Exclusive: Banks Braced For Cash Bonus Cap

By Mark Kleinman, City Editor

The two giant banks bailed out by British taxpayers in 2008 are preparing to impose a fourth consecutive annual cap on cash bonuses as they finalise staff payouts for last year.

I have learned that executives at Lloyds Banking Group and Royal Bank of Scotland (RBS) are braced for the Government to push for a £2,000 ceiling on cash payments as ministers and investors seek to drive down pay in the financial services sector.

The boardroom remuneration committees at Lloyds and RBS have begun consulting with leading investors about the size and shape of their bonus pools for 2012, with approximately eight weeks remaining until the two state-backed banks report their full-year results at the beginning of March.

No formal talks have yet taken place between the banks and UK Financial Investments (UKFI), the body which manages the taxpayer's 82 per cent stake in RBS and 41 per cent of Lloyds, about using the £2000 limit again this year.

However, several bank executives spoken to by Sky News in recent days said a repeat of the £2,000 cap was inevitable.

Any nod toward restraint would gain public support from Cabinet ministers such as George Osborne, the Chancellor, and Vince Cable, the Business Secretary.

"It would be politically impossible for the Government to sanction a removal of the cap, or even raising it modestly, given the wider economic environment," one of the bank executives said.

The £2,000 limit on cash payouts was introduced in 2010 amid pressure from Gordon Brown's Labour government a few months before the general election.

It was repeated in the following two years, and in 2012, David Cameron, the Prime Minister, said the cap was essential as part of a broader Coalition crackdown on executive pay.

The imposition for a fourth year of the cash cap is unlikely to muster significant opposition from Lloyds and RBS executives, who in previous years have complained privately that it leaves them more exposed to having employees by other banks not subject to the cap.

That is because intensifying pressure from City shareholders and new remuneration rules set out by the Financial Services Authority (FSA) have triggered a reduction in cash bonuses across the banking industry.

Both Barclays and HSBC both imposed cash ceilings on investment banking staff last year - although these were much higher than the £2000 limit at Lloyds and RBS.

The FSA has been particularly robust about banks' plans to pay bonuses for 2012, arguing that the spate of scandals which has hit the industry - ranging from payment protection insurance mis-selling to Libor rate manipulation - must be reflected in the size of payouts.

Only the cash components of bonuses for Lloyds and RBS staff would be restricted to £2,000, with dozens of staff likely to receive share-based bonuses running into tens or hundreds of thousands of pounds.

These employees will principally be employees of RBS's global banking and markets arm, although there will be fewer of them this year than in any previous bonus round since the bail-out of the banks because of the subdued performance of the division.

RBS has already side-stepped the annual row over the bonus of Stephen Hester, its chief executive. He waived his entitlement to be considered for a bonus following the IT systems glitch last summer which left millions of RBS customers without access to their accounts.

Lloyds, RBS and UKFI all declined to comment.

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Exclusive: ShEx Boss In DECC Move

By Mark Kleinman, City Editor

The man responsible for stewarding tens of billions of pounds-worth of state-owned assets and who oversaw the sale of the Government's stakes in the Tote and British Energy is to step down from his role.

I can reveal that the departure of Stephen Lovegrove, chief executive of the Shareholder Executive, will be announced in the coming days. He is quitting to become the new permanent secretary of the Department for Energy and Climate Change (DECC), one of the most senior posts in the civil service.

Mr Lovegrove's appointment will be closely-watched in Whitehall, since it follows a decision in November by David Cameron, the Prime Minister, to veto the previous choice for the permanent secretary role at DECC. Mr Cameron is understood to have blocked climate change expert David Kennedy despite his appointment having the support of Ed Davey, the Liberal Democrat MP who is Secretary of State.

Mr Lovegrove is among the most widely-respected figures in Whitehall. He was recognised in the New Year's honours list in and was awarded a Companion of the Bath in acknowledgement of his role in the sale of the Government's stake in British Energy and the ongoing preparations for the privatisation of Royal Mail, which is expected to take place through a stock market listing later this year.

Mr Davey is understood to have developed a strong working relationship with Mr Lovegrove during his stint as the minister responsible for the state-owned postal operator.

