A growing number of blue-chip US companies are using environmental and social factors to decide bonuses for top executives, but investors are worried the metrics are being gamed to increase payouts.

Three-quarters of S&P 500 companies have disclosed that environmental, social and governance metrics contributed to executives’ pay, up from two-thirds of companies in 2021, according to data from The Conference Board and Esgauge, an ESG data analytics firm.

Among them are American Express, Dow and Southwest Airlines.

More than half of all S&P 500 companies have diversity and inclusion components in executives’ pay, according to Semler Brossy, a consultancy. Almost half of these businesses included environmental metrics as part of bonuses, up from a quarter of companies in 2020.



Since 2015, pay factors tied to profitability and business matters have declined at more than 13,000 global companies, while environmental and social pay factors have surged, according to ISS ESG, a division of Institutional Shareholder Services.

Now some of these determinants of executive pay are coming under fire from asset managers.

“We are sceptical of ESG metrics being used in compensation,” said Ben Colton, head of stewardship at State Street Global Advisors, which manages $3.79tn. “Oftentimes they are very subjective, fluffy and easily gamed.”

At Southwest, chief executive Robert Jordan’s pay increased 76 per cent to $5.3mn last year even though the airline angered passengers by cancelling more than 16,700 flights during the holiday season.

Southwest, in a regulatory filing earlier this year, said the December cancellations negatively affected executives’ bonuses, but added: “With respect to ESG initiatives, including DEI and sustainability, the [board] determined that the company performed above target-level expectations.” DEI stands for diversity, equity and inclusion.

The pay plans at Southwest have drawn fire from Strive Asset Management, a conservative-leaning firm that has criticised ESG investing principles.

Strive was co-founded by Vivek Ramaswamy, now running as a Republican in the 2024 US presidential primary. In a letter this week to Southwest it said: “There is no easier way to cut the company’s carbon footprint than to ground thousands of flights.”

Southwest did not respond to requests for comment.



Other asset managers support companies including ESG metrics in remuneration. UK-based Legal & General Investment Management has said that beginning in 2025, it wants to see net zero carbon emissions targets linked to long-term executive pay.

“We have taken a stance that ‘employee engagement’ is a poor submetric inside of ESG that some people are using that we think is troubling,” said John Hoeppner, head of US stewardship at LGIM. “We have frankly never seen a company ever score under median for employee engagement. These things can be gamed.”

About 190 executives at S&P 500 companies have an employee engagement pay metric, the Esgauge data shows.

Unlike financial metrics tied to earnings or share price performance, it is almost impossible for outsiders to tell if ESG pay metrics are worthwhile “or merely line CEOs’ pockets with performance-insensitive pay”, two Harvard researchers said in a January 2023 paper.

ESG in pay “enables executives to obtain extra compensation when equity pay is not rewarding”, Lucian Bebchuk, the director of the corporate governance programme at Harvard Law School and co-author of the research, said in an interview. “But they are happy to get extra compensation also when equity pay is rewarding.”

Credit card company American Express paid 15 per cent of executives’ annual bonuses for diversity, talent and culture achievements. But it is unclear how those achievements are met, the Harvard professors said in their research. “It is unclear whether there was a quantitative target or whether any increase (even of only one woman) would suffice.”

Chief executive Stephen Squeri earned the maximum annual bonus allowed by the company for 2022: $10.3mn, which was up from $8mn in 2021. Squeri’s total 2022 pay nearly doubled to $48mn from what he was paid in 2021 even as the company’s total shareholder return declined last year.

American Express declined to comment.



At chemical company Dow, executive pay ESG metrics include a “customer experience index”, which measures prospective customer sentiment, as well as workforce diversity. The diversity factor “does not disclose the relevant starting points at the beginning of the year”, the Harvard professors said in their paper.

ESG metrics comprised 20 per cent of executives’ annual bonuses at Dow. CEO Jim Fitterling earned a $3.5mn annual bonus for 2022, down from $5mn in 2021.

In a statement, Dow said its executive pay programme “is in line with market practice” and that it added “quantifiable ESG metrics” in 2020. The company said its 2022 sustainability report “provides the most recent quantitative and qualitative information supporting performance against our targets”.

Real estate company CBRE disclosed that chief executive Robert Sulentic did not meet the targeted financial objective that accounted for half of his annual bonus last year.

But he overachieved on five strategic goals that included boosting “employee engagement” and improving diversity, CBRE said. Excluding a one-time equity award, Sulentic’s pay increased by one-third to $18.4mn. The company disclosed that its total shareholder return declined last year.

CBRE and did not respond to requests for comment.

When journalist Anne-Marie Schiro reviewed the arrival of Zara International on Manhattan’s Upper East Side in 1989 she used the phrase “fast fashion” to describe its approach. The new shop offered fresh styles that only 15 days earlier had been dreamt up at the company’s headquarters in Spain.

Zara, Schiro wrote, was speaking a language understood by young people on a budget “who nonetheless change their clothes as often as the colour of their lipstick”. Her words were a powerful prophecy of a new era in fashion. By 2012, Zara’s parent company Inditex was churning out 840mn garments a year.

