So reads a popular message on social media. We know that the wealthy live in a very different world from the majority, and experience things like inflation differently. It means that tax cuts for the wealthy may bring some growth – but it is likely to be a very different form of growth from that which would come from poorer members of society having more money (whether that might be through lower taxes, more social security benefits, or simply being paid higher salaries). Even those who believe that growth in GDP (a very narrow definition of human success) is a good and desirable thing need to be thinking about not just growth but fair growth.
In considering whether growth is fair, we also need to consider what actions may best deliver greater growth. And there is strong evidence that lowering taxes for the wealthy leads to much lower growth than more broadly-based tax reductions.
In a 2019 study Owen Zidar, now Professor of Economics and Public Affairs at Princeton University, used differences between the distribution of incomes in different US states to provide a series of natural experiments giving insight into what the impact of changes in tax rates at different parts of the pay scale are on growth.
Zidar’s conclusion is simple:
“If policy makers aim to increase economic activity in the short to medium run, … tax cuts for top-income earners will be less effective than tax cuts for lower-income earners.”
He also finds:
“the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and the effect of tax cuts for the top 10 percent on employment growth is small.”
This shouldn’t be surprising – the growth sparked by lower income households having higher spending capacity is likely to be spent locally, rather than spent on more esoteric, often imported high status goods or international experiences (let alone spaceships!). Growth sparked by lower income households is also certain to be more geographically spread across a given country given the way the wealthy concentrate themselves in a limited number of places (a physical reflection of the metaphorical different world in which they live). Given the way we define GDP, shifting activity back into the economic zone from charitable activity – such as buying goods in supermarkets rather than reliance on foodbanks – will also be reflected in growth figures.
The world is worried about anaemic growth. In large part, this has arisen because of the persistent downward pressure on middle class pay levels. Addressing that directly may offer a better response to the challenge than any other. Fairer pay for these workers – whether or not sparked or supported by tax or social security changes – may provide the best route to fair growth.
“low-paid workers continue to face a greater risk of receiving a pension that delivers an inadequate standard of living in retirement”
It’s the starkest of the conclusions of a new analysis of pension saving. This Resolution Foundation work reveals we are a long way away from having fair pensions.
If you talk to pensions specialists about making pensions fairer they tend to think immediately of GMP Equalisation – the arcane process of addressing historic gender inequalities in pensions. Though the issue has been known for some years, the complexities of addressing it mean it is far from finished working through the system. But huge though this unfairness is, there is a much greater issue out there: whether future pensions will be enough to avoid significant proportions of the population retiring into poverty. People may be being fooled into the current minimum savings requirements into thinking they will achieve the fair and comfortable retirement that people expect at the end of their working lives.
Unfortunately, the Resolution Foundation analysis on Living Pensions suggests that many will instead retire into destitution. The Living Pensions work is so-called because of its association with the Living Wage Foundation, which presses that pay should at least reach a minimum threshold that enables people to live a decent life. By analogy, the Living Pensions analysis seeks to identify levels of pension saving that should enable people to live a decent life in retirement – and it identifies how far away saving levels are currently from those needed to deliver that fair outcome.
The work on the Living Pension is based on the new world of pensions. I explain this new world briefly at the foot of this blog to avoid the details getting in the way of the message about fair pensions, and our current lack of them.
The Resolution Foundation’s work identifies minimum necessary savings levels of 11.2% for those saving for their whole working lives, or 16.1% for those starting to save later (in effect, some time in an individual’s 30s). In 2019, the minimum contribution level as a portion of salary that must be paid under auto-enrolment rose to 8%. Even though this 8% falls below the levels estimated necessary to achieve a Living Pension – it is notably half the rate estimated to be required for those who do not save for the whole of their working lives – it isn’t being achieved. “Given the influence the auto-enrolment scheme is having on workers’ contribution rates, it is not surprising that we find relatively few workers are saving at or above the [Living Pension] benchmarks,” says the Resolution Foundation. Statistics suggest saving levels for the poorest – where a fair pension threshold must matter most – may be as low as 3-5% on average.
Even with auto-enrolment, the Resolution Foundation analysis of ONS data shows that fully 35% of workers are still not saving into a pension at all. That number rises to 74% for those in the lowest fifth of earners – nearly half of whom do not earn enough to reach the threshold at which they must be auto-enrolled (£10,000; and contributions are only made on earnings above £6,240).
And that is before the cost of living crisis fully kicks in and makes more people study carefully every item of their expenditure, which may include paying into pensions. While every employee must be auto-enrolled into a DC scheme, everyone can choose to opt out and stop their contributions. Anecdotes suggest an increase in opting out has already begun.
The overall statistics show, positively, an increase in overall levels of pension saving (though this is before any impact from the cost of living crisis). But they also show just how far below the necessary levels of saving we are overall:
No wonder that a number of pensions experts are very worried. Particularly striking was a recent LinkedIn post from Charlotte O’Leary, CEO of Pensions for Purpose, which began “I cried yesterday…”. Charlotte wonders if it will take a generation retiring into poverty before we as a nation begin to save more appropriately for our pensions.
Helpfully, the Living Pension calculations are not just based on percentages of salary but also offer absolute rates of saving necessary to build funds sufficient for a decent living standard in retirement. These are £2,100 a year for those saving for their whole working lives, and £3,000 for those who only start to save later. This has to make sense, and fits with the heritage of the Living Wage Foundation. Only real levels of cash can be lived off, not percentages of variable salaries over a working life. A Living Pension is only fair and can only amount to that baseline necessity if it provides an absolute threshold of cash that will keep people at a decent level of living.
Unfortunately, under 20% of us are reaching these thresholds for saving. The Resolution Foundation says: “82 per cent of workers (again, approximately 16 million) [in] 2018-20 were saving at or below the ‘whole career’ cash benchmark, and even more (89 per cent, or 18 million) were saving below the ‘all age’ cash benchmark.” Most of those saving at these levels are earning significantly more than the real living wage – almost all are in the top two-fifths of earners – so even those who are meeting the Living Pension cash thresholds risk finding their spending ability in retirement being much more constrained than they are used to. As with previous failures to deliver pension fairness, there is also a major gap between the sexes: 23% of men meet the ‘whole career’ cash benchmark, while only 15% of women do. We are storing up real problems for fairness in the future.
This point that calculating pensions merely as a percentage of salary may give the wrong answers and that we need to consider much more actively absolute numbers has a counterpoint at the upper end of the pay scale. Investors have pressed hard that executive directors should not receive pension benefits that go beyond those of the wider workforce – and now, some four years on from this being specifically referenced in the UK Corporate Governance Code and in investor expectations, this has largely been delivered (in the UK at least; elsewhere is another story) – at least in terms of the percentage of salary. But any fair assessment of whether the pension benefits go beyond those enjoyed by the broader workforce surely needs to go beyond just percentages: if percentages don’t tell the whole story regarding fair pensions at the bottom end of the pay scale, then perhaps we shouldn’t be so satisfied just with aligning percentages at the top end. Any company that is aspiring to be a fair wage employer needs also to consider being a fair pension one too, and that probably requires considerations of minimum cash payments into staff pension pots, not just percentage payments that may or may not match those enjoyed by the boss.
