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The Money Programme Superstar, Super-Rich shows how globalisation has made certain people mega-rich, with football and musical talents now reaching global and not local audiences. The distribution of wealth statistics show that 1% of the British population controls nearly 25% of the wealth. The fact that incomes in the tens of millions are no longer unusual has also had a major impact on the distribution of income – with the top 10% in the UK having nearly 7 times the disposable income of the bottom 10%, up from only 3 times in the mid 1970s.

The lowering of the top rate of UK income tax from 98% to 40% in that time, with businessmen and women now able to turn income into capital gains paying a special low rate of 10%, has also widened the gap between after tax pay of high and low earners. Governments now compete to attract entrepreneurs to their shores. For many foreign-born super stars, London is a tax haven, with non-domicile status meaning that they don’t have to pay UK tax at all – apart from council tax.

there are problems with being super-rich

But there are problems with being super-rich. You need the trappings to go with it – and they don’t come cheap. Forbes’ so-called CLEWI index (Cost of Living Extremely Well) keeps on going up by more than the standard rate of inflation. The index includes such essential items as designer handbags, opera season tickets, a Harvard education, as well as a Rolls Royce, Lear jet and a race horse. This dollar-based cost of luxury goods index went up 7% last year compared with 4% for the US Consumer Price Index. But this may be understating the problem for the super-rich in Britain: London rents have increased by 25% since 2002 and, since last year; Range Rovers cost 20% more; a season ticket at Chelsea 8% more; and a case of Château-Lafite 117% more!

The increasing disparity between the rich and the poor and between high earners and low earners is a global phenomenon. In the US, for example, 1% of the population control almost 40% of wealth and 20% of income. However, in emerging markets, High Net Worth Individuals (HNWIs) – defined as those with over $1 million in financial assets alone - are rapidly acquiring large shares of their national cakes. And their numbers are growing at a faster rate. In a single year – 2006 – the percentage increase in HNWI wealth in Africa was 14.0% and in Latin America 23.2% compared with a measly 7.8% for Europe.

This also has implications for the super-rich. An ever increasing number (currently 10 million HNWIs globally) are chasing the same status symbols. There is increasing similarity as to which types of property, cars, boats and planes, and which “investments of passion” – jewellery, art and football clubs – HNWIs want to buy. So it is likely that the CLEWI index will continue to rise by much more than the average rate of inflation!

Find out more

• Join the discussion - should the super-rich pay more tax?
• Superstar, Super-Rich - technology is helping Britain's super-rich grow their fortunes.
• Is tax avoidance only for the rich?
• Tax shelters - nobody likes paying tax, but how far would you go to avoid it? Liberia? Monaco?
• Where do the millions go? - it costs more to keep up the lifestyle
• Gaps in income and wealth remain large
• 1% of population owns 21% of wealth
• Take it further - the Open University's finance courses explain more about the distribution of income and wealth

About the author

Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

In Last Orders for Guinness we see a company grappling with declining sales. Guinness has chosen innovation, in the shape of Guinness Red, as a strategy to reverse its fortunes, but what other avenues could it explore?

One possible strategy is to look to new territories for salvation. Guinness is very popular in Europe, in the US and in parts of Africa, particularly Nigeria. That still leaves sizeable swathes of the world with potential for growth. But there’s a big stumbling block with this strategy: distribution.

If you brew beer centrally, in Dublin for instance, how do you actually get it to market? Well, tankers sail it across to Britain, and when the beer arrives it’s loaded into lorries and distributed across the country.

"getting the product to the consumer can be difficult"

But what if this ‘distribution network’ didn’t exist? If Guinness wants to sell to a developing economy, and the infrastructure doesn’t exist in the way that it does in Europe, then they would have to think again about how to service the market. It’s relatively easy to build and operate a brewery, but getting the product to the consumer can be difficult.

Consider the South African market, for example. One reason why SABMiller have a virtual monopoly there is because they’ve got a well established distribution chain going into the townships. It’s difficult for other companies to replicate and therefore compete with them in this environment.

One way to obtain access to a distribution network is to join forces with a company that’s already built one. For example, in 2004 the Belgian company Interbrew and the Brazilian company AmBev merged, creating InBev. This hook-up allowed InterBrew to use Ambev’s distribution channel to sell beers such as Becks or Stella Artois to Brazil. Likewise, Ambev gained access to the European market for its Brazilian Beers.

There are other, more creative ways, to gain distribution capability. There’s one company in Denmark, for example, that uses a meat distributor in Italy to reach its target market: restaurants in Italy. Guinness may have to think outside the box in a similar fashion if it decides to expand overseas.

Take it further

• Join the discussion - what should Guinness do to save itself?
• Video extras - do things look black for Guinness?
• Competitive advantage - how can companies ensure they've got a lead over their competitors?
• Last orders for Guinness - after years of falling sales, Guinness fights back with new stouts and adverts
• When there’s nowhere to go but each other’s arms - the global brewing business is going through another of its spasms of consolidation
• 'Strategic alliances in international distribution channels' by Rajiv Mehta, Pia Polsa, Jolanta Mazur, Fan Xiucheng and Alan Dubinsky, published in the Journal of Business Research.
• Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management by V Kasturi Rangan and Marie Bell, published by Harvard Business School Press
• Gaining and Sustaining Competitive Advantage by Jay Barney, published by Prentice Hall

About the author

Geoff Mallory is a Lecturer in Strategic Management and Director of the Postgraduate research Degrees Programme at the OU Business School. He has taught organization theory and strategy in a variety of countries and contexts.

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Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

Last November the Money Programme revealed how large numbers of customers were successfully taking court action to retrieve charges made by their banks for exceeding overdraft limits and for other bank account ‘misdemeanours’.

Such charges are a major money spinner for the UK banks. Whilst it is unclear exactly how much UK banks earn from them, best estimates suggest a figure of between £2 billion and £3.5 billion a year. The consumer campaign against these charges has made the banks start to talk about the possibility of charging all customers for current accounts to compensate for the revenue stream that would be lost if these unauthorised overdraft charges are deemed unfair.

Arguably the court cases are being won by customers because the banks are not adequately defending the actions - relying only on a written defence and not turning up in court to argue their case. This tactic has resulted in judicial criticism from several County Court judges. Additionally some banks have been settling cases out of court, perhaps because the time and cost of even a limited defence in court is not viewed as being cost effective even if judgment is made in their favour.

Over the past twelve months the story has developed further, with attention focussing on action to clarify the legality of these bank charges.

In March the Office of Fair Trading (OFT) announced a formal investigation into the fairness of unauthorised overdraft charges. This followed on from the OFT’s initial review where it concluded that it shared public concern about the level and incidence of such charges. The OFT recognised, though, that applying the general principles it had set out in 2006 in respect of credit card charges - where the OFT recommended a maximum default charge of £12 - was not straightforward.

Subsequently, in April, the OFT announced details of a more wide ranging investigation into bank charges - including the examination of so-called ‘free banking’ and the implications of moving towards the charging of customers for provision of current account. This investigation sits alongside that into the fairness of unauthorised overdraft charges.

Then in May the Lloyds TSB became the first bank to successfully defend actions by customers trying to reclaim charges, with victories in the Birmingham and Lancaster County Courts. Other banks are now using these judgments to defend cases brought against them.

At the heart of the issue lies the question of whether the 1999 ‘Unfair Terms in Consumer Contract Regulations’ (UTCCRs) apply to unauthorised overdraft charges. The banks believe the rules do not apply; the OFT believes that they do. So given the lack of clarity the OFT launched proceedings in the High Court in July for a legal declaration on the applicability of the law. The other parties to the test case are the Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, the Royal Bank of Scotland and the Nationwide Building Society. Together these current account providers account for circa 90% of personal current accounts in the UK. The parties to the action are all interested in a timely and orderly resolution of this legal issue. Clearly the banks need to know where they stand on a matter which has attracted so much adverse publicity for them.

In September the OFT announced that it would consider dropping the test case if the banks unilaterally cut charges significantly. Under these circumstances it would no longer be in the interests of consumers to press on with the case. Currently, however, the OFT is still set to continue with its test case which is scheduled to be heard early in 2008.

The outcome of this case will shape the future not only for such overdraft charges but, in all likelihood, for the charging for the provision of current accounts for all customers.

Find out more

• Join the discussion - are bank charges unfair?
• Are banks ripping us off? - when a cheque bounces, we get charged. Is this fair?
• Your and your money - don't let your money be the boss of you
• Take it further - the Open University Business School offer a range of courses covering personal finance
• Personal Finance edited by George Callaghan, Ian Fribbance and Martin Higginson, published by John Wiley & Sons

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

Financial institutions have to manage a cocktail of risks. Foreign exchange risk, interest rate risk, credit risk and operational risk can, if poorly managed, dent profits and attract adverse headlines in the press. But what is most feared is liquidity risk - the risk that a bank cannot adequately finance its lending activities.

In September Northern Rock - a bank formed by the conversion of the Northern Rock Building Society to banking status in 1997 - found out the realities of a liquidity crisis with their customers queuing to withdraw their savings. This followed news that the bank had been forced to go ‘cap-in-hand’ to the Bank of England, the ‘lender of the last resort’, for an emergency loan. This was the first ‘run’ on a UK bank by its depositors for more than 150 years.

The immediate cause of the crisis was the drying up of liquidity in the global institutional debt markets - known as the ‘wholesale’ markets - following a rise in mortgage defaults in the US. These defaults were concentrated in ‘sub-prime’ mortgages - home loans to borrowers with a