Today, these first-generation fast fashion giants — a wholly European group that includes Sweden’s H&M and Dublin’s discount retailer Primark — have been joined by more affordable, more aggressive “ultra fast” social-media-savvy brands, such as British retailer Boohoo and Chinese behemoth Shein. Collectively, they have supercharged the speed at which clothes are made, consumed and discarded.

This surfeit of cheap, shortlived garments has come at an enormous environmental and social cost, however. The average European throws away 12kg of clothes every year, the European Commission estimates, and the consumption of textiles accounts for “the fourth-highest negative impact on the environment”.



Now, the birthplace of fast fashion is making moves to end it.

With pressure mounting on the EU to meet its climate target of net zero emissions by 2050, Brussels has set out a broad vision to reform the sector.

By 2030, it wants textile products imported into the EU market to be “long-lived and recyclable, to a great extent made of recycled fibres, free of hazardous substances and produced in respect of social rights and the environment”. It is part of what the EU describes as a “circular economy” in which the bloc consumes and discards less overall.

The EU hopes its legislation will encourage policymakers around the world to adopt similar measures and force brands to rethink their business practices with benefits for every market where they sell their clothes.

“Industry was never part of the story and I think that’s the game changer. That . . . will inevitably steer them to think in a more responsible way,” Virginijus Sinkevičius, the EU’s environment commissioner, told the FT last month.

Achieving this, however, involves changes to existing legislation, awareness campaigns and a new proposal to require producers — whether manufacturers, importers or distributors — to pay for the treatment of waste textiles.



But sustainability advocates say the proposals, while a step in the right direction, are too vague and not underpinned by concrete measures. “There are big pronouncements, but the intent of ‘we want to end fast fashion’ is not [yet] translating into law,” says Maxine Bédat, a former lawyer and author of Unraveled: The Life and Death of a Garment.

These intentions are also not yet matched by the required infrastructure. Under new waste and recycling targets for example, member states will be required to collect discarded textiles from 2025. But in many cases the necessary recycling facilities are not widely available to deal with fabrics made up of multiple fibres, such as cotton and polyester. Elastane, which is added to many garments to increase stretchiness, can act as a contaminant during the recycling process and must first be extracted, increasing the cost.

“There seems to be a lot of emphasis on disclosure of information in clothing, and circularity,” adds Bédat, who wants to see a greater focus on tackling emissions. “But we don’t have the technological solutions for this mythical circular world.”

Throwaway culture

The global fashion industry has long been a dirty business.

But it is the rise of ultrafast online retailers that has led to an unprecedented volume of cheap, poor-quality clothes made from virgin polyester and other synthetic fabrics derived from fossil fuels. These items have little to no resale value and end up being incinerated or languishing for hundreds of years in landfills, usually in developing countries.

Global textile production, of which 81 per cent is used by the clothing industry, nearly doubled between 2000 and 2015. Consumption of apparel and footwear is expected to grow another 63 per cent between 2022 and 2030 to 102mn tonnes, predicts the European Environment Agency.

The glut of low-priced clothes has contributed to a culture in which consumers increasingly think of them as disposable. More than half of all fast fashion is discarded in less than a year, according to the Ellen MacArthur Foundation, a non-profit that campaigns against waste and pollution. If the average price on an item sold by Shein is about $7.60, for example, it becomes more convenient for consumers to buy new than to repair existing clothing or buy second-hand.

The fast fashion model has also been accused of contributing to exploitative working conditions in order to maintain the low prices customers expect. The 2013 Rana Plaza tragedy, in which an eight-storey commercial building in Bangladesh collapsed and killed more than 1,100 people, mostly women and children, helped expose the dire circumstances many garment workers face.



Lawmakers pushing for change often cite the incident but the pace of those efforts since has been slow at best. Bédat, the author, says the EU should make it a legal requirement for brands to pay living wages across its supply chain to enable workers and their families to meet their basic needs.

Yet, so far, the fashion industry has been largely left to self-regulate, despite industry groups and designers, such as Stella McCartney and Orsola de Castro calling for greater government intervention. Out of all the EU’s member states only France, Sweden and most recently the Netherlands have implemented schemes to make producers financially responsible for the waste they create.

Another problem with relying on voluntary action, says Valérie Boiten, senior policy officer at the Ellen MacArthur Foundation, is that brands trying to do better are “put at a competitive disadvantage”. “At the end of day, there is a premium to pay for circular design [and other sustainability measures],” she adds.

This will change when EU-wide legislation comes into force in 2030 but Emily Macintosh, senior policy offer for textiles at the European Environment Bureau, argues that the proposed extended producer responsibility (EPR) scheme should not simply “allow producers to pay to pollute for a negligible fee”. She adds: “We can’t just raise money through an EPR system to fund collection, sorting, recycling, circularity . . . in Europe without recognising that a huge amount of our fashion and textile products are exported to the global south.”



On the industry’s side, progress has been slow. Brands including H&M, Zara and Primark have launched in-store clothing “take-back” schemes, inviting customers to drop off worn clothing from any brand in exchange for a discount on a future purchase, which have been widely condemned by sustainability advocates for encouraging further consumption. To date, 369 textile, apparel, footwear and luxury goods companies have voluntarily committed to science-based targets, in line with efforts to keep global warming to 1.5C above pre-industrial levels. Only 170, however, have been approved by the Science-Based Targets initiative, a partnership between the Carbon Disclosure Project, the UN Global Compact, World Resources Institute and the World Wide Fund for Nature.

