No tears should be shed for the likely failure of the London Stock Exchange’s £24bn plan to merge with Deutsche Börse.
This deal, unveiled almost 12 months ago, cried out for a public interest study even before the UK voted to leave the European Union. Brexit then piled confusion upon uncertainty. If we don’t know what passporting and clearing arrangements will apply in future, how can anybody sensibly assess the long-term consequences of creating a bigger European mash-up of financial infrastructure?
The only surprise is that Brexit wasn’t the immediate cause of the deal’s death, though it may have contributed. The critical event was the last-minute intervention of Margrethe Vestager, the European commission competition commissioner. If you want to proceed, Vestager said, the LSE must sell MTS, the Italy-based electronic platform for trading government bonds.
Italian regulators hated the idea that their local assets could be carved up to facilitate a predominantly Anglo-German merger, thus the LSE couldn’t possibly comply. That the only credible buyer of MTS would have been Paris-based Euronext added another twist to the game of competing national interests.
An attempted land-grab by the French? Italian intransigence? Or was the German financial establishment, which has never been enamoured by the idea that a merged LSE/Deutsche would be housed under a UK holding company, stirring the pot? In the end, it doesn’t matter. Even if the commission could be persuaded (and, technically, it still can be), other obstacles remained. The German state of Hesse could have objected. And the insider trading investigation into a €4.5m (£3.8m) share purchase by Carsten Kengeter, the Deutsche chief executive who had been lined up to lead the merged business (and who denies the allegations), is an unresolved difficulty.
What matters now is that the LSE prospers in independent form. A merger with Deutsche would have been messy and awkward. But a takeover from the US, in the form of Intercontinental Exchange, owner of the New York Stock Exchange, would be much worse. The LSE would be relegated to junior partner, a grim prospect if a post-Brexit goal for the UK is to retain the City’s status as the financial capital of Europe.
There are reasons to be cheerful. First, the LSE has emerged stronger from its many non-mergers over the last 15 years. Second, the jostling of national egos may have made Downing Street appreciate that ownership matters when it comes to stock exchanges, clearing houses and bond trading platforms. Theresa May is preparing to unveil the government stance on foreign takeovers involving “critical infrastructure”. She should make it crystal clear that bids for the LSE are not welcome, at least until the post-Brexit financial landscape can be mapped.
Truss must find compromise on injury payouts
The Association of British Insurers thinks the lord chancellor has made a “crazy” decision. That’s unfair. Liz Truss has merely followed the law in adjusting discount rates – used in calculating losses in personal injury cases – to reflect the plunge in gilt yields since 2001.
But, yes, there is something silly about a figure of -0.75% that could cause motor premiums to rise steeply and create an annual £1bn bill for the NHS. The system looks outdated. Common sense suggests even risk-averse individuals wouldn’t invest all their lump sums in gilts, certainly not at prices distorted by quantitative easing.
A more sensible approach would start by obliging insurers to underwrite long-term investment risk. Since they do so already in some cases – via a system called periodic payment orders – a compromise ought to be possible that still allows claimants to receive full and fair compensation. Truss will review the current framework to ensure it remains “fit for purpose”, which suggests she knows it isn’t.
PwC holds its hands up for Hollywood
PriceWaterhouseCoopers was the auditor on the job at Tesco when the supermarket chain confessed to a £263m overstatement of profits. The firm also conducted the “full-scope audit work” at BT’s Italian operations that failed to spot the alleged fraud that ripped a £530m hole in its last set of numbers. Now comes the real shocker: a cock-up at the Oscars involving La La Land.
Only one of these disasters, note, shamed PwC into issuing a “sincere apology”. The power of Hollywood is remarkable.
Or, rather, auditors tend to get a disgracefully easy ride when calamity strikes at large quoted companies. It is true that PwC lost its audit gig at Tesco (and would be wise to brace for a similar response at BT) but shareholders, unlike Hollywood producers and Oscar viewers, are rarely deemed worthy of a grovelling apology. The normal response is silence – or some empty words from Blah Blah Land.
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