MACK THE KNIFE LETS RIP

Regulation is crippling banks Britons are turned into fraudsters by PPI claims And I could stay on in the power struggle at Barclays...

FROM the upper echelons of the banking industry, John McFarlane has seen the fortunes of his profession wax and wane over decades. As the sixmonth countdown to Brexit begins, the 71-year-old Barclays chairman is optimistic the Square Mile will not wither and die as the UK is cut loose from the European Union.

But the straight-talking Scot says years of being beaten down by Government-sanctioned regulation in the aftermath of the financial crisis have left our banks lagging competitors in the US – and therefore vulnerable to foreign invasions and takeovers.

To demonstrate his point, he grabs his iPad from a table in his uncluttered Canary Wharf office in London and begins testing me on where UK banks come in a global list ranked by stock market value.

HSBC is eighth, then Lloyds in 30th. RBS and Barclays are somewhere in the 50s. JP Morgan is worth $380 billion (£290 million); Lloyds Bank is valued at $55 billion.

‘ What’s that? Seven times the value? It’s pocket money [to a US bank attempting a takeover],’ says McFarlane, who is stocky, with a shock of white hair, in shirtsleeves, maroon tie and sips black coffee while we talk. ‘In 2005 there were four British banks in the top 20 and there is one now. We in the UK will be on the receiving end of consolidation if nothing changes.’ Barclays, the bank he has overseen for three years now, is a case in point. Since it was linked to an unlikely merger with the Asia- focused Standard Chartered in spring, a power struggle has emerged at the very top of the organisation.

McFarlane plays down the idea of a grand merger but, crucially, the lender’s lowly share price has increased the influence of an American activist investor who is thought to want its investment banking arm scaled back.

Edward Bramson, whose investment vehicle S her borne has amassed a 5.4 per cent stake in Barclays, is thought keen to release some of the £26 billion of capital tied up in that side of the business.

Yet by contrast, McFarlane’s chief executive, Jes Staley, is keen to push in the other direction and capitalise on the bank’s strong foothold serving international corporate clients on both sides of the Atlantic.

There is growing anticipation that a shake-up is on the way. McFarlane has been widely expected to step down in time for the company’s annual general meeting next year and couldn’t be clearer: ‘The future of Barclays is still to fight for.’

Somewhat ominously, the Dumfries-born City grandee has earned the nickname ‘Mack the Knife’ for deftly dispensing with chief executives and swathes of staff when the going gets tough. He switched to banking f rom carmaker Ford almost 40 years ago, and 18 years at Citibank led to executive roles at Standard Chartered, based in Hong Kong and London, where he tackled strategy and handled the investigation into a bribery scandal, followed by a decade Down Under, where he revived Australia and New Zealand Banking Group.

He arrived back in London on a high in 2008, first as a non-executive director at Royal Bank of Scotland (the view in the City is that he might have chaired RBS had it not fallen into taxpayer hands), then chairing Aviva and now Barclays.

Three years ago, he made an internal rallying cry for a strategy that would double the share price from 260p. On Friday, the shares closed at 176.5p. It’s clearly the cause of great frustration for McFarlane – particularly given that in August, half-year pre-tax profits were up 20 per cent at £3.7 billion when legal and conduct costs were excluded.

‘We have turned it round – and curiously the value has gone down,’ McFarlane says. He thinks shareholder nervousness could point beyond Brexit and right to the bank’s core strategy – and specifically the future of the investment arm. ‘ There must be something else in shareholders’ minds [other than Brexit],’ he says. ‘There is probably an aversion to our significant position in wholesale banking that might be contributing to it.’

Somewhat surprisingly against t hat backdrop, relations with Edward Bramson and Sherborne appear cordial: ‘The nice thing is he likes me for some strange reason,’ McFarlane says.

Then he adds, intriguingly: ‘He wants me to stay. There was some report in the newspaper that said Sherborne wanted me to go. He immediately came back and said that it is the opposite. He thinks I might be part of the solution.’