Greenwashing, whereby brands market themselves as more climate-friendly and sustainable than they really are, is rife. How best to measure how companies’ claims of sustainability is something the EU has tried to tackle in its Green Claims Directive, which was published in March. The aim of the new law is to regulate how businesses verify their environmental claims. Statements that do not meet the minimum criteria set will be banned. The European Commission estimates that substantiating a single claim about materials used could cost around €500, a cost that could rise to €54,000 if businesses wanted to prove statements about their overall environmental footprint depending on the method used.



Separately, the World Resources Institute sets out guidance for companies to measure emissions both from their own production and that of their suppliers but with less focus on waste or consumption. Given the industry involves complex, multinational supply chains, the WRI admits that it is difficult for companies to access the necessary primary data, particularly on the production of upstream materials such as cotton.

Efforts have been made to address the lack of information. The Sustainable Apparel Coalition launched the Higg Index in 2012, a set of standards designed to help companies around the world trace the environmental and social impact of their products. It covers issues from waste and chemical use to human rights and labour practices.

But the index, since rebranded as Worldly, has been criticised by NGOs for being too heavily skewed by industry interests and not robust enough, which it has since pledged to address. Other measures including Life Cycle Assessment and Product Environmental Footprint, both designed to calculate the effects a product has on the environment from creation to disposal, have also been accused of falling short.

“The reason [such methodologies] are falling down is because we are taking materials from nature, from a farm, and putting them in a mix with materials of a very different origin” such as oil-based polyesters, says Dalena White, secretary-general of the International Wool Textile Organisation. “We are making natural fibres much higher in terms of [environmental] footprint because we never measure where the oil comes from.”

Burden of change

In an atmosphere of high inflation and tensions around global trade, many companies fear that the EU’s push for sustainability comes at too high a price.

Part of the issue is the sheer amount of legislation the commission has introduced. Euratex, the European textile industry body, estimates that there are 16 pieces of legislation relevant to textiles currently being worked on, covering everything from sustainable public procurement to chemical use and waste shipment rules.

And that is only in the EU. In the US, fashion trade groups recently endorsed a proposed bill in California, known as SB 253, that requires companies with revenues of more than $1bn to report greenhouse gas emissions across their value chain on an annual basis.

A separate proposal in New York known as The Fashion Act would require all apparel and footwear retailers with global revenue of at least $100mn to set and achieve science-based targets to reduce their climate impacts — or face fines of up to 2 per cent of annual sales.

Some in the industry argue that the EU’s demands are unrealistic. “For what is probably the oldest industry in the world, [the green transition] is a big challenge because we want to change everything in a short period of time and the value chain is not prepared for that,” says Mauro Scalia, Euratex’s director of sustainable businesses.

Scalia argues a better way to promote sustainability would be to mandate that governments have to ensure that they purchase sustainable fabrics for public workers and services, such as towels in hospitals or uniforms for firefighters: “If you start to ask that all of them have some sustainability criteria incorporated then you send a tremendous signal to the market.”

There are others who believe that changing consumer behaviour is the key to pushing the industry towards greater sustainability.

One of the ways this can be done is through so-called ecolabels. Germany’s “Grüner Knopf”, or Green Button, for example, launched in the wake of the Rana Plaza disaster, gives a seal of approval to products that can prove they have robust environmental and social credentials. Yet just over two-fifths of German consumers are familiar with it. Similarly, the Nordic Swan, a voluntary initiative, has been around since 1989.



The EU, which has a similar system for white goods, is working on a revised version for textiles. Brussels also plans to establish a “digital product passport” that will provide consumers with information about how an item can be recycled or repaired. But officials warn that the commission must carefully balance the need to prevent erroneous green claims without confusing consumers with a plethora of labels.

“The problem is we have too many labels,” says one EU official working on consumer legislation, who also complained that half of an online sample of green claims made by businesses did not meet the criteria.

The rise of online shopping also means that measures like these have less impact. Instead, young consumers in particular are bombarded with advertisements and aspirational sponsored content on social media sites such as Instagram and TikTok. Shein, which has 30.1mn followers on Instagram, and Boohoo, which has 12.6mn, both make effective use of so-called influencers to market their clothes.

Shein says its “on-demand, lean production model” is well-aligned with EU efforts to cut waste, adding that it had established a road map that “outlines our commitment to addressing social and environmental challenges by embracing sustainable practices”. Boohoo did not respond to requests for comment.

But those who represent consumers say that the responsibility of building a cleaner industry cannot hinge solely on people changing their lifestyles. Monique Goyens, director-general of BEUC, the European consumer association, believes that addressing the huge damage that the textile industry causes to the planet means moving away entirely from a growth economy that requires people “to go on buying things with money they don’t have for things they don’t necessarily need”.

“Circularity doesn’t mean it is not capitalistic. You can create new companies and new wealth [without exhausting] the raw material,” she says, adding that there is a business “opportunity for people who are creative and innovative”.