In his new role, Mr Lovegrove is set to be heavily-involved in Government plans to sell the state's one-third stake in Urenco, the nuclear fuel processor. Britain owns an equal stake with the Dutch government and two large German utilities and a sale is likely in the next couple of years.

During more than eight years at ShEx, Mr Lovegrove was instrumental in the professionalization in the way the Government managed publicly-owned assets, creating a separate wing to oversee the state's vast property portfolio. He was also responsible for the Nuclear Decommissioning Authority, a non-departmental public body established in 2004.

One of the most significant transactions during his time at ShEx came two years ago when the Government finally sold the Tote, the bookmaker, more than decades after the company's privatisation was originally signalled.

Mr Lovegrove, a former investment banker with Deutsche Bank, also sits on the board of the London Organising Committee of the Olympic Games and is a director-general of the Department for Business, Innovation and Skills (BIS), one of the ministries top management posts.

It was unclear on Sunday who would replace Mr Lovegrove at ShEx, although insiders pointed to Mark Russell, his deputy, as an obvious candidate for the job. Mr Russell was one of the key figures who represented the Government during last year's aborted merger discussions between BAE Systems, the defence contractor, and EADS, the European defence and aerospace group.

BIS and DECC both declined to comment, while Mr Lovegrove could not be reached for comment on Sunday.

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Morrisons Sees Sales Drop Over Christmas

Morrisons has revealed it had a "disappointing" Christmas period with like-for-like sales, excluding fuel, down 2.5% in the six weeks to December 30.

The supermarket chain appears to have been the big loser in the so-called supermarket war over the festive period.

The UK's fourth-biggest grocer, which has 455 stores in the UK, admitted it was "disappointing".

The group said the Christmas period had continued to be challenging, with customers shopping to a budget and relying on vouchers in a "highly promotional" market.

Despite the latest drop in sales, which follows a 2.1% decline in the previous quarter, the company said it remained on track to meet profit expectations.

The firm said: "2012 was difficult for the consumer and the sales environment has proved to be challenging.

"Through the self help available to us we have managed our business tightly and accordingly the board believes that our full year performance will be broadly in line with its expectations."

Morrisons said it placed renewed emphasis on altering its broader strategy.

These may include greater online offerings and opening of smaller convenience stores.

Unlike its competitors, Morrisons does not offer an online shopping service.

Analysts believe the supermarket has struggled to compete with its rivals because of its lack of grocery delivery service and small number of convenience stores.

Investment bank Jefferies International said it now believes Morrisons is a buy target in the coming months.

"The major challenges which have become more visible in recent months - namely the lack of exposure to convenience and online - continue to impact trading form," Jefferies said in a statement.

Consumers are increasingly turning towards 'click and collect' online shopping, and for those living in built-up areas convenience stores have become the outlet of choice.

Dalton Philips, Morrisons' chief executive officer, admitted the firm's festive sales performance was "lower than anticipated".

He said: "Our 130,000 colleagues have done an outstanding job serving our customers great value food this Christmas and I would like to thank them for their dedication and hard work.

"In a difficult market, our sales performance was lower than anticipated, but we have a strong business and significant opportunities to advance our strategy, as we accelerate our multi-channel offer," he added.

The Bradford-based company also admitted it has not done enough to advertise its promotions and communicate its points of difference.

Last week, the company announced a brand endorsement and sponsorship deal with Geordie duo Ant & Dec to promote the chain's fresh food credentials.

The TV stars will front Morrisons' 2013 advertising campaign, and the supermarket will sponsor their shows Britain's Got Talent and Ant & Dec's Saturday Night Takeaway as part of the deal with broadcaster ITV, FreemantleMedia Enterprises, Syco and James Grant management.

Sainsbury's reports third-quarter sales on Wednesday, while Tesco publishes Christmas figures on Thursday.

Tesco sharpened its performance after a disastrous 2011 and is likely to show a modest return to like-for-like sales growth, while Sainsbury's is expected to be up by about 1% in sales figures.

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New Car Sales At Best Level Since 2008

New UK car registrations rose more than 5% in 2012, an increase that has taken the annual volume to its highest level since 2008.

More than two million vehicles were registered, which is the largest recorded increase since 2001.

The Society of Motor Manufacturers and Traders (SMMT) said growth of 5.3% in 2012 was led by private demand and not fleet buyers.

