March 2019

Thought For The Month

Increasingly our clients enquire how we embrace ESG issues in our analysis. One way we approach this subject is to assess whether the company we are analysing is behaving in ways which a regulator may at some point consider are taking advantage of clients, particularly those considered most ‘vulnerable’.

This theme applies to a surprisingly large number of sub-sectors that appear heavily in our current list of out of favour stocks (and the list below is certainly not complete). Some are where regulation has arrived, others, where it appears to becoming:

Bookmakers - significant changes to the upper stake limits on fixed odds betting terminals.

Utility providers/insurance companies/breakdown organisations - a focus on whether the inertia of long-serving customers is resulting in unfairly high renewal premiums for the most loyal customers. Saga’s recent large profits warning, recognised that this strategy is no longer working (or acceptable) and proved how painful a transition to a new model can be for companies.

Banks – are some customers unfairly locked into expensive mortgages?

Funeral companies – an investigation into whether the industry has been pushing prices up excessively, particularly given customers’ vulnerability at the time of purchase.

High-cost credit – various studies covering a number of areas from overdraft costs, rent-to-own products (The FCA recently highlighted an example of an electric cooker which could be purchased for less than £300 on the high street costing over £1,500 if paid for by monthly instalments), home collected credit and catalogue and credit cards.

Spread betting – the protection of retail investors against suffering losses in highly geared products such as contracts for difference (CFDs).

Airline companies – increased compensation to customers suffering delays.

Estate agents – studies into whether agencies give priority to those prospective house buyers most likely to purchase financial services from them and if it is right that the estate agents should in many cases receive fees from both the customer and the mortgage provider.

Regulators are certainly on the front foot – perhaps embarrassed by what they missed around the time of the global financial crisis (GFC) or simply because they are better staffed as a consequence of the GFC. It is unlikely that companies will be allowed to slip back into old habits anytime soon. And all this with a Conservative led, Brexit-distracted, government.

Simplistically, those companies with very profitable back books will find themselves reducing prices to their loyal customers and increasing them to their new customers. Two excellent rules of thumb are never to underestimate how profitable back books are and to never bother wasting one’s time asking management for a guide. The issue, as articulated by Saga with the size of its profits warning, is that new customers have a lot of choice and will prove very resistant to such price increases, particularly if competitors are yet to reprice. By moving early, Saga is effectively running the risk of relegating itself to the nether regions of the comparison websites.

Equilibrium in these industries will eventually be found, but it could get uglier for some companies first, especially if they are not sufficiently cost efficient to be the keenest pricers. ESG is certainly a force for good, but if the issues at hand are too large, the right investment action may often be avoidance rather than engagement.

Latest updates from Temple Bar

Use this simple form to let us know the type of updates you would like to receive.

We will email you when your selected updates become available.

By providing us with your contact details you are opting to receive the materials you have requested. In particular, you will be giving your consent for Temple Bar Investment Trust plc to use your email address (including your name) to send these materials.  You can withdraw this consent at any time.  We will stop sending updates unless you re-subscribe.  You have rights in relation to how we use your personal information for this purpose – see our Privacy Notice and Cookie Policy.

Step 1 of 2