But until the industry is forced to change, a majority of the world’s clothing will continue to simply be thrown away. Campaigners are resolute that if Europe is serious about wanting to clean up fast fashion it must legally require companies to set and meet science-based targets. “The methodology for [making the fashion industry sustainable] is already there,” Bédat says. “If that’s what the EU wants to achieve, that’s what the law should be.”

When it comes to drug spending, there is one 500lb gorilla in the room: America. The US market has long been the heavyweight player — Americans shelled out more than $600bn on medicines last year, almost half the global total.

The country also dominates the research pipeline; its research and development spending accounts for nearly two-thirds of the OECD total. Last year, the US had 10,265 drugs in the works, more than double both China and the EU, and four times as many as the UK.

While this means that US priorities play an outsized role in setting the research agenda, other nations quietly benefit from piggybacking on American innovation. This week’s move by the Biden administration to target 10 top-selling medicines for tough price regulation will rock this global market.

The drive to cut the prices paid for blockbuster heart, stroke, diabetes and cancer treatments will not just trim drugmaker profitability. It could also reshape drug discovery, affecting what medicines are available to patients worldwide.

Americans, who pay three times as much for branded drugs as the OECD average, overwhelmingly support the idea of their government negotiating for price cuts. But policymakers everywhere should be on their guard against subsequent market distortions. There is now a risk that R&D switches focus from the drugs that are most needed, to those that avoid US price controls.

Unlike most of Europe, the US government has not previously controlled medicine prices. Last year’s Inflation Reduction Act authorised Medicare, the taxpayer-funded healthcare system for retirees, to bargain directly with drugmakers. It plans to seek cuts of 25 per cent or more to list prices, focusing on top-selling drugs nearing the end of patent protection. This is expected to save Medicare nearly $100bn over the course of a decade, while reducing out-of-pocket costs for many older Americans.

Drug companies, which must negotiate or pay punitive taxes, have questioned whether this is constitutional; some have sued. They expect private insurers will try to push down what they pay too, sharply cutting revenue. As the list of covered medications expands, the industry warns this will put pressure on R&D budgets and limit the number of drugs in development that it can back.

Price caps may also make it harder to attract venture capital investment because the potential pay-off will be lower. This is particularly concerning because so much early stage drug research is now done by start-ups that later sell out to Big Pharma.

The impact is already starting to be felt beyond America’s shores. “We have decided that we are not going to do certain trials, or that we are not going to do a merger or acquisition or licensing [deal] because it is becoming financially not viable,” Thomas Schinecker, chief executive of Swiss drugmaker Roche, said on a recent media call.

Treatments for the elderly and research into new uses for drugs nearing the end of patent protection are most likely to be affected by the price caps. And manufacturers may prioritise large-molecule treatments, such as gene-therapy drugs or vaccines, over traditional ones simply because the former are exempt from price negotiations for longer.

Much of Big Pharma’s warnings may be scaremongering. The Medicare programme is limited to wildly popular drugs that have already earned back their development costs many times over. And the current system of uncontrolled pricing is not covering itself with innovative glory. Critics say it rewards extremely similar “me-too” drugs that offer little advantage over pre-existing treatments as well as minor reformulations to extend medicines’ patent life. One recent study found that fewer than a third of new drugs approved in Europe and the US between 2007 and 2017 were rated of “high therapeutic value”.

Manufacturers may also benefit from another prong of the IRA reforms that caps out-of-pocket costs for drugs. Some 30 per cent of Medicare patients do not fill new cancer prescriptions because of cost concerns. “They might make up in an increase in volume for the decrease in price,” explains Stacie Dusetzina, a Vanderbilt University professor.

The US has several years to work out the kinks in its new system: the first negotiated prices will not go into effect until 2026. But the upheaval should serve as a wake-up call for both Americans and everybody else.

Sky-high US prices are not the only way to fund global medical progress. Other countries will have to contribute more, but it does not have to be expensive for patients. Governments can give drugmakers a leg up by funding research into the causes of disease as well as the pathways and receptors that can be targets for treatment. They can also reduce risk by helping fund clinical trials and guaranteeing sales. Recent experience with Covid vaccines demonstrates that this can work.

The US drug industry’s size, wealth and scientific prowess mean that it will always play a big role. But it should no longer be the only gorilla in the room.

brooke.masters@ft.com

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UBS’s second-quarter results last week included the effects of its June shotgun wedding with arch-rival Credit Suisse. Its $29bn profit was, by far, the single greatest three-month result earned by a bank.

This apparent “deal of the century” bore an accounting gain that in effect contributed all of those earnings. UBS scavenged the mortally wounded CS cheaply amid its potential collapse, a tie-up effectively demanded by the Swiss government. 

With the books closed on that combination, we now have the official figures from quarterly reports and securities filings on all four of the major bank M&A rescues since the early spring crisis:

-New York Community Bancorp/ Signature Bank (March)

-First Citizens/ Silicon Valley Bank (March)

-JPMorgan Chase/ First Republic Bank (May)

-UBS/ Credit Suisse (June)

In any M&A deal, so-called purchase accounting will require the buyer to allocate the “excess purchase price” to all acquired assets and liabilities. Typically, the purchase price — the present value of future cash flows — will still exceed the revised balance sheet valuation.

