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Farepak: Meagre Fare Indeed (November 2006)

This article was first published on The Guardian's Comment is Free

The savings scheme collapse was no freak of nature but, thanks to government negligence, an accident waiting to happen.

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The law will jail the man or woman Who steals the goose from off the common, But lets the greater villain loose Who steals the common from the goose.

Anonymous radical, c1820

The Farepak Hamper/Voucher Company collapse might have been scripted by Dickens. Remember, his Christmas Stories were the ones that appealed most to the Chartists. This sting on at least 150,000 ordinary folk - the Guardian even suggested 300,000 - showed the Great Wen's hypocrisy in fine shape, with vintage performances from the Treasury and its satraps. Remember also Dickens' loathing for the "Circumlocution Office" of Whitehall.

Ten days after Farepak went into administration, trade minister Alistair Darling said, on the October 23, that it was "a matter of great concern" that families had lost millions. He didn't reflect that the disaster had been predictable for at least four months. At the beginning of July, the share price of Farepak's owner, European Home Retail, fell in a day from 40p to around 16.50p - and this was down from almost 110p in December 2005. EHR's shares were suspended on the stock exchange on August 23: six weeks before the crisis broke.

Why? Darling's department didn't bother to ask, because hamper savings schemes were not regulated. EHR, however, wasn't an obscure, fly-by-night operation but the firm whose Kleeneze products had been a fixture of British homes for decades, sold by trusted local agents, often the same people who collected cash for Farepak. Its chairman was Sir Clive Thompson, formerly chair of the Rentokil conglomerate, and in 2000 chair of the Confederation of British Industry, "the bosses' trade union", to whom regulation was a dirty word. EHR was in funds in 2005, and Farepak - effectively a bank that didn't have to pay interest - was a cash-cow for EHR, which had used it to bale out some dubious acquisitions.

Why did it plunge? Not through straightforward crookedness, or greed by EHR's bank, HBOS, which had just posted £2.5bn profits. A Telegraph investigation found that, after the failure of another hamper company, Family Hampers, the bankruptcy in February of the gift voucher business used by Farepak, Choice Gift Vouchers, broke the credit chain that had always governed the business. Vouchers would now have to be bought up-front. Hence the hit on shares, making Farepak a belated casualty of the disastrous festive season of 2005.

The government had, from July 2006, plenty of warnings and plenty of time to act. But did they do anything? There was certainly enough time for one Farepak director, William Rollason, to sell himself on, along with most of Kleeneze, to Findel plc of Bristol. He had earlier been responsible for withdrawing Farepak from the Direct Selling Association to avoid having to insure against the sort of disaster that actually occurred.

And there was certainly time for the HBOS (chaired by the Labour-leaning Lord Stevenson of Coddenham) to drive its own interests and get its money back from the receiver at the expense of the oblivious Farepak savers and collectors.

Up against furious MPs, Darling promised an inquiry. But what, in all this, had the Treasury been up to, because business supervision was one of "Gordon's things"? Disaster for 150,000 householders could have immense electoral consequences - to put things at their crudest. Cue the high-risk attitudes to finance of the government, and the Chancellor in particular. The vast sums of geld sloshing into the City for a year or so, in flight from American prosecutors and from Russian mafiosi, had been welcomed in his Pollyanna way by Brown, but had also put his uncoordinated and overstretched regulatory system under unbearable strain.

The distinguished financial journalist Nick Kochan wrote in his study of money-laundering, The Washing Machine, in 2005: "London increasingly looks like an offshore center serving many dubious financiers while at the same time claiming to have regulations which put it among the world's top onshore jurisdictions ...

"London's vulnerability is not in its laws but in their implementation. Government has failed to invest in sufficient skilled law enforcement officers or regulators to curb its sprawling financial system. But this is no accident. The UK's economy cannot afford to curb its income from the 'invisible' financial sector while its industrial sector becomes anorexic. As the UK feeds its addiction to finance and hot money, its regulators bluster ever less convincingly about the security of its financial system and its antipathy to money launderers."

In late summer 2006, when the Farepak crisis was unravelling, the Treasury was obsessed with "carousel" VAT frauds. These might mean a hit running into tens of billions of pounds. In 2005, the Serious Fraud Office already felt overwhelmed. Such was the jam of cases that mistakes and aborted inquiries were inevitable: "Anyone swindling less than £1m will probably get away with it, and even those cheating a larger amount have the odds sacked in their favour."

Under Brown, and typical of the man, there had been unending makeovers of a failing system, resulting in a chaos of competing quangos, with the SFO falling over the Financial Services Authority, Customs and Revenue, the Competition Commission and the Office of Fair Trading. As a survey of fraud by two regulation barristers, Jonathan Fisher and Jeremy Summers (Times 13.6.2006), argued, the system was completely dysfunctional and its personnel in decline: fraud investigators falling from 869 to 600 between 1995 and 2003. "The buck stops with Gordon Brown," they concluded, with the carousel frauds in mind, but this was only one peak in the landscape of regulatory collapse that the Chancellor had contrived.

Brown told the IMF on September 15 that the government was "getting to grips with the problem", but a senior economics commentator wrote privately to the author, "All I can say is that at the World Bank/IMF annual meetings in Singapore last month, one needed several hands to count the number of people who were concerned about the possibility/probability of a great regulatory failure!"

Thus the bulky figure who waddled on stage with the Farepak fiasco wasn't Scrooge, who came good in the end, but Bumble the Beadle, incompetence and "old corruption" personified.

God help us, every one!

 
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