There is also a structural complexity to delivering fair pensions. My old pal and former colleague David Pitt-Watson made the point in questions at the launch event that the Living Pensions calculations entirely miss longevity risk – the pensions jargon for those who live longer than expected. Living longer is obviously a wonderful thing for the individual and their families in general terms – except that if their pension is based on a fixed pot of money, living longer risks individuals falling into destitution. Because they are based on average necessary pension pots, and based on a regulatory system that means every individual’s pension pot belongs to them alone, some of those with Living Pension average pots will die prior to their pension pot being used up and some will die after. Those who live longer risk having used up their pension pot before death and so having years where their pension isn’t fair, even if they have in fact reached the Living Pension threshold. The Living Pension in the context of the current defined contribution (DC) model may not turn out to deliver on the name even for half of those who achieve the threshold savings levels and fund value.
David has a long heritage in the world of pensions, and has helped lead work, not least at the RSA, on a new form of pension for the UK, Collective Defined Contribution (CDC). CDC pensions have just been given initial regulatory approval and we are likely to see the first launched shortly. CDC offers some opportunity to address this problem with the defined contribution world. The collective element of CDC allows pooling of longevity risk; it is only with such pooling that the unfairness of pots running out before an individual dies can be addressed.
In a personal conversation, David summarises the position simply: “It isn’t a pension if it’s just a cheque.” The work by industry body the Pensions and Lifetime Savings Association on its Retirement Living Standards re-emphasises this: its work on living standards in retirement is all about income not pension pots, and suggests a ‘minimum’ income in retirement needs to be £10,900, or £16,700 for a couple.
It seems that in a post-defined benefit world only within the context of CDC can fair pensions actually deliver on the promise of a Living Pension.
In brief: the new world of pensions
There are three aspects to the new world of pensions: the move from the historic Defined Benefit (DB) structure to a Defined Contribution (DC) approach; pension freedoms; and the requirement that all employers now offer all staff a workplace pension, through so-called auto-enrolment.
Defined Benefit pensions – sometimes called final salary schemes – were the promise from an employer that they would pay a fixed annual pension to former employees, based on their years of service and usually the final salary that they were paid. For example, many individuals built up promises worth a sixtieth of their salary for each year of service (though some schemes were based on fortieths or eightieths) – the benefit was the fixed element and employers promised to provide the funding necessary to support this. DB now feels like ancient history, partly because its implicit assumption of working for one employer for much of one’s career now seems an anachronism and partly because people lived a lot longer than expected, making the pensions promise much more expensive than planned. Companies have regretted their generosity and the balance sheet risks that such pensions brought and have largely withdrawn from offering defined benefits – though many are still funding those past promises. In large part, DB pensions are now only available in the public sector.
In the DC world the only thing that is fixed is, as the name suggests, the contribution – the amount of money put aside each month. This is used to buy investment products that hopefully will perform well enough to provide scope for pension payments after retirement. Individuals face much more risk in the DC world, especially investment risk over their lifetime of saving. While death, like taxes, is a certainty, its timing isn’t, and individuals in a DC world also take on the financial risk that a long life may bring, that even the largest pension pot may run out, with no sharing of risks and no backstop (other than state pension provisions).
Former chancellor George Osborne took the further step along this line of seeing pension saving just as the creation of a pot of money rather than a later-life income stream. In 2015 he announced what were billed as pensions freedoms – releasing the obligation to use pension pots to buy annuities (rights to income payments) and allowing people to unlock their pension pots for other purposes at the age of 55. Many have used this freedom wisely, but many have found it is a freedom to lose money through mistaken investments and fraud. Often it seems the wealthy have paid for valuable advice and the less well-off have been exploited by fraudsters. The full consequences of these freedoms are yet to be seen.
Automatic (usually auto-) enrolment is the requirement since 2012 that every employer should offer all staff paid more than a minimal level some form of pension provision. Minimum levels of saving are 8% of qualifying earnings (between £6,240 and £50,270), at least 3% from the employer and the remainder, up to 5%, from the employee (when first introduced the total auto-enrolment minimum was 2%, 1% from each party). This has helped drive much broader pension saving, and led to the creation of a number of specialist workplace pension providers, such as Nest and NOW Pensions. Nest in particular, the largest of the new providers, is now a substantial financial institution with £24 billion assets under management.
Full disclosure: I am a Nest customer and have provided some stewardship advice to NOW. I have also provided advice to a trustee of the likely first CDC pension provider.
“Unless there is the clearest provision to the contrary, Parliament must be presumed not to legislate contrary to the rule of law. And the rule of law enforces minimum standards of fairness, both substantive and procedural.”
So spoke Lord Steyn giving his judgement as part of the majority in the House of Lords in the Pierson case, rejecting a political intervention in the justice system. The Home Secretary (the often-grandstanding Michael Howard) was seeking to increase the sentence given to a young murderer – which had been set according to the standards then established by Howard’s predecessors. This rejection of a political intervention into a properly decided legal determination could not be a clearer example of the rule of law: even elected politicians must act within the frame set by the law. And, as Lord Steyn makes clear, that frame is in essence one of fairness. The rule of law is fairness.
The rule of law seems to many an abstruse concept – about the law sitting above all of our actions – but at its core it is simple: the activities of even the most powerful are subject to constraints. Without it, we might face arbitrary treatment by the government, through police actions say, or through administrative decisions that lack procedures where the views of impacted individuals are heard. Without it, the strong and the wealthy would be able to exploit their strength and wealth and squeeze the rights and powers of the weaker and poorer. Often, it will feel like many of these things happen anyway, but it could be worse – and in countries which lack full benefit of the rule of law, it is.
The rule of law underpins capitalism, allowing us to believe it is worthwhile to agree contracts and to trust that they will be enforced, and to believe that our property rights will be protected. These factors mean that having the rule of law in place was a foundation for the economic success of the last centuries. Sometimes it feels like courts too need to remember this – not least in the country proudest of its recent economic history. US courts, though, seem at risk of forgetting it.
Lord (Tom) Bingham, the pre-eminent judge of his generation, brought the rule of law from its abstruse level to more ready recognition in his seminal short book on the topic. He sets out eight principles of the Rule of Law:
i. The law must be accessible and so far as possible intelligible, clear and predictable.
ii. Questions of legal right and liability should ordinarily be resolved by application of the law and not the exercise of discretion.
iii. The laws of the land should apply equally to all, save to the extent that objective differences justify differentiation.
iv. Ministers and public officers at all levels must exercise the powers conferred on them in good faith, fairly, for the purpose for which the powers were conferred, without exceeding the limits of such powers and not unreasonably.
v. The law must afford adequate protection of fundamental human rights.
vi. Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve.
vii. The adjudicative procedures provided by the state should be fair.
viii. The rule of law requires compliance by the state with its obligations in international law as in national law.