That gap is known as “goodwill”. Often thought of as the je ne sais quoi of a company, yet goodwill is ultimately a mechanically-derived arithmetic output to ensure that the pro forma balance sheet does indeed balance.

But with this foursome of deals, the calculation is far more interesting. The transactions were extraordinary, with authorities desperate to find a buyer quickly and prevent broader contagion. As such, buyers could largely dictate the deal terms.

In each of these instances, the buyers took over the targets for an effective purchase price far less than the target’s book equity value, also called net asset value (the fair value of their assets less the fair value of their liabilities).

As such, the buyers did not need to raise their own costly and possibly dilutive equity in order to complete the deals. (In contrast, look at the recently announced merger between PacWest and Banc of California, a regular way transaction that requires a $500mn private equity infusion.) 

The four deals each created the unusual “negative goodwill” since the net asset value exceeded the purchase price. Negative goodwill is the term under IFRS. Per US GAAP, the concept is known as a “bargain purchase gain”. In both instances, a gain is recorded and runs through the P&L to create income and then equity capital boosts at essentially no cost. 

(Note that at the time of the deal announcements, the buyers each shared a preliminary calculation of their expected gains and now final purchase accounting largely confirms those initial figures.)

Here is an example, this one from JPMorgan/ First Republic:



Alphaville has attempted to show the scale of the gains for the four buyers:









Those four green bars of bargain purchases prices/negative goodwill add up to $44bn in collective gain. Next we can see how big those gains were, relative to size of the banks, pre-deal, measured by their shareholder equity recorded in the previous quarter.



JPMorgan paid a relatively hefty price for First Republic, including a $10.6bn cheque to the FDIC and writing off the $5bn deposit it had made into First Republic earlier in the year. Its bargain purchase gain was less than $3bn for a bank with $300bn of shareholder equity.

First Citizens, a relatively small bank, doubled its equity base by getting most of Silicon Valley Bank for just $500mn. 

More precisely, return on equity (profits divided average shareholder equity) shows how efficient these deals were for the buyers.

First Citizens, UBS and NYCB each had RoEs in the previous quarter of between 9 per cent and 11 per cent. Then they each struck gold.



Accounting aside, what may matter most is how shareholders embraced these deals.



First Citizens stock price has almost doubled. NYCB is up 43 per cent and UBS is not far behind. JPMorgan is up just 9 per cent, indicating the small potatoes of FRB, but still is nearly 30 points ahead of the KBW bank index which is down nearly a fifth this year.

Exploiting the desperation of regulators meant mostly easy money for the buyers. The tough losses then have been imposed on previous shareholders of these moribund banks, their non-deposit creditors as well as the deposit insurance schemes that are funded broadly by the banking industry.

These failed banks had viable assets as these acquirers have demonstrated. Why the returns from those assets must be only captured by opportunistic parties remains a public policy question.

You may not have heard of drip pricing — but you will almost certainly be the poorer for it.

Go online to buy a flight, a concert ticket, or even a trip to the cinema and by the time you check out, an array of extra charges and add-ons will have been “dripped” on top of the advertised price, meaning consumers pay more than they bargained for.

The airlines are obviously the masters at this. The advertised price of a flight soars after baggage fees, seating options and access to “fast track” lanes have been added. But many other retail, hospitality and service businesses are borrowing from this price-inflating playbook.

In fact, close to half of all purchases involve the addition of at least one extra (but necessary) fee, according to an independent study published this week by Alma Economics, a public policy consultancy, that analysed over 500 UK websites and apps.

It found the worst examples of drip pricing were associated with buying event tickets (93 per cent of providers), cinemas (69 per cent) and even gym memberships (60 per cent).

One gym chain pumped up prices with a mandatory joining fee that made up 39 per cent of the base price.

It’s also impossible to tell what many hidden charges are actually for, given the catch-all nature of terms like “admin fee”, “processing fee” or “service charge”.

Frankly, “extra profit” would be a more accurate description.

“If you knew the final price up front, the question is: would you have a different decision,” says Nick Spyropoulos, Alma’s managing director.

Overall, drip fees added a median 6 per cent to the advertised base price, according to Alma.

Scale this up across the wider online consumer marketplace, and these small yet annoying charges could add up to £3.5bn of additional annual spending — the last thing we need in a cost of living crisis.

Keen to crack down on the causes of inflation, the Department for Business has launched a consultation about how best to slow the drip, drip, drip of unfair pricing.

I expect they will receive a torrent of replies.

Not all the extra charges people resent having to fork out for relate to online purchases. Consider, for example, being stung by optional” service charges in restaurants of 12.5 per cent or more. Suffice to say, few diners have the chutzpah to ask for this to be removed, even if they receive terrible service.

Ordering food via online delivery apps is another area where extra charges added at the end of the process really sticks in the craw.

And many will have gripes about Airbnb (“the price on the map looks OK, then when you go to book admin fees and cleaning charges are applied”).

Plenty of drivers rage about admin fees charged by digital parking apps. Car hire companies upselling expensive insurance add-ons at the last-minute is another thing that drives people mad.

And even if you haven’t bought a flight, simply dropping someone off at Stansted airport costs an eye-watering £7 for 15 minutes..

