from directorships and advisory positions. Further investigation reveals that EHR, under Sir Clive's chairmanship, and managed by Mr Rolleson, since disappeared from the scene, used Farepak's savers' money to help fund a stream of acquisitions, many of which failed badly and bled EHR dry.

The Farepak scandal is just one episode in a long history of uncaring irresponsibility demonstrated by many of those who we are supposed to look up to for leadership. Top jobs command top rewards. Far too often those in highly rewarded and powerful positions seem to neglect the duty of care that they should owe staff, customers and society. The apparent attitudes of Sir Clive Thompson and Sir Digby Jones - denying their responsibility for the actions of the companies that they chair, casting about for others to blame - are not good examples of demonstrating care. And a lack of care at the top can lead to irresponsibility, incompetence and evasion of accountability eventually leading to deception and outright dishonesty. We have witnessed all of these things from the commanding heights of UK finance and industry.

Heroes and villains

A number of retail companies including Sainsbury and Tesco - the erstwhile beneficiaries of Farepak saver's money - have put significant amounts of money into a fund for the victims. Members of the public and HBOS have also stumped up contributions. All of this is very laudable, but at a current total of £4m insignificant by comparison with the losses incurred by savers.

The whole story of the uncaring attitudes of the major culprits have just been put in context by the actions of a Farepak subscription collector, who has just paid out her life savings to her customers by way of some compensation. May she receive her rewards in heaven - may the rich and powerful perpetrators also receive their just desserts!

Just desserts

Farepak is a disaster for its savers, but only the very tip of a huge iceberg of rip-offs committed continually by some of the biggest companies in the land - often abetted by government. Perhaps those who lead companies who are found to be guilty of blatant incompetence or mal-practise should be given yellow and red cards to stop them working as business leaders for specified periods - or in the case of the worst offenders with serial records - for ever. This might encourage such as Sir Digby and Sir Clive to pay great attention to their responsibilities, checking out the answers as well as asking the questions. Several Enron directors have received stiff prison sentences - and the Enron disaster cost billions less than some of the scams and malpractices perpetrated on the public by the UK financial services industry. We need someone like Eliot Spitzer, former state prosecutor for New York to strike fear into a few breasts.

Here are two quotes from Spitzer that UK authorities should take seriously to heart:

"First and most important, I think business leaders have to make it clear throughout their companies that there is a zero tolerance standard - one infraction and you're gone. There are no excuses, there are no explanations. It may sound harsh, but in order to recoup what we've lost, we need to begin with this approach".
Q. "So, have you found an alternative to traditional regulation that is a more effective way to use the law"?
A. "For some kinds of cases, I think so. Sending CEO's to jail works as a deterrent".

What about it, Mr. Brown?

ADDENDUM

Tragically, Farepak is simply one episode in a long history of scams and rip-offs.

Here is a short collection of events and perspectives that have impacted on the public consciousness in the last 20 years. As the scandals and uncaring behaviour continues, nothing has yet deterred finance and industry from continuing to regard their customers as cannon fodder.

Personal pensions mis-selling. The pensions industry, taking advantage of the deregulation of the provision of pensions and the opportunity to sell people alternatives to their occupational pensions, sold millions of personal pension plans, frequently grossly over-selling their benefits by comparison with previous arrangements.
Millions lost out and eventual compensation, delivered reluctantly by the pensions companies, amounted to more than £15 billion. This represented deception on a bewildering scale, and scarred many people. (The financial services industry is slavering to have a second bite at consumers through the Adair Turner's proposed National Pensions Savings Scheme - and incandescent with rage and righteous indignation at the thought that that the scheme might be protected from them).
Endowment Mortgages. Individuals were sold insurance-based savings schemes that were initially guaranteed to mature and pay off their mortgages at a specified future date. Unfortunately, investment returns were not sufficient to cover the whole mortgage, and hundreds of thousands, if not millions, of people were left with large shortfalls that they did not expect. Again, another example of mis-selling by the industry, leading to a shortfall of some £40 billion - that's a lot of shortfall for a lot of people.
Precipice Bonds. People were offered very high income returns on investment bonds - what most did not appreciate was that the promise did not cover the value of the investment capital - a large number of individual investors lost large amounts of capital, to the tune of £2.2 billion.
Split capital investments, initially designed for rich and sophisticated investors, but then marketed to a more general market. Investors expected either to receive an enhanced capital sum at the end of an investment period, or income plus a capital sum. These bonds were sold as safe investments, but in many cases turned out to be anything but.
Over 50, 000 people lost over £700 million.
Additional Voluntary Pension Contributions. A large number of prudent people topped up their pension contributions in the expectation that they would receive an enhanced pension at retirement age. The collapse of Equitable Life, a major AVC provider, cost thousands over 50% of their hard-earned savings.

Behind the high-profile cases - a constant stream of lower-level malpractise.

The high profile cases represent the high notes of a discordant symphony. The background 'music', which is likely to impact the public consciousness just as much is an almost daily dirge of mal-practise and excess. Here is a small random sample:

Pressure selling of loan and credit deals, including sending blank cheques and inviting people to 'take the money now'. The banking, loan and credit industries have bombarded the populace with offers based on the seductive notion that people can have everything that they want - immediately.
The result is a huge burgeoning of personal debt, which is bound eventually to hurt millions when they cannot repay. Patrick Hosking in the 'New Statesman' gives the example of Lloyds TSB, which badgered a couple into taking on a loan of £100,000, despite the fact that the husband was unemployed and mentally ill and the wife was a low-paid part-time nursing assistant.
An audit revealed that staff were highly incentivised to maximise loans - a sample of 185 loans revealed that 104 were inadequately documented and evidence that a further 31 borrowers could not afford the loans.
Banks and credit card companies have been publicly castigated by MP's for their 'excessive' rates of interest on loans.