In short, the rule of law is fairness. A great organisation named for Bingham – the Bingham Centre for the Rule of Law – now tries to promote the concept, and its effective recognition in practice, in the UK and around the world. There are times when its work seems to be getting harder, but that makes the work of course still more important.
Fairly or not, the UK and the US are nations that proudly think of themselves as governed by the rule of law. As early as in the 1830s, Frenchman Alexis de Tocqueville in his tour of the developing US democracy noted the importance of the law in how its political system functioned. Both nations now have Supreme Courts (the UK one created when the function of the House of Lords as a judicial chamber was replaced to make more clear the separation of powers between legislature and judiciary). But the US Court now seems to have become more a political body than a legal one – in ways that do not serve the rule of law and fairness.
The series of cases recently decided certainly have a political flavour, and the splits on the Court now seem much more on ideological lines than was previously the case. Indeed, the most recent slew of decisions appear to display coherence more through political views than legal analysis. It is also becoming clear that this Court is willing to take decisions that it does not need to. The recent cases include among others: barring the Environmental Protection Agency from taking forward emissions caps under the Clean Air Act that were never pursued (West Virginia v EPA), freeing a sports coach to make religious observance on the sports field, encouraging broad participation (Kennedy v Bremerton School District), overturning the right to abortion (Dobbs v Jackson Women’s Health Organization), preventing recompense being due from a police officer to an innocent individual who was interrogated and threatened in clear breach of Miranda rights protections (Vega v Tekoh), banning a state law against the carrying of firearms (New York State Rifle & Pistol Association v Bruen), and barring a state law that rejects state funding for private religious schools (Carson v Makin).
The EPA judgment and that in a case on worker protections at a nuclear facility (US v Washington) need not have been as broad, and it is arguable that in their specific circumstances they need not to have been considered at all (the EPA rule was never enforced and the worker protections were rapidly rectified). But this Court, for all that it would claim not to be an activist one, goes to places it needs not. This tendency is most clear in Dobbs.
Unusually, there are five separate judgements in Dobbs; as well as the majority view (agreed by five judges, two of whom also filed concurring opinions) and the dissent (agreed by three), there is an opinion from Chief Justice Roberts which agrees only with the decision at hand, not with the overall majority opinion. While the majority opinion and the two concurring opinions appear to be mostly history, and the dissent mostly politics and rights, Roberts’ opinion seems to be largely law.
Throughout all the Dobbs opinions, the issue of stare decisis is a central consideration – the legal principle that an existing decision should stand, in all but the rarest circumstances. Considerations of this principle are clearly central to the ultimate court decision since it chose to overturn Roe v Wade, the 1973 decision granting constitutional protection to the abortion rights. We’ve seen that predictability and consistency of the law and court decision-making is central to the concept of the rule of law (both are explicit in at least the first two of Bingham’s principles). The majority largely argues that stare decisis doesn’t matter if the original decision was wrong – and for those who fear the rolling back of anti-racism laws the fact that the overturning of Plessy v Ferguson is lauded across the opinions is helpful (Plessy was the racist decision overturned in 1954’s Brown v Board of Education, the great and unanimous Supreme Court finding that enforced the desegregation of schools).
Roberts CJ is more nuanced and more clear. He urges that stare decisis means that the Court should not do more than it needs to. In the case in hand, he argues that there is no need to overturn Roe v Wade in its entirety. Rather, the Supreme Court should consider the case as it was when the Court agreed to consider the arguments – it was only when those arguments were made that the Court was urged to consider overturning Roe v Wade. Roberts starts his opinion by noting that when the court granted the right to plead the case before it, it was to decide the narrow question of whether all pre-viability bans on elective abortions were un- constitutional, and he believes that is the only question that the Court needed to have considered and should have considered. He concurs with the majority only to the extent that they, in his view, answer this question correctly.
The rule of law is fairness, but that does not mean that the courts are justified in all actions. Rather, like all arms of the state, they need to take their decisions within a framework of controls and constraints. It’s hard not to agree with Chief Justice Roberts that the Supreme Court has risked stepping beyond that framework. Fairness, and the rule of law, require a little more circumspection.
“I understand and appreciate the British sense of fairness and I do not wish my tax status to be a distraction for my husband or to affect my family.”
It is welcome to hear anyone refer to the sense of fairness. But when that woman is a millionaire who happens to be married to a cabinet minister, the reference perhaps gains an added resonance. It’s a shame though, when it appears that the sense of fairness is only brought to bear to drive a change in behaviour following newspaper headlines, and both personal and political embarrassment.
I don’t wish to linger particularly over the personal choices of Akshata Murty, daughter of the founder of India’s tech giant Infosys and wife of British Chancellor of the Exchequer Rishi Sunak, to start paying UK tax on her worldwide income rather than just that remitted to the UK – though notably she is choosing to retain her non-domiciled status for inheritance tax purposes, likely to be a much more valuable decision. And I’m sure that I should at this stage note more generally that I make no comment on the tax position of Murty, or any other individual or corporation. Her comments serve simply as an introduction to general thoughts that are not intended to have any particular target.
Tax is, famously, one of only two certainties in life. For most of us, it is indeed a fixed certainty. Yet as Murty shows, for the wealthy – and for companies – tax is rather more a matter of choice. We need to assume that no one evades taxes (that is, after all, illegal – though this story from the FT just today suggests that we and the tax authorities simply don’t know) but by linguistic sleight of hand and legalistic structuring, some do avoid it.
Tax expert Dan Neidle, newly retired from Clifford Chance and now operating as Tax Policy Associates, explains several of the choices that are available to the wealthy to limit their tax bills – see for example his briskly entertaining ‘How to avoid UK tax if you’re an oligarch’. The wealthy can choose to take income in forms that aren’t income for tax purposes, or which are taxed at a lower threshold. They can decide to take the benefit of capital gains without ever crystallising them, they can use trusts and corporate structures to pass ownership through the generations without facing inheritance taxes.
Multinational companies have even more choices of ways to smooth their tax burdens and avoid (never evade) taxes. Just as ordinary folk don’t have the options that are available to the wealthy, domestic companies face many more constraints and have fewer choices available to them. This can mean that multinationals are handed a further advantage and can undercut their more heavily taxed local rivals.