These extra charges are clearly something that really annoy people, but the main issue here is transparency. If material pricing information is being withheld, it makes it harder for consumers to compare the true costs, so we risk making a suboptimal purchasing decision.

From a behavioural point of view, it’s no coincidence these extra charges are dripped in very late in the process. By the time the final price is revealed, psychologically, we’re more committed to buying whatever it is, and thus more likely to proceed (albeit through gritted teeth). Abandoning our basket and starting again also costs more of our precious time.

Following the consultation, how might ministers try to remedy this?

There’s certainly scope within the existing regulations for the Competition and Markets Authority to crack down on the worst of these charges, but some argue there are too many grey areas, and the rules need to be properly updated for the digital era.

Citizens Advice, the independent consumer watchdog, wants to see “new fit-for-purpose regulations and clear obligations for retailers” when it comes to website or app design.

Few would agree that the corporate world needs another awards ceremony, but an annual event (The Drips?) to name and shame the most egregious examples is one way consumers could stage a fight back.

Nomination categories could include The Biggest Drip, Most Pointlessly Named Charge and the Droplet Award for multiple extra pricing add-ons.

And there wouldn’t be an admin fee charged for handing out the gongs.

claer.barrett@ft.com

Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb

Deutsche Bank continued to sell risky foreign exchange derivatives to companies in Spain that had suffered big losses from such products even after an internal inquiry found long-standing mis-selling.

An internal probe that began in 2019 after a whistleblower complaint found that staff exploited flaws in the bank’s controls and broke EU rules, pushing small and medium-sized Spanish companies to buy highly complex products that were promoted as safe and cheap hedges against foreign exchange risks.

The products generated huge profits for Deutsche but exposed clients to extensive risk and losses in some cases.

Deutsche has disciplined about a dozen staff in response and also paid tens of millions of euros in settlements to larger clients that bought the derivatives from its investment bank.

But according to people close to the businesses involved and documents reviewed by the Financial Times, smaller companies that bought the products from Deutsche’s international private bank are still being asked to pay up on large losses caused by derivatives that were mis-sold starting more than five years ago.

“No foreign exchange market professional would ever buy this kind of instrument,” said Prosper Lamothe, a finance professor at the Autonomous University of Madrid, who has investigated some of the cases. He added, that Deutsche had been “exploiting” the ignorance of its customers.

In one case that was reviewed in detail by the Financial Times, a family-owned fruit and vegetable wholesaler with €3mn in annual sales was sold derivatives over the past five years covering €19mn of foreign exchange exposure.

The Canary Islands business, which has just four employees, sells pumpkins, carrots, oranges and other produce to clients in Switzerland. It wanted to hedge its Swiss Franc exposure and, according to the owner, was offered products that Deutsche said would be low cost and low risk. He said he only realised what he had been sold in early 2023 and that the product had caused the business €1.5mn of trading losses.

“Deutsche Bank has long brushed aside pleas to settle those cases, arguing that the contracts signed by the affected clients are legally binding,” said Julio Ribelles, a Valencia-based lawyer who represents some of the affected companies.

People familiar with Deutsche Bank’s internal discussions said the bank had stopped selling the products to new clients after the probe found mis-selling. They added that until this summer, the bank did continue to offer new derivatives to existing clients in an attempt to offset previous losses. Ribelles said this created a risk of losses “snowballing over time”.

According to these people, Deutsche stopped offering derivatives to these existing clients only after the Financial Times made an inquiry in August. They also pointed to a recent rule change by the Spanish regulator CNMV that has made it harder and more expensive to sell complex derivatives to SMEs. They added that the bank was now trying to settle the remaining cases. “We are in talks with a small number of clients regarding outstanding transactions,” said one of the people, acknowledging some of the cases were “not easy to solve”.

Other people with knowledge of the bank’s policy told the FT that some senior managers were unimpressed with how the bank had treated affected clients, blaming the lender’s international private bank for the slow response and saying that the investment bank had been quicker off the mark.

These people also said that the cost to Deutsche of waiving client losses was large and that it had been trying to spread the impact on profits over a longer time, hoping losses would become smaller and easier to settle if the Euro strengthened with rising interest rates.

Until earlier this year, Deutsche’s international private bank was run by former Credit Suisse banker Claudio de Sanctis, who was then promoted to the management board and is now in charge of the bank’s retail operations.

Chief executive Christian Sewing has been promising to put past misconduct problems, which include the manipulation of benchmark interest rates and the mis-selling of mortgage-backed securities, to rest. He has said he wants to reposition the bank as the “global Hausbank” of corporate clients and has promised “to support our clients in a spirit of partnership and remain part of the solution”.

“Deutsche Bank’s treatment of SME clients in Spain has long been completely at odds with this promise by Sewing,” said Ribelles. Sewing and De Sanctis declined to comment.

Some of the affected companies have been pushed to the brink of insolvency, people familiar with the cases told the FT.

A Madrid-based importer of sporting goods made in Asia told the FT that it had to fire a quarter of its 40-strong workforce after its auditor earlier this year uncovered €1.5mn in trading losses on Deutsche derivatives that it needed to provision for.