The statistics have been welcomed by the industry, which has suffered as a result of the global financial crisis.

However the new car market is still 14.9% below the pre-recession 2007 level, when 2.4 million vehicles were registered with the DVLA.

SMMT chief executive Paul Everitt said: "Boosted by strong consumer demand, the market grew at its fastest rate for 11 years with innovative, fuel-efficient cars keeping buyers in showrooms.

Private vehicle registrations rose 12.9% to 106,346, with incentives and buying patterns shifting away from used vehicles as possible reasons for the upturn.

Smaller cars and so-called dual purpose vehicles saw the biggest growth.

The Mini sector rose 54%, Superminis were up 5.6% and dual purpose climbed 21.1%.

"It's terrific news for everyone involved in the UK car industry that we have moved back above two million new car registrations," What Car? editor in chief Chas Hallett told Sky News.

"Of course, this is still lower than the best years - but it's a real sign that consumer confidence is bouncing back.

UK-built cars saw a volume rise of 11.1% in 2012, taking British manufactured market share to 13.5%.

It appears that the higher per litre cost of diesel has dampened desire for what was once an alternative to petrol-engined cars - diesel vehicle sales only rose by 0.2% to 50.8%.

Meanwhile, registrations of alternatively-fuelled vehicles rose 9.4%, achieving a new high of 1.4%.

The Ford Fiesta remained the best-selling car in Britain during 2012, the title it has held since 2009.

Mr Hallett from What Car? added: "We should also remember other successes in the UK manufacturing industry.

"Companies such as Land Rover, Nissan and Toyota are now also producing hundreds of thousands of cars which are being exported to all corners of the globe."

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VAT Evasion At Highest Level Since Start Of Crisis

Tax fraud has reached its highest level since the start of the financial crisis, a new study suggests.

VAT evasion now accounts for 44% of all fraud and is costing Britain more than £3bn a year. - the equivalent to a 1p reduction of the effective rate of tax for every UK taxpayer.

And according to a report by accountancy firm BDO, the problem is largely down to a significantly under-resourced HM Revenue and Customs.

Its author, Simon Bevan, said half of the fraud is being committed by professional fraudsters, while the rest is down to deliberate evasion or mistakes by legitimate traders.

He said: "Politicians and the public at large are presently pointing their finger at various multinationals for allegedly not paying the correct amount of corporation tax.

"However, our latest survey of UK fraud shows that, in reality, it is the fraud element of UK's VAT gap - the theoretical difference between what the Government expects to collect in sales tax and what it actually collects - that is the bigger drain on the public purse."

He said the Germans and the Dutch have thrown resources at the issue and now suffer proportionally much less professional VAT fraud than other EU countries.

"If we focus on serious VAT fraud - and resource HMRC accordingly - we can immeasurably improve the public purse in a relatively cost effective manner," he added.

The findings come as separate data from law firm Pinsent Masons shows the number of times HMRC requested help from overseas governments for information on the tax affairs of suspect tax dodgers fell last year by 40%.

The taxman made 640 requests in 2011-12, compared to 857 in 2010-11.

Phil Berwick, a partner at the firm, said it may have "picked off most of the low hanging fruit", and its recent tough, targeted approach may have prompted some individuals "onto the straight and narrow" to come forward voluntarily.

"It may also be the case that HMRC's heavy workload is catching up with it," he continued.

"The recent NAO report on HMRC's compliance performance revealed that HMRC had 41,000 open avoidance investigations.

"HMRC has pushed very hard on compliance recently and may be hitting capacity," he added.

A HMRC spokesman said: "We do not believe that there has been an increase in VAT fraud. HMRC's latest estimate of the VAT Gap shows a decrease from 10.1% in 2010/11 to 9.7% in 2011/12.

"HMRC is investing in a highly-skilled workforce to combat evasion. We will increase the number of staff working on compliance by around 2,500 people by 2014/15 with an additional 200 criminal investigators and 40 intelligence officers.

"If people continue to refuse to comply, we will find them and penalise them heavily."

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HTC Profit Plunges 91% In Smartphone War

HTC is losing the smartphone sales war, with its devices continuing to be outsold by Apple's iPhone and Samsung's Galaxy range.