There are of course multiple attempts by the tax authorities to limit the choices available to those who have them. The G7 tax deal from this time last year attempts to set a minimum tax level of 15% globally (though with many exceptions and caveats that reduce its effectiveness). In a similar way, individual countries, notably the US, set minimum tax levels for income taxes in an attempt to ensure individuals cannot use exemptions to bring their tax burden too far below the nation’s headline rate. It should be said, though, that the US’s Alternative Minimum Tax (of 26% or 28%) itself has several degrees of complexity, and as I have noted, the wealthy need not take all of their income (as broadly understood) as income in the narrower way that tax regimes understand it. Given that income levels can be so manipulated, it is not surprising that there are increasing calls for taxes based on wealth rather than on income.
The way the choices that companies make can play out is amply demonstrated by the ongoing work by the Fair Tax Foundation (now preparing for the rapidly-approaching 2022 Fair Tax Week) in looking at the tax gaps of the so-called Silicon Six – Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft and Netflix. The tax gap is the often large gap between cash tax paid and that provided for in accounts. The Foundation’s recent update on Amazon shows that its tax gap continues to grow:
Amazon faced a shareholder proposal at its AGM this week, calling for the company to issue a tax transparency report. In its formal response to this proposal, the board did not argue against tax transparency, but did note that “we believe the prescriptive granularity of the GRI Tax Standard’s reporting would potentially force disclosure of competitively sensitive information about our operations and cost structures and would hamper our ability to make operational decisions”. It also suggested that the focus on income taxes is mistaken and that its property and payroll taxes (both of which are much harder to avoid) should also be taken into account.
Perhaps Amazon should take care with this argument: just as with individuals, if income taxation falls into disrepute it may be that there is a shift to other ways to calculate tax liabilities for companies, in ways that may be less easy to avoid. In any case, independent shareholders did not seem particularly persuaded by the company’s arguments, with around 21% of them voting for the proposal. This provides a sign that shareholders are more willing to press for tax transparency.
Let’s hope so. Investors need to have more conversations with companies about tax matters. In my experience, it was only the language of fairness that elicited useful discussions on tax with company boards. Companies have had detailed advice on their structures and – except in the most unusual circumstances – what they do is legal. But they need to consider whether the choices that they make are fair and just. My best conversations with board chairs always focused on whether there was some tax structure or approach that might cause the company embarrassment. The scale of tax gaps can be a sign that there is an issue, essentially where there is a sizeable gap between cash tax paid and the headline rate of the home jurisdiction. Where such a gap is big, there’s a danger that a fair approach has not been applied – and that profit margins may not be sustainable in the long-run as the tax rate actually paid becomes fairer. That is certainly something that should matter to all investors.
Tax should be a certainty. Tax is the entry fee to a civilised society, and while the wealthy may feel that they can pay privately for everything that society provides they are more dependent than they wish to admit. They may tend to take for granted the availability of staff and the general good running of the state, but these are things that all of us depend upon and which themselves depend upon a functional society that is able to fund itself, in part at least, through taxation. States need to be able reliably to raise the funds that they need, confident that the tax levied will be paid as due. Tax should be a certainty, not a choice.
For those who have such choices, I would naturally agree that the sense of fairness should be the main driver of deciding what are the appropriate choices they should make. But tax shouldn’t be a choice. Like death, it should be a certainty for us all. If the rules aren’t yet smart enough to make that so, then it is only fair that they should be toughened up.
This refreshed analysis is highly welcome and timely. We should remind selves that this is a political disclosure. For example, the fact that the disclosure is regarding the UK workforce means that its information value is purely local, and not about the businesses as a whole. Its information value for investors is limited because of that – and I’ll discuss ways of giving investors more insight into low pay issues – but its value as a political tool is clear.
Political disclosure and the politics matters. It’s a real problem for all in business that there’s an 11% deficit on the public’s view of whether business operates in a way that’s beneficial for society. This key outcome from the High Pay Centre’s public opinion survey carried out by Survation, showing fully 49% of people do not believe that businesses generally behave in a way that is beneficial to society, is a problem for all those interested in business, including all investors. That this is the balance of public opinion at the start of a cost of living crisis is actually potentially dangerous – one assumes that as life gets harder for so many of us, so opinions will harden in an unfavourable and increasingly problematic way.
That could be politically difficult. Unfairness fosters all sorts of problems, political and societal.
To use the political power of public naming, as last year, I think it is appropriate specifically to call out those companies that have not disclosed the pay data on their workforces as they should. According to the report, this year there are fewer than last year’s 11, but seven companies continue not to disclose what they should. Centrica, Electrocomponents, Ibstock, Pearson, Pets at Home, Rentokil and JD Wetherspoon could all do better.
It is clear again from the data that the biggest driver of these high pay ratios is low pay among the workforce, not so much high pay of the CEOs. The chart below comparing industries makes this plain, with the highest pay ratios coinciding generally with the lowest median pay among the workforce (it would be clearer if the scale for the pay levels was inverted, but the correlation is pretty clear anyway). Looked at in this way, there are some clear outliers – notably that even though median pay in the banking sector is high, the ratio is also high, contrasting with financial services more broadly (median pay appears similar at around £65,000, but ratio at financial services is about half that of banks, about 30:1 rather than over 60:1). At other end of the spectrum, it seems clear that the main driver of the high pay ratios in retail appears to be low pay. Yet the next worst-paying sector travel and leisure (which reports median pay maybe 50% higher but still under £30,000) has pay ratios under half the level of the retail sector. There’s a correlation but there are nevertheless clear variations in the approaches of different sectors.
As the biggest driver of these issues is low pay, we need greater disclosure of pay structures and approaches at this end of the pay spectrum. This would allow investors and other stakeholders to understand business models more clearly. As inflation adds pressure to increase pay, understanding these dynamics will gain added importance. In a previous blog, I’ve argued that companies should be required to disclose: (1) the number of full-time equivalent roles in their business and (2) the proportion of those roles that pay a living wage. I don’t diminish the challenge of calculating the latter for many countries, but there’s a lot of work gone into it so it is possible. Actually seeing which companies pay their people enough to live on and to bring up a family with dignity is surely a key metric. These two measures are also aggregable so can be considered across portfolios, something which matters to investment institutions, particularly asset owners. [This recommendation was kindly – and nearly accurately – picked up by Nils Pratley in The Guardian; “Good idea: a league table would get noticed and may cause more embarrassment,” he says].
A further way that the disclosures on low pay are deficient is, as the report notes, the exclusion of many of the lowest paid from the calculations. The exclusion of agency staff, including temps and cleaners and so on, clearly diminishes the insights the reporting gives, both for investors and for political purposes. Finding ways to capture the workforce more generally would be helpful.
The question of inflationary pressures on wages will be a key one for the next few years. It’s worth noting that inflation is experienced very differently at different income levels. Different groups buy different baskets of goods, meaning that 9/10% headline inflation is not what any one group actually experiences. Analysis by the New Economics Foundation suggests that the variation could be as much as between 20% for the poorest and perhaps 2% for the richest; one hopes that remuneration committees bear this in mind when considering both the pay of top executives – who are unlikely to need anything close to headline inflation-level pay increases to maintain their standards of living – and the pay of the general workforce – who may need pay increases well above headline inflation to maintain theirs.