The company imports sporting goods worth $7mn a year but was sold derivatives covering an import volume of €35mn by Deutsche Bank, according to documents seen by the FT. The company only sells products in Spain, but Deutsche also sold it €27mn in derivates to hedge exports.

Lamothe estimated that Deutsche earned more than €2mn in fees from derivative trades with that client. “We’re facing an existential crisis,” a senior manager of the business told the FT.

Lamothe told the FT that he was personally aware of “at least 15 such cases”, adding that there could be hundreds of other companies that were still unaware, because trading losses might not have come to light yet.

Alfonso Ramos, a Madrid-based lawyer representing the fruit and vegetable wholesaler, estimated that on the Canary Islands alone there were up to 50 companies in a similar situation. “But only very few have the power and determination to take legal steps,” he added. Spain is one of the biggest markets for Deutsche Bank’s international private bank, which has more than 650,000 clients and 2,300 employees in the country.

One of the lawyers for the Spanish companies said that changes to derivatives contracts made by Deutsche last year mean it is now harder to sue the bank. The bank added new clauses stipulating conflicts must be resolved in private arbitration tribunals rather than public courts. While private-sector tribunals can work faster than courts, they act without public scrutiny and can be expensive.

According to Ribelles, a company with an average loss of €1mn could expect to pay about €70,000 in arbitration costs plus legal fees, and could have to cover the bank’s costs if it lost. He added that it was impossible to appeal tribunal decisions and that Deutsche Bank had failed to make the implications of the new rules clear to clients. “Deutsche Bank effectively sneaked in new rules that are severely limiting the SME’s legal rights”, he said.

Deutsche Bank declined to comment on the specific cases but said the facts as described by the FT were “largely taken out of context”. It added that it had “taken appropriate action including improving our processes and enhancing our controls” after reviewing “parts of our sales activities in structured FX derivatives”. The bank added that implementing changes that came out of the mis-selling probe was “an ongoing process”.

People familiar with the bank’s view pointed out that the type of derivatives sold “are widely used by many organisations and sold by many banks”. They added that some of the clients made financial gains from the products in the past, and disputed the claim that the clients were unaware of the risks or treated unfairly by Deutsche.

These people also denied that the bank changed the contracts to make it harder for clients to sue, but acknowledged that “there was an exercise last year to update all [Master Agreements for Financial Transactions],” and that this had followed recommendations from the Spanish Banking Association. They also said the bank’s preferred option of arbitration over open court was “not uncommon or unreasonable for derivatives disputes”.

Private equity firms have started to borrow against their funds to backstop overly indebted portfolio companies, a new financial engineering tactic meant to cope with higher interest rates and a slowdown in dealmaking.

The manoeuvres, which lenders have dubbed “defending the portfolio”, have cropped up as many older private equity funds run low on cash just as the companies they own struggle with their own debt loads.

Buyout firms have turned to so-called net asset value (NAV) loans, which use a fund’s investment assets as collateral. They are deploying the proceeds to help pay down the debts of individual companies held by the fund, according to private equity executives and senior bankers and lenders to the industry.

By securing a loan against a larger pool of assets, private equity firms are able to negotiate lower borrowing costs than would be possible if the portfolio company attempted to obtain a loan on its own.

Last month Vista Equity Partners, a private equity investor focused on the technology industry, used a NAV loan against one of its funds to help raise $1bn that it then pumped into financial technology company Finastra, according to five people familiar with the matter.

The equity infusion was a critical step in convincing lenders to refinance Finastra’s maturing debts, which included $4.1bn of senior loans maturing in 2024 and a $1.25bn junior loan due in 2025.

Private lenders ultimately cobbled together a record-sized $4.8bn senior private loan carrying an interest rate above 12 per cent. The deal underscores how some private equity firms are working with lenders to counteract the surge in interest rates over the past 18 months.

Vista borrowed money at what it felt were more attractive prices that would allow it to cut Finastra’s interest costs, according to a person familiar with thinking at the firm. The person added that the dislocation in the riskiest corners of credit markets was a “market issue” that Vista believed was unrelated to Finastra.

While it was unclear what rate Vista had secured on its NAV loan, it is below a 17 per cent second-lien loan some lenders had pitched to Finastra earlier this year.

Executives in the buyout industry said NAV loans often carried interest rates 5 to 7 percentage points over short-term rates, or roughly 10.4 to 12.4 per cent today.

Vista declined to comment.

The Financial Times has previously reported that firms including Vista, Carlyle Group, SoftBank and European software investor HG Capital have turned to NAV loans to pay out dividends to the sovereign wealth funds and pensions that invest in their funds, or to finance acquisitions by portfolio companies.

The borrowing was spurred by a slowdown in private equity fundraising, takeovers and initial public offerings that has left many private equity firms owning companies for longer than they had expected. They have remained loath to sell at cut-rate valuations, instead hoping the NAV loans will provide enough time to exit their investments more profitably.

But as rising interest rates now burden balance sheets and as debt maturities in 2024 and 2025 grow closer, firms recently have quietly started using the loans more “defensively”, people involved in recent deals told the FT.

“This is early days for this asset class and as it becomes more mainstream and people employ these facilities more frequently, it’s only natural that you’ll see different uses of them,” said Richard Sehayek, managing director at Ares, one of the world’s largest private lenders. “The defensive play is just one of the drivers for it and as the universe itself grows, that particular part will as well.”