Could McFarlane stay on beyond next year’s AGM? Could he even grant Bramson a board seat – just as Rolls-Royce did for its activist investor ValueAct?

‘That is hard,’ McFarlane says, without explicitly ruling out the idea. ‘I think if you own 19.9 per cent of a company you think, well hold on… Five per cent? Some borrowed? We have not discussed it actually.’

No wonder rumours of tension between McFarlane and JP Morgan veteran Staley persist.

McFarlane stood by his chief executive through a whistleblowing row that could have cost him his job – Staley was fined and reprimanded by t he regulator f or attempting to unmask the employee involved.

But Staley could be forgiven for remaining anxious over his future. ‘We get on fine. He is strong-minded and I am strong-minded. We talk frankly about t hings. For t he moment, I have backed him,’ says McFarlane.

McFarlane’s biggest concern, he says, is the UK Government’s lack of support for the banking industry as a whole. It must decide what the country should excel at, he says. If banks remain important beyond Brexit, it should get behind the industry a decade after the Lloyds and RBS bailouts. ‘They need to do something to assist in the strategic advancement of UK Inc,’ he says firmly.

It is an arresting – and in some ways controversial – view given that the 2008 crash, excessive pay and mis-selling scandals are still fresh in the memory. McFarlane says lenders have largely cleaned up their act – yet badly lag their rivals in the US largely due to hefty fines, conduct costs, heavier capital requirements and tax.

In the past six years, McFarlane says Barclays made £9 billion after penalties and fines, which sunk to a £1 billion loss following £10 billion of taxes and levies. ‘If banks get into trouble, society is safer now. But are banks safer? They are less profitable.’

The scandal of payment protection insurance is a particular niggle. Not that the banks shouldn’t refund where appropriate, but, with the final total expected to hit £50 billion, the compensation process has been massively abused, he claims. ‘It is almost inconceivable to think that £50 billion was missold,’ he says.

He thinks the claims management firms lack adequate regulation. ‘This is stimulation of the economy by buying flat-screen televisions. The percentage of fraudulent claims is enormous. We have turned portions of Britain into fraudsters.’

He adds: ‘It was in Government’s interests: consumer spending rose and it weakened the banks. So the Government is complicit here in the decline of the City.’

With a fearsome reputation, it is no surprise that McFarlane is a prime mover in trying to preserve London as a global financial services hub after Brexit. As chairman of TheCityUK, a broad Square Mile lobbying outfit, he has hosted dinners with Theresa May and the Chancellor Philip Hammond to press home the industry’s points.

Lenders have given up on keeping passporting rights which let them serve clients across the EU from a base in t he capital. So- called ‘mutual recognition’, a plan drawn up by TheCityUK and adopted by the Government whereby the UK and EU would accept each other’s rules in exchange for broad twoway market access, has also failed to catch fire.

Banks are left pinning their hopes on ‘ enhanced equivalence’, by which the UK can gain EU access as long as it can prove it is following the same laws. It sounds fine, except as it stands equivalence rules give the EU a 30-day notice period for cutting off access – far from ideal for banks such as Barclays that want certainty before putting billions to work.

McFarlane is realistic that ‘mutual recognition’ was going nowhere. Since it was dropped, talks have become ‘much more constructive and they made some progress’. The UK is playing the financial stability card strongly, suggesting its deep capital markets are not easily replicable elsewhere. However, there are almost daily announcements of jobs leaching on to the Continent as contingency plans are enacted. For its part, Barclays is beefing up operations in Dublin and Frankfurt.

‘Logic says that this is in everyone’s interests to solve and therefore it will be solved ,’ says McFarlane. He can only hope that Britain’s biggest banks will prosper on the global stage once again. And it would cap an illustrious career if he could leave Barclays on a high – whenever that may be.

We have turned it around – and curiously the value has gone down

The percentage of fraudulent claims for PPI compensation is enormous

For the moment I have backed Jes Staley. We talk and get on fine