The pay ratio is a political metric, but that doesn’t mean investors and companies can ignore it. On the contrary, the current political and economic environment requires that they respond actively to this agenda. It is not in any of our interests that more people doubt the benefits of business for society than think it is a positive – and that that is true at the start of the cost of living crisis is genuinely a dangerous position for us.
We all need to pay more attention, and simply, to pay more.
The shocking statistics released last week by the Trussell Trust – the UK’s main foodbank provider, with a network of 1400 – bring to the statistical surface the reality of the cost of living crisis in the country. It is unfairness writ large, and it reflects the different worlds in which our people live.
Some may be shocked simply at the number of foodbanks in the UK, which is at least in theory a wealthy nation (as well as the Trussell Trust ones, there are an estimated 1200 further banks). But the fact that the Trussell Trust distributed more than 2.1 million food parcels in the year to end-March 2022 is still more shocking. That’s up 14% compared to the pre-pandemic year 2019-2020 and up no less than 80% in five years. What’s worse is the notable acceleration. The 14% increase in the annual figures masks quarterly variations, with Q2 up 10% against the 2019-20 equivalent, Q3 up 17% and Q4 up 22%. The last month for which the Trust provides figures, February, saw demand for food parcels up 25% over February 2020 numbers.
It is clearly a mark of an unfair society that so many should be so dependent. The opening line of the Trust’s statistical paper is shaming:
“Destitution, which means that people cannot afford to buy the absolute essentials that we all need to eat, stay warm and dry, and keep clean, drives the need for food banks in the UK.”
But it is all too easy for the comfortable to under-estimate the cost of living crisis. The averaged measure of inflation – the consumer prices index – reached a level unheard of for 30 years in March 2022, at 6.2%. This headline rate is what drives monetary policy decisions, and those within corporate boardrooms too. Yet the averages used to produce that statistic mean that few will actually experience that number. Those with lower incomes and less discretionary spending are likely to face far higher levels of overall inflation given the recent increases in the staple spending categories of fuel and food. People at other income levels will experience very different levels of economic pain. The overall statistic masks added unfairness to those least able to bear the burden. By concentrating solely on the headline figures, policymakers and corporate decision-makers may risk missing the real scale of the impacts for some members of society – in ways that may exacerbate existing unfairnesses.
The mere facts of these different experiences of economic life may be well understood, but the scale of it is not. The New Economics Foundation has produced two charts that bring this impact very fully to life. The first demonstrates the scale of the differential between those at different income levels, and the way in which the cost of living squeeze is a painful bear hug at the lowest income levels, while being not much more than a cuddle for the wealthy:
Any company board thinking about pay rises for top executives based on headline inflation would do well to take note of this chart, and the extent to which the wealthy are feeling only the most limited of impacts; they should also consider the extent to which even inflation-level pay rises for their general workforce may not be sufficient to reflect the squeeze that they are facing.
Perhaps even more shocking are NEF’s calculations regarding the differential impacts of the squeeze on pre-existing social unfairnesses:
Two further vignettes illustrate how this differential experience of inflation works in practice. First is a brilliant recent working paper, Consumption Inequality in the Digital Age. We already knew that digitalisation was a driver of inequality by narrowing the group of economic winners and by reducing others’ economic opportunities. But this paper notes that technology products form a greater part of purchasing by wealthier individuals – as well as becoming a greater proportion of all purchasing over time. This much is not terribly surprising; what is is the overall impact of these effects. The researchers state: “we demonstrate that the price channel has sizeable wealth effects and explains 22.5% of the increase in consumption inequality”. Just this one portion of the purchased basket has an outsized effect on inequality and entrenching unfairness. And it is masked by the headline inflation number, which has been consistently deflated by the falling prices of technology.
The second study considers how unequal experiences of headline economics can be driven by the debt burden that individuals face. The paper Indebted Demand takes a macroeconomic perspective but it is built on the insight that the propensities for marginal spending are very different for those with significant debt burdens than for those free of such burdens. The indebted – most of us – are constrained by debt and so our spending activities are curtailed. The wealthy (the paper cuts this as the top 1%) have a wholly different experience of economic life. Nothing surprising in that – but the point the paper makes is that with so large a portion of the economic actors in most economies being constrained by debt their ability and willingness to consume is eroded significantly. In effect, there is a transfer from the indebted to savers, depressing demand overall. And so, demand in the economy overall is restricted, it is the title’s indebted demand. Only by breaking out of this debt trap will consumption and economic activity be reawakened.
The paper notes that productive debt – debt financing capital investment for use in the economy – can have positive impacts. But it notes that most debt, certainly most household debt, finances housing and so is largely unproductive. It also considers the ballooning levels of student debt and notes that while this does have some productive impacts (in the rather unpleasant economic jargon, it builds human capital) to the extent it reflects merely increases in the costs of education and not greater investment in skills it should be viewed as unproductive debt.
Overall, the paper argues that many western economies are mired in a debt trap, with inequality being a feature of this market failure. The authors argue that economies will struggle to emerge from their current doldrums without ‘unconventional policies’:
“For example, redistributive tax policies, such as wealth taxes, or structural policies that are geared towards reducing income inequality generate a sustainable increase in demand, persistently raising natural interest rates away from their effective lower bound. One-time debt forgiveness policies can also lift the economy out of the debt trap, but need to be combined with other policies, such as macroprudential ones, to prevent a return to the debt trap over time.”
It remains to be seen whether the headline numbers will distract attention from the terrible nature of the challenge faced by so many in society. If they do, unconventional policies will probably not gain traction. But clearly something needs to shift if we are to reawaken fairness.
We are used now to talk about the carbon footprint of our activities, including the carbon footprint of our investments. But activities and investments have many other impacts on the world, they have many other footprints. Until we begin to assess these, we risk continuing to ignore them. One of those we need to consider much more actively is the social footprint. We need to capture this because the systemic nature of global inequalities – the world’s unfairness – is, alongside climate change, the other great systemic risk for us all, including for investment institutions.
To help investors, particularly the large asset owners, consider their exposures to the risks associated with global unfairness, and start to consider approaches to mitigating and managing them, we need to be measuring the social footprint of their investments.
This consideration is brought forcefully to mind by a recent excellent report by my friends at the High Pay Centre on behalf of dear colleagues at CIPD, PLSA and RailPen, How do companies report on their ‘most important asset’?. Playing on the corporate trope that employees are so often said to be a company’s most important asset, the report contrasts this with the substance with which companies tend to discuss workforce issues – or the lack of such substance. Naturally I was taken by the starting words of the executive summary:
“A company’s workforce is central to its long-term success. The provision of secure, safe, fulfilling and fairly-paid work should therefore be a priority for companies.”
The report highlights disappointing gaps in the reporting on company workforces, but notes some good practice – with leading FTSE companies providing disclosures and data such as:
Employee turnover, skills, training and recruitment
Accident and fatality rates; mental health statistics
Trade union relations, and other information on giving workers a collective voice
Links between workforce and strategy, as well as inclusion of workforce statistics in company targets and risks
While the report notes substantial gaps, it is unfortunately fair to say that UK-listed companies are generally better at reporting on such matters than many private companies and by others around the world, not least because the Corporate Governance Code calls for workforce reporting. The gaps in reporting from other companies are still more substantial. As the report calls for, I tend to use the term workforce to encompass all those working to deliver on a company’s business model, regardless of the legal niceties of the contract between the company and them. The term means that, for example, contractors and gig workers are not excluded from consideration.
Rachel Kay from the High Pay Centre followed up the report with an energetic blog post railing at the excess of narrative reporting and the limited data that companies disclose on workforce issues. While personally I am a fan of narrative reporting – when done well, it can inform investors and other stakeholders very fully and fairly about the individual circumstances of a company – the simple fact is that it is rarely done well. And the lack of concrete data makes poor narrative reporting worse than useless. What’s more, having spent the last year thinking exclusively from the asset owner perspective, I’m acutely conscious that from a portfolio level only data matters: narratives about individual companies simply cannot be aggregated. What’s more, only certain data is capable of being aggregated.
This is the gift that climate reporting has given us. Through the lens of TCFD (the Task Force on Climate-Related Financial Disclosures, the group fostered by the gnomes of Basle to help the world comprehend the challenge of climate change and report on it consistently), we have seen that it is possible to aggregate reporting on climate change issues across funds aggregating many company holdings and across portfolios encompassing multiple funds. The fungibility of CO2 emissions globally and the ability to calculate carbon footprints and intensities in terms of tonnes of CO2 equivalent mean that we can have such a broad oversight. The term carbon footprint has become meaningful.
The term social footprint is not yet meaningful. To make it meaningful, we need a measure that is genuinely capable of being aggregated across companies and across portfolios. None of those highlighted in the recent CIPD/PLSA/RailPen report deliver on that – all of those considered are currently too tailored to the company to be meaningful if aggregated.
My starting suggestion for measures that are capable of being aggregated are more simple, as they need to be if they are to apply across companies in a range of sectors and in a range of geographies. That suggestion is:
The number of full-time equivalents in the company’s workforce
The proportion of them who are paid enough to fund a decent life for a family
Neither of these measures is straightforward: calculating full-time equivalents from the variations of flexible work can be a challenge, let alone the difficulties of considering the positions of consultants and gig economy workers. The concept of decent pay – usually termed a living wage – has been subject to ongoing debate, but that means that there have been multiple calculations and assessments across the globe (which is necessary to make international reporting make sense).
Despite these complexities, hopefully the aim of these metrics is clear and their value is also. Their simplicity is clear: more jobs are worthwhile, but only if they pay a decent wage. Only if we have more such jobs will the world become a fairer place. These metrics are not intended as a substitute for more detailed reporting on workforce matters that are tailored to company-specific business models; they are a proposed supplement to it, to enable an aggregated social footprint to be calculated. They are the starting point for a social footprinting of global investment portfolios.
A recent presentation that I was party to, but sadly cannot share publicly, indicates how far we need to travel to deliver on the promise of fair pay for all workers that the living wage calculation represents. An assessment of the extent of underpayment around the world, through the Global Impact Database at the Impact Institute, showed extensive unfair pay, not just in supply chains but within company operations and in what the analysis calls their downstream activities.
Perhaps most surprising was the company-by-company analysis of underpayments, across companies included in the MSCI World index. This showed that Apple had by far the worst social footprint. Issues within its supply chain are perhaps well-known, but it was also found to have extensive underpayments in its employee base and downstream. In spite of pitching itself as a luxury brand with prices to match, the company apparently does not see the need to pay its workers a fair wage – not even its employees a fair wage. Some might suggest that Apple could be still more successful had it chosen to pay its workforce more fairly. An alternative interpretation is that this is actually a sign that a portion of Apple’s profits are only illusory: if it did but choose to pay its workforce enough to live on, its operating margin would not be the current generous 30%. This puts debates about the fairness of the company’s executive pay further into context.
It seems to me somehow fitting that I post this blog on Maundy Thursday, the date where by tradition the British monarch humbly gives small gifts of money to paupers. Fairness should not be dependent on the wealthy making occasional honourable donations from their wealth to those deemed the worthy poor, but the world seems we have moved on less than we might hope from the time of bad King John (the first monarch recorded to have made Maundy donations, a few years before his disgruntled barons forced him to increase fairness and the Rule of Law by signing Magna Carta).
A billionaire investor rails at the suggestion that someone earning $99 million is paid inappropriately, complaining that in some way the system for raising concerns must be fixed. It’s an article that could probably only appear in one of our financial markets-focused newspapers – in this case it was the FT.
The complaint from Michael Moritz, partner at technology investor Sequoia Capital, is still odder because what it frets about is that 36% of Apple’s shareholders voted against what is usually called the say-on-pay vote. Formally, this is called an ‘Advisory vote to approve executive compensation’, and the word ‘advisory’ matters more than the word ‘approve’. Even if a majority of shareholders had opposed the vote, Tim Cook, Apple’s CEO, would still have been paid: such a vote would have amounted only to a slap on the wrists. A vote against by a minority of the shareholder base amounts to even less than such a slap on the wrists.
And yet Moritz feels this is evidence that the system is broken. While this blogger agrees that the US pay system is indeed broken, that’s from a very different perspective.
The brokenness of the US pay system is shown very clearly in these statistics from the 2022 version of the 100 Most Overpaid CEOs, the 8th edition of an excoriating report from ethical campaigners As You Sow:
Average CEO pay in the US is $15 million each year, though as the table shows many are paid much more than this. On average that is almost 300x the pay of that company’s workforce, though as the data also shows, at many companies the CEOs earn thousands of times more than their average worker. Indeed, the only times that the ratio appears to drop below 300x are where that company’s median employee earns over $100,000, which is rare as average pay in the US is around half that, and probably reflects a narrow understanding of the company’s workforce. In general, US CEOs are taking a disproportionate level of pay, and leaving their colleagues with unfairly low amounts.
Thus, the stagnation of the pay of ordinary people makes these numbers appear still more extreme. As well as excess pay at the top, these disparities are being driven by the average worker’s salary falling in real terms as ordinary jobs are squeezed from our system and the middle class is hollowed out. That reduces people’s ability to consume and so is a drag on our economies – something that ought to matter to broad-based investors. Of course this economic drag is in addition to the way that unfairness both blights lives and shortens them.
But broad-based investors are not yet responding to the harm caused to their investments by these inequalities and unfairness. It’s hard not to see a reason for this US excess pay lying in some way in the following chart, also from the 100 Most Overpaid CEOs report. In effect, some of the world’s largest investors, particularly those based in the US, are endorsing this manifest unfairness:
At the other extreme of this table are some of the European investors who now oppose the bulk of US pay resolutions. Some I have directly influenced to take such tougher lines. I personally found it wasn’t hard to design a policy on pay voting that led exactly to broad opposition to US pay: if you oppose so-called ‘long-term’ schemes that start paying out in less than 3 years, schemes that pay out for performance that is below average, or where there is no performance element, you find yourself opposing pay at the majority of US companies. It’s odd: none of these expectations seems very much to ask, and most of them are stiffly enforced by investors in various markets outside the US (including those same institutions which seem so weak in the US market), and yet different rules seem to be applied by many to US companies. That result of opposing most pay votes in the US held true even before I added a view about a maximum level of pay in any single year.
While the majority face pay stagnation and precarious work, a few enjoy untold riches. Pioneer activist investor and campaigner Bob Monks has noted the insanity of this: in effect it means that a few years of work by some individuals can earn them enough that their children’s children need never work. That’s hardly reflective of the American Dream.
Instead of being concerned about these manifest unfairnesses, billionaire Moritz argues that the Apple vote is evidence that ISS and Glass Lewis – the world’s leading advisers to institutional investors on how they might choose to approach voting matters – are acting as both judge and jury. Their recommendations against the resolution were the determining factor for how the votes fell, he suggests.
This is nonsense. I’m no apologist for ISS and Glass Lewis. I took the services of both over the years and had multiple disagreements with each; ISS in particular has been poor at handling conflicts of interest, and it does have far too dominant a position in so-called proxy advice (its market share is usually estimated at around 80%). Yet to suggest 34% of shareholders at Apple had abdicated their responsibility to take a decision and just leant entirely on the advisers recommendations is simply wrong.
Let’s be honest: investors do on occasions lean very heavily on ISS and Glass Lewis, or their other voting advisor(s) of choice. That is particularly true when faced by the height of the voting season (which Apple’s meeting preceded but we are just about to enter), when for many investors there will be dozens of meetings to be voted every day, and it is particularly true also of the long tail of small investments in small companies that many institutions have. But to imagine that it’s true in relation to votes at the largest company in the world at a time out of sync from the broader voting season is unrealistic.
ISS and Glass Lewis are not judge and jury. Usually, their work amounts to a judge’s summing up of the evidence, and the shareholders themselves act as the jury (though with no obligation to reach consensus, let alone unanimity). The simple evidence of the votes on the various shareholder resolutions at the Apple AGM shows this: ISS recommended that investors should vote in favour of five such shareholder proposals and yet the votes in favour of these varied from 31.7% for to 53.6% for. The last, calling for a civil rights audit, reflects broadly held concerns about allegations of Apple’s mistreatment of black employees, and its apparent racial unfairness.
There were good reasons to oppose the Apple executive pay vote. Among them were: not only is Cook’s share award of $75 million extraordinary, his pay generally is generously above that of peers; though the share award is said to cover a 10 year period Cook is permitted to keep it if he retires ahead of that, and at 61 he is already allowed to retire (to be fair, he forfeits it if he retires within a year of the award); and the vote covers other executives too, who each received pay identical to each other – suggesting that there is no rigorous assessment of performance involved in their awards at all. Let’s not get into the generous perks that sit on top of the generous pay, such as Cook’s extensive use of an executive jet for personal purposes, estimated to be worth $700,000 in the year.
The reasons to oppose the pay vote hold true even though as Moritz notes Apple’s valuation has risen from $360 billion to $2.4 trillion over Cook’s tenure. As well as sound management, there are some other small reasons for this rise, not least the pumping up of share prices generally because of quantitative easing by the world’s central banks, and the technology tailwind from the pandemic. Cook was awarded 100 million shares when he took over the job in 2011, then valued at around $370 million and now worth billions. Some might suggest he has already been well-compensated for his stewardship of the business. Others will note that the value creation that there has undoubtedly been is not down to one individual but to a broader workforce, including those within the Apple supply chain.
It’s also a dangerous game to suggest that executive pay should be driven purely or mainly by share price valuations from time to time. At the time of writing, Apple’s share price is down around 10% this year. I’m sure Michael Moritz would not suggest that Tim Cook should be paying money back to the company.
US executive pay truly is insane, and billionaires may not be the best persons to judge what is fair and unfair in respect of it.
The law, like history, is written by the victors. It acts to protect wealth, even sometimes wealth that appears ill-gotten. It should protect the weak against the strong, but a series of recent situations suggest that the law may too often be supporting the strong and operating to the detriment of the weak. Its cheerleaders will claim that fairness is inherent in the law, but sadly it seems, that is not always true. In practice, not everyone gets a fair trial, or fair treatment under the law.
That’s become very apparent in recent days, as Russian oligarchs use legal threats to avoid being named in the media as being close to President Putin and potentially implicated in his misdeeds. It’s true too in the case of Charlotte Leslie, former Conservative MP for Bristol North West, who is being effectively muzzled and bullied through legal means because, she suggests, she questioned whether the party should be willing to work with an individual who (as revealed by the Panama papers) has an association with the agreement under which Swedish telecoms firm Telia supplied services in Uzbekistan – over which the company has admitted bribery. It may be similarly apparent in the recent decision of the Supreme Court to bar Bloomberg from disclosing the existence of a regulatory investigation that implicated an senior individual in a UK business (even if the Bloomberg headline responding to the decision does seem a little hyperbolic – UK Judges are Helping the Next Robert Maxwell).
As a law graduate who then spent nearly a decade editing legal journals, I have long had a lot of faith in the law, and in the concept of the Rule of Law. That’s the idea that all, including those with power, are subject equally to the law, and that the law should be applied fairly to all – with structures in place to ensure that fairness can indeed be delivered procedurally. The Rule of Law, put in the simplest terms, is fairness. But these situations tend to suggest that, as in other parts of our economies, the wealthy have a significant advantage over others. Money can skew this playing field just as it does others.
And sadly it seems that the wealthy and powerful using the law to overwhelm those weaker than themselves is not restricted to oligarchs. It is not just done by individuals eager to protect their personal reputations. Perhaps the most egregious recent example is now being played out in a belated public inquiry – and it is worse than the other situations mentioned above, because it subverts that very foundation of our trust in the law, the right to a fair trial in a criminal case.
The public enquiry is so belated that the Post Office Fujitsu Horizon scandal is now decades old, although most people will not have heard of it till recently. It dates back to 2000, yet only Private Eye and Computer Weekly have been covering the scandal for any period of time. Even as an avid reader of Private Eye for decades, and so hearing a steady drumbeat about the scale and nature of this scandal, I was shocked by the details revealed in the court judgements.
Soon after a new IT system was introduced to the UK Post Office (the consumer-facing mail transactions and financial services operation, which is often run at an individual business level by local shopkeepers known for these purposes as sub-postmasters), problems began to emerge. Rather than trust its workforce, or its systems for assessing their reliability, the Post Office attributed these errors to human error, or indeed fraud. This continued even as the numbers of these errors continued to build up. Between 2000 and 2014, the Post Office prosecuted (oddly, it had powers to mount private prosecutions) 736 sub-postmasters – and many more chose to remedy shortfalls in the system out of their own pockets to avoid prosecution. Even after 2014, when the Post Office stepped back from prosecuting individuals, it continued to fight calls for legal redress. Even now, though the failings of the Horizon system have been publicly exposed, only a handful of those who were wrongly prosecuted have gained legal absolution. Others who were equally wronged still have their names unfairly sullied. There is manifest injustice – unfairness – in the delay in clearing these individuals who have been so badly treated.
A failure to remedy a wrong from 2014 to the present day would be one thing. But it’s worse than that. It’s apparent from the cases that the Post Office as an organisation was aware of issues with Horizon from at least 2001, and yet it continued with prosecutions.
It’s no wonder that the crucial Court of Appeal decision last year, Hamilton v Post Office, found not just that “a fair trial was not possible” but also agreed that “it was an affront to the public conscience for the appellants to face prosecution”. Shocking, judicially enforced unfairness was allowed to persist for 20 years and more in some cases. The Court of Appeal leans on years of remarkable and detailed judgements by Fraser J in a series of cases collectively referred to as Horizon Issues (perhaps the most striking is Bates v Post Office Judgement 6).
Fraser J is not prone to overstatement, but his views of the Post Office and those individuals implicated by the scandal are coldly clear. He is transparently frustrated by the approach of the Post Office legal team, and in the documentation the Post Office provided to the claimants, saying in his very understated way: “I have gained the distinct impression that the Post Office is less committed to speedy resolution of the entire group litigation than are the claimants.” He is bluntly clear in his dismissal of some of the witnesses called by the Post Office. It is Fraser J who notes clear evidence that the organisation was aware of issues with Horizon as early as 2001, which is the date of a detailed IT error report (known internally as a PEAK) setting out the substance of the issues. And yet the prosecutions went on for more than a decade.
He does conclude that the Post Office suffered from “a simple institutional obstinacy or refusal to consider any possible alternatives to their view of Horizon, which was maintained regardless of the weight of factual evidence to the contrary.” His most direct comment is to say about this view that: “It amounts to the 21st century equivalent of maintaining that the earth is flat.”
Others who have followed this scandal and tried to expose it are more blunt and excoriating. A particularly striking headline from Computer Weekly was Post Office CEO either knew what was going on in Horizon scandal, or was ‘asleep at the wheel’ (and it certainly seems appropriate that Paula Vennels stood down from her public roles following the Court of Appeal’s judgement in Hamilton). Barrister Paul Marshall’s speech to the University of Law is if anything even less forgiving. At its simplest level, the miscarriages of justice arose because there was an unchallenged assumption that if the IT system said there was a shortfall, then there must be a shortfall. It is a remarkable failure of imagination – perhaps even a delusional confidence in technology – to fail to consider that the evidence of an IT system might be wrong. Yet both the Post Office, and the English courts, suffered from that failure, that delusion. That is the heart of this particular unfairness.
As Marshall puts it: “The first problem that the Post Office litigation painfully exposes is that English judges and English lawyers commonly do not understand the propensity of computers to fail.” As Marshall rightly notes, the truth is that technology is as fallible as humankind, and tends to embed the same unfairnesses as exist in the human world. One hopes that our country’s lawyers will rapidly remedy their error. Otherwise our increasingly technology-beholden world will deliver many more such unfair judgements.
These situations seem strongly suggestive that the law is being used to perpetuate unfairness. It’s hard not to conclude that if the law is to live up to the fairness promised by the Rule of Law, it must do better. More on this in due course.
The Financial Conduct Authority – the UK’s financial regulator – is moving towards finalising its proposed Consumer Duty. It is welcome that the FCA is holding firm against suggestions from some (happily not all) in the industry that it is asking too much or that the proposal would over-protect consumers and remove competition. Instead, the regulator is continuing to insist that the industry must be fair to its customers.
Firms selling products not appropriate for those to whom they are sold
Firms selling products that do not offer fair value
Firms providing such poor customer support that consumers are in effect hindered from taking the right decisions or rectifying the wrong ones
Firms exploiting customer loyalty or inertia
Sadly, in each of these cases the FCA identifies multiple real-life examples of industry misbehaviour and consumer harm.
It is welcome that the FCA has not been blown off-course and is proceeding largely as it proposed. It is particularly welcome that it is not pandering to calls from some in the financial services industry for more detailed rules, for example in relation to deciding what amounts to fair value for consumers. Instead, the FCA is insisting on the industry being willing to exercise professional judgement. Fundamentally, that professional judgement must be exercised to put the interests of consumers higher up in their considerations than many companies previously have.
In particular, arguments that the proposals might limit competition are, rightly, given short shrift. Competition is fostered by treating customers fairly, ensuring that they can understand and trust what is going on. That is a necessary condition for real competition to function. I would therefore firmly endorse the following response to the argument (in paragraph 2.20 of the latest consultation) that a Consumer Duty might be in some way anti-competitive:
“We think the Consumer Duty will create a fairer and more consumer-focused playing field on which firms can compete and innovate in pursuit of good consumer outcomes. Competition can more effectively act in the interests of consumers where firms design products and services to meet consumer needs, and consumers are put in a position to make informed decisions and act in their interests. We do not think there is good reason to think this will reduce the intensity of competition.”
However, it is with regard to the proposed Consumer Principle where some reconsideration may still be needed. The proposed Principle is left as originally drafted: ‘A firm must act to deliver good outcomes for retail clients’. That’s in spite of the suggestion – apparently made not just by this blog – that ‘fair outcomes’ might be a better aim than ‘good’ ones.
This is odd, because the FCA accepts that not all outcomes for consumers will be good (it mentions the repossession of a house or a situation of money being lost on an investment). Its reasoning (in paragraph 5.24) that this is OK because “Our focus is on firms acting reasonably to deliver good outcomes” would carry more weight if the draft principle actually included the word ‘reasonably’. This is one area where this blog might have sympathy with comments from the industry that the standard the FCA seems to be asserting seems excessively absolute. Once again, asking firms to deliver fair outcomes would seem a more appropriate standard, as well as employing this blog’s favourite word.
The fact that the Consumer Principle lies at the heart of the Consumer Duty – it is the lodestar to guide all industry judgements – means that getting its drafting right matters crucially. I would again commend ‘A firm must act to deliver fair outcomes for retail clients’ as a better option, one that insists on judgement being exercised, both by the industry and by retail customers (who crucially must of course have the necessary transparency and understanding to enable them to exercise that judgement).