Relying on NAV loans is not without its risks.

Private equity executives who spoke to the FT noted that the borrowings effectively used good investments as collateral to prop up one or two struggling businesses in a fund. They warned that the loans put the broader portfolio at risk and the borrowing costs could eventually hamper returns for the entire fund.

“We get pitched left and right,” said one executive at a large US buyout firm that has resisted such loans. “To me, it seems like pretty risky financial engineering.”

Large banks like Goldman Sachs and JPMorgan have long provided NAV loans, but there has been a growing number of lenders entering the space broadening the usage of the debt. Banks now compete with a specialised group of private NAV lenders like 17 Capital and Whitehorse Liquidity Solutions, in addition to new entrants to the marketplace like private lenders Apollo Global, Ares and HPS.

“Everyone is talking about it,” said a senior banker who advises large US private equity firms. “It is easier to borrow at the fund level with all the NAV financing available than it is at the portfolio company level for certain companies facing distress.”

Executives in the NAV lending industry said that most new loans were still being used to fund distributions to the investors in funds. One lender estimated that 30 per cent of new inquiries for NAV loans were for “defensive” deals.

Private equity executives warned that rising interest rates were making the loans expensive and could come back to haunt investors.

“It could be a big drag to overall performance,” warned one executive.

“People are going to start to feel tight,” predicted the buyout firm executive. “In this cycle, we haven’t seen any car crashes yet.”

Decades ago when I was a sellside analyst in the City of London doing the rounds of my firm’s fund management clients, I would regularly ask them a simple question: what did they want in research?

The answer back then was: every conceivable option. The fund managers’ desks were often overflowing with mounting stacks of unread research and their phones besieged by brokers brimming with ideas. But the investors still wanted more. Why? Because there was little direct cost to them. It was all largely paid for with commissions on trades. In turn, these were paid out of the pockets of fund manager’s clients — pensions funds and the like.

Eventually, regulators thought this was not such a great idea and in came Europe’s much heralded Markets in Financial Instruments Directive II — or Mifid II — from 2018. This aimed to shine a light on research expenses, unbundling research fees from trading commissions and making the costs explicit.

Now, though, regulators are carrying out what is known in my current trade as a “reverse ferret”. Pushed by the UK Treasury that is seeking to take advantage of its post-Brexit freedom from EU rule-setting, regulators at the Financial Conduct Authority have begun to rethink this unbundling of research and trading expenses. The European Securities and Markets Authority is carrying out a similar exercise.

The main driver of this extraordinary turnaround is the realisation of the unintended consequences that Mifid II has wrought. The directive undoubtedly brought more transparency. But there also have been complaints that the changes have damaged the financial ecosystem and diminished the supply of equity research, particularly for smaller companies.

Initially, Mifid II unbundling promised a means of promoting higher quality analysis and reducing any redundant reports. But it also began a period of vicious price cutting on research by the largest brokerage firms. 

As small, independent research houses watched with horror, prices for their services plummeted. Asset managers, who found they had to pay more explicitly for research costs, happily grasped at any chance for discounts. Bulge-bracket brokers tackled any competition from independents head on with all-inclusive research packages at very low prices. 

And even for large investment banks, there were downsides to Mifid II. It added layers of administration to win the research battle. Regardless of any subsidies provided by other parts of investment banks, research became even larger cost centres than they had been previously. 

“I would think that quite a few research heads will be happy to see the previous system go,” says Steve Kelly, an adviser to the European Association of Independent Research Providers.

Research remains a big business. Last year, global cash equities research was estimated to cost around $11bn annually, according to Kelly’s analysis of Integrity Research data. About $6bn comes from the US, with Europe and the UK providing $3bn or so. But research clients have become more careful with their budgets, even in the US. “When you go from an all-you-can-eat model to à la carte, you think more carefully about what you consume,” says one senior executive at a large US fund manager.

In the US, the investment community has long bundled research costs with trading commissions. Under the US Investment Act of 1940, professional investors cannot pay for research directly. Local concerns that US brokerages would have to create special investment advisers to accept direct payments under Mifid II were put to rest recently. A workaround will leave any UK and European research money paid sequestered in that region.

In Europe, things will not return to pre-Mifid II days. Even in the UK, a government-commissioned review by financial services lawyer Rachel Kent did not recommend a mandatory return to the commission-sharing agreements (via trading) of the past. But Kent did suggest more payment flexibility is needed. And even independent research groups are not expecting business will suddenly improve radically. “I expect an uplift of perhaps 5 to 6 per cent in our global revenues,” says Iain Johnston, chair at New Street Research. 

Having seen the backtracking by the government on Mifid II for research, many investment managers will want to delay having any cost discussions until confirmation of changes. Those discussions will no doubt be tricky. If their clients expect their asset managers to do in-depth analysis, shouldn’t this cost be shared? 

When seen as part of trading expenses the cost may be only a few hundredths of a per cent. Not so fast, asset owners may say. Mike Carrodus at Substantive Research quips that pension fund bosses ask, “If it’s so little, why don’t you pay for it?” Who forks out for research, not just how much, is the real issue.

alan.livsey@ft.com