Europe thwarts LSE’s plans

The LSE’s merger with its German counterpart looks all but dead. Perhaps that’s just as well. Ben Judge reports.

The controversial £24bn “merger of equals” between the London Stock Exchange (LSE) and Deutsche Börse, which has been rumbling on for a year now, now looks “all but dead”, says Chris Hughes on Bloomberg Gadfly. The ostensible reason for the halt to proceedings was the European Commission’s insistence that the LSE sell MTS, its Italian bond-trading unit, which it is loath to do. It’s hard to see how the deal can get through this impasse.

This is “nonsense on stilts”, says Allister Heath in The Daily Telegraph. The Commission’s rationale for blocking it makes no sense. Apparently Brussels was worried that the LSE’s clearing business could remain too powerful because the activities it had relinquished in this field by ditching its French unit could be revived in Italy. The Commission has had ages to think about this, yet it says it only came to this conclusion two weeks ago. Come on. The upshot is that “politicians and eurocrats”, for whatever reason, must have wanted to kill the deal. Brexit “is beginning to reveal the EU’s darker, protectionist side”.

The LSE may have blamed its “cooling ardour” on the European Commission, says Lex in the Financial Times, but its “indignant refusal” to sell MTS was “overblown”. After all, MTS is “much smaller than a French unit it is already selling”. So what, really, was the problem? You don’t have to be a “swivel-eyed conspiracy theorist” to suspect that Competition Commissioner Margrethe Vestager “merely gave LSE a pretext to object on its own terms”.

A more likely reason for the deal’s collapse, says Lex, is that the LSE is “irked by German pressure” for the combined entity to be based in Frankfurt. “It’s the headquarters, stupid,” agrees CNBC’s Gemma Acton. “The situation leaves losers all round,” says Bloomberg’s Hughes, with Europe’s exchanges in a “big, fragmented mess”. But it does create an opportunity for NYSE’s owner Intercontinental Exchange or Chicago’s CME Group, either of which “might be interested in buying either LSE or Deutsche Börse”.

Steady on, says Nils Pratley in The Guardian. A merger with Deutsche Börse would have been “messy and awkward”, but a takeover by Intercontinental Exchange “would be much worse”. It would see the LSE being “relegated to junior partner”, which would hardly bode well for the City’s odds of remaining the financial capital of Europe. The broader point is that there is no point in doing any deals at all until we know what kind of arrangement we can secure with the EU. Theresa May “should make it crystal clear that bids for the LSE are not welcome, at least until the post-Brexit financial landscape can be mapped”.

Insurers take a pummelling

Insurance firms were caught by surprise on Monday when Liz Truss, the Lord Chancellor and Secretary of State for Justice, made a change to the way personal injury compensation payments
are calculated. Truss reduced the “discount rate”, which is linked by law to the yield on index-linked government bonds, from 2.5% to negative 0.75%. 
The change means that insurers will face increased payouts to claimants who have suffered severe injuries, and is likely to cost the industry hundreds of millions of pounds. The Association of British Insurers (ABI) called the move “crazy”.

Huw Evans, the ABI’s director-general, said the formula was “broken”, and making such a significant change to it was “reckless in the extreme”, showing an “utter disregard” for the effect it will have on consumers and businesses. The decision will affect “up to 36 million” policies just “to overcompensate a few thousand claimants a year”. Motor insurers are likely to be hit the hardest.

Many had already prepared for a reduction in the rate, but the size was a shock. Admiral’s share price dropped by 2.7% and it has postponed its annual results. It expects its earnings to be hit by between £70m and £100m; last year it earned £377m before tax. Direct Line’s share price fell by 7.6%. Profits could be cut by a third. Esure saw its price rise by 2.8%, however. It had already factored in a drop in the discount rate to 0%.

City diary

• Socially responsible investing isn’t new. There are plenty of products for those who don’t want to support arms manufacturing, alcohol, tobacco and pornography, for instance. Now, however, California-based Inspire Investing is taking it a step further by launching “Biblically responsible” ETFs, reports Robin Wigglesworth in the FT. What sets these ETFs apart is their refusal to invest in the securities of any firm “that has any degree of participation [in] the LGBT lifestyle”. Inspire’s chief executive Robert Netzly says there is a “huge demand for low-cost investing aligned with biblical values”. Mark Snyder, a spokesman for the Equality Federation, isn’t so sure. “This is out of step with mainstream America, which has embraced non-discriminatory policies and fairness,” he said.

• Charlotte Hogg, the Bank of England’s incoming deputy governor for markets and banking, has been answering questions from MPs, says The Daily Telegraph. As part of her job she will sit on the Prudential Regulation Committee, which regulates banks – including Barclays, where her brother works. Would there not be a conflict of interest, MPs wondered? “My brother is part of Barclays’ strategic planning group,” she admitted. But “I don’t discuss work with him and he doesn’t discuss it with me. We mostly talk about his children.” She may have to recuse herself from committee discussions about Barclays.

• Congratulations to Philip Green, says Alistair Osborne in The Times. The “errant knight” has finally agreed to pay £363m to bail out the BHS pension fund. But it had to be “dragged out” of him after a parliamentary inquiry, an Insolvency Service probe, public outrage and regulatory action. “If he hadn’t begun by being so greedy, he could’ve saved himself a… lot of trouble.”