The Taiwanese firm, whose phones include the Butterfly, said net profit in the fourth quarter of 2012 had missed forecasts and plunged 91% year on year.

HTC's unaudited net profit for the October to December period was $34.47m (£21.47m), down from $379.84m (£236.67m) in the same period a year earlier and $134.44m (£83.72m) in the previous quarter.

HTC, the world's fifth-largest smartphone maker, did not elaborate.

Eighteen analysts had forecast a net profit of $50.67m (£31.55m) in the quarter, according to a Thomson Reuters survey.

Last week, market research firm Strategy Analytics predicted Samsung would continue to dominate the smartphone market.

It said there would be a clash between the South Korean firm and its US rival this year, with Apple trying to claw back the lower end of the market with a cheaper "iPhone mini".

Meanwhile, Sharp, which makes Aquos brand TVs among other products, is projecting an operating profit in the October-March second half of its business year.

That would unlock additional funds from banks, after the struggling Japanese company won a $4.4bn (£2.7bn) bailout from its lenders in October.

Sharp had warned in November that it might not be able to survive on its own after doubling its full-year net loss forecast to $5.6bn (£3.49bn).

Company president Takashi Okuda said the firm had been benefiting from higher revenues from large household appliances and a slight upturn in LCD TV sales.

Sharp shares lost more than half their value in the 2012 calendar year against a 23% rise in the Nikkei index.

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City Jobs: New Posts Down Amid Weak Economy

The number of City jobs being created has fallen by more than a third, according to new figures.

Just 35,115 posts were created in 2012 - down 35% on the 54,025 in 2011.

In addition, around 800 new City jobs were available in December last year, compared with 1,490 in December 2011.

The data has been released by financial services recruitment firm Astbury Marsden.

Chief operating officer Mark Cameron said 2012 "was a busy year for HR departments across the City as cost-cutting remained a key focus for senior management and board members throughout the year".

He added: "Tighter regulation including higher capital requirements forced up costs at a time when revenues dipped due to a number of factors including a continued weak economy and less trading activity.

"Although broad cost-cutting is fairly typical in the City during a downturn, 2012 was particularly significant as senior management in banks took very decisive action and implemented major structural changes including winding down entire units.

"Hopefully we are now behind the worst of the cost-cutting. Although banks may still tinker with staffing numbers, most of the obvious and immediate cuts are likely to have now been made."

The firm believes developments in the handling of the eurozone crisis since the autumn have started to have a positive impact, which could improve hiring confidence in 2013.

"Some of the dark clouds around the euro - which has been a major concern in the City for the last 18 months - seem to have lifted which will encourage some firms who are contemplating hiring staff," Mr Cameron said.

"Whilst the closure in the US budget battle is still to come, markets have responded well to progress already made there.

"For the world's largest economy, which is so important in setting trends globally, 2013 has certainly started on a more positive note than 2012 ended, which could help mitigate the gloomy outlook around hiring."

There has been a spate of redundancies in the financial sector as it battles to gain ground in a weak economy - amid increasing regulation and public scepticism.

Last month, banking giant Citigroup announced plans to axe 11,000 jobs worldwide - some 4% of its workforce - to cut costs.

In October, Switzerland's biggest bank UBS confirmed it was cutting 10,000 jobs to shrink its investment operations.

Of the total job cuts, it said 2,500 positions would be lost in Switzerland while the rest would be felt in the UK and US.

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Google's Eric Schmidt Arrives In North Korea

Google's executive chairman Eric Schmidt has arrived in North Korea for the highest-profile visit by an American CEO since Kim Jong-Un took power a year ago.

Mr Schmidt arrived on a commercial Air China flight with former New Mexico Governor Bill Richardson, who has travelled more than half a dozen times to North Korea over the past 20 years.

Mr Richardson, speaking ahead of the flight from Beijing, called the trip a private, humanitarian mission.

"This is not a Google trip, but I'm sure he's interested in some of the economic issues there, the social media aspect. So this is why we are teamed up on this," he said.

"We'll meet with North Korean political leaders. We'll meet with North Korean economic leaders, military. We'll visit some universities. We don't control the visit. They will let us know what the schedule is when we get there," he added.

The visit has drawn criticism from the US State Department because it comes only weeks after North Korea fired a satellite into space using a long-range rocket.