Profiteering by banks on credit card insurance, according to the 'Guardian' of April 4^th 2005. About 25% credit card customers and half of loan customers buy payment protection from the banks. About 14% of Lloyds TSB profits and 180% of Egg's come from credit insurance. DTI figures show that only 4% of customers (some of whom are unaware of the fact that it is optional) claim on the insurances and of this tiny minority one quarter are turned down. Consumer groups reacted angrily to what they described as blatant profiteering.

Charging on ATM 'Hole in the Wall' machines. Following a considerable outcry at the growing habit of banks to charge for the use of ATM machines, the practise was curtailed. Now the practise is creeping back through the back door by banks selling their machines to ATM operators who charge customers. Banks have also been castigated for varying interest payments on savings and loans without direct notification to customers and a variety of sharp practises that have stirred a deep well of ill-feeling amongst their customers.

Some Building Societies have been exposed as offering incentives, such as a £3,299 plasma TV to people who sign up for mortgages, sometimes up to 130% of the value of their properties.

"Standard Life reneges on payouts", says the 'Guardian' of October 6th 2004. Indeed it appears that Standard Life, preparing for flotation, has withdrawn an implied 'promise' to bail out mortgage endowment holders facing shortfalls. Says the 'Guardian', The move affects 600,000 policyholders covered by the pledge, many of whom will now receive top-up payments that are tens of thousands of pounds less than they were expecting.

Nor are the above cherry-picked examples - the exceptions to an otherwise unblemished record of customer service. Here is a random selection of items collected from a casual scan of the papers on a couple of days during October and November 2006.

City bonuses are postulated to reach £19 billion, whilst, with a straight face, the minister for the City, Ed Balls, exhorts the rest of us to keep inflationary pay increases down - citing around 2% as a benchmark.
FTSE top managers' pension provisions reach an average of £3 million, led by Lord Browne of BP with £20 million, Sir Francis McKay of Compass of £16 million and Sir John Sunderland of Cadbury Schweppes, £15 million. Meanwhile, over 50% of FTSE 100 companies have closed their final salary schemes for ordinary new employees.
The government issued bum guidance to pension plan members, advising that their pension funds were safe - and when subsequently they folded refused to accept any responsibility for the consequences, despite being exhorted to do so by MPs and the parliamentary ombudsman.
Debt management companies' turnover and profits boom as personal indebtedness soars. Debt companies are accused of leading clients towards individual voluntary arrangements to manage repayments at a reported £1000 fee.
Banks and other lenders continue to sell 'cheap' credit, using the usual 'Why wait, you can have it now message, despite soaring levels of personal debt and bankruptcy.
The Guardian of 20.10.2006 headlines: "Borrowers in £1bn insurance con". The Office of Fair Trading reported that Britain's high street banks rip off customers when they sell them insurance to cover monthly payments on loans, credit cards and mortgages. The consumer watchdog believes that high pressure sales tactics, inadequate information and an almost complete lack of competition have resulted in overcharging totaling almost £1billion.
Electricity companies are accused of overcharging customers based on usage estimates and then dragging their feet on repayments when the true bill comes out at less.
Directors of Thames Water are expected to make 'hundreds of millions' of euros on the sale of the company to private investors, despite the fact the fact that the company has failed to meet its leakage targets in 5 of the last 6 years. Meanwhile, John Lawson, the Institute of Civil Engineers Water Board chairman, comments that "Water consumer prices will have to rise to pay for new infrastructure". Yet another example of the rich getting the gravy whilst the average punter pays for it.
Mortgage companies are accused of offering seductive low-rate deals and then hitting homebuyers with huge arrangement fees.
Severn Trent are accused of adding electrics insurance cover to a plumbing-type insurance because the customer didn't specifically turn the offer down and then refusing to refund the amount for the unwanted insurance.
"Long-suffering savers with most of the big banks and building societies are yet to see any increase in interest rates three weeks after the Bank of England increased base rates by 0.25%." Guardian 26.08.06.
First Direct Bank about to renege on free banking for all those with balances of less than £1500. Other banks reported to be waiting in the wings to follow suit. The 'Independent' of November 17 2006 reports the Nationwide, the UK's largest building society as claiming that it could not afford to be left with 'the poorest quality customers' if other banks levied charges on those with small accounts. It would therefore be forced to follow suit if others levied charges, as seems almost inevitable. It doesn't pay to have a small income - in today's Britain poorer people get punished.
Nationwide Building Society have just been forced to disclose that one of their employees kept the personal details of 11 million customers on his personal computer, which was stolen from his house. There is suspicion that the information about the theft, which occurred in August 2006 and disclosed in November 2006, would not have seen the light of day at all if it was not for a whistleblower's leak to the press.

This is just a tiny recent sample of a continual stream of lack of care, incompetence, mal-practise, unfairness, deception and near fraud by suppliers in many service and financial industries. This list does not include rail transport pricing, a story in itself.

Farepak is only the tiny tip of a vast iceberg, overshadowing the good work of honest practitioners - time to call the perpetrators to account for neglecting their duty of care for customers and society and bringing industry into disrepute�.