Washington condemned the December 12 launch - which it considers a test of ballistic missile technology - as a violation of UN Security Council resolutions.

Former New Mexico Governor Bill Richardson at Beijing airport

The Security Council is deliberating whether to take further action.

"We don't think the timing of the visit is helpful, and they are well aware of our views," State Department spokeswoman Victoria Nuland told reporters last week.

The visit has also prompted speculation about what the businessman hopes to accomplish.

Computer use is gaining ground in North Korea's larger cities.

But most North Koreans only have access to a domestic intranet system, not the World Wide Web.

Internet use is still strictly regulated and allowed only with approval.

Mr Schmidt, a staunch proponent of internet connectivity and openness, is expected to make a donation during the visit.

Mr Richardson will try to discuss the detention of Korean-American Kenneth Bae, who was jailed by Pyongyang in December on spying charges.

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House Of Fraser Boasts Cracking Festive Sales

Online sales helped make it a bumper Christmas for House of Fraser which has posted record trading results for the festive period.

The company said demand for fashion and beauty products pushed like-for-like sales up 6.3% in the six weeks to January 5.

Overall like-for-like sales excluding VAT, for the first 10 weeks of the fourth quarter were up 5.2%.

It said online sales rose by almost half in the period.

The privately owned group, which has 60 stores in Britain and Ireland, said sales were up across all areas.

"There is no doubt that 2012 was a challenging year in retail and it remains difficult to predict when economic conditions and consumer sentiment will improve," chairman Don McCarthy said.

"With the strong sales performance in the period and a close focus on margins and operational efficiencies, we expect to report growth in full-year earnings in line with previous indications."

British retailers generally found the going tough in 2012 with shoppers fretting over job security and a squeeze on incomes.

Some traders have also come under pressure from online sellers, who can operate with less overheads and offer home delivery.

House of Fraser is the latest department store to reveal the details of how its trading fared over the festive period.

Last week, John Lewis revealed it made £684.8m in the five weeks to December 29 - up almost 15% on the same period in 2011.

Compared with two years ago, total sales were up 25.5% and like-for-like sales grew by 20.1%, the partnership said.

Electricals and home technology were up 30.9%, fashion and beauty climbed 10% and home furnishings increased by 6.2%.

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Exclusive: PPI Bankers Face Public Grilling

By Mark Kleinman, City Editor

The bankers responsible for one of Britain's worst mis-selling scandals are to be interrogated publicly about the sales culture that artificially inflated industry profits by billions of pounds.

I have learned that Britain's major banks have been ordered to submit the names of executives who were directly responsible for devising payment protection insurance (PPI) sales practices during the first half of the last decade.

Lenders including the state-backed Lloyds Banking Group and Royal Bank of Scotland (RBS) were told that the lists should include the names of former executives, even if they left the banks' employment many years ago.

The Parliamentary Commission on Banking Standards (PCBS), which is headed by the Conservative MP Andrew Tyrie, who also chairs the Commons Treasury Select Committee, is understood to have fired off the demand in the last few weeks.

In most cases, this will be the first occasion on which those directly involved in PPI mis-selling will have been held publicly accountable for a scandal which has grown in terms of public prominence and financial impact during the last two years.

To date, Britain's big four banks have had to set aside more than £10bn for PPI mis-selling, with Lloyds leading the way with a bill for £5.3bn.

The Bank of England's Financial Stability Report in November raised the prospect of another £10bn being added to the industry's compensation bill.

Among those who face being called as witnesses by the PCBS will be Gordon Pell, the former deputy chief executive of RBS, who was one of the key retail bankers during Fred Goodwin's reign at the Edinburgh-based group.

The major banks have also been asked by the PCBS to answer a series of questions about PPI, which has become an emblem of the egregious sales practices which became commonplace across the sector.

Several bankers suggested that the PCBS "risked becoming a show-trial" but accepted the need for public accountability

Some of the worst culprits stopped selling PPI policies several years ago, meaning that clawing back bonuses from executives involved in the practice has been legally impossible. Clawback has only become established as a feature of bankers' employment contracts since the financial crisis.

Later this week, the PCBS will hold an evidence session with consumer groups about bank mis-selling, with witnesses from the big lenders likely to appear in the next few weeks.

None of the banks would comment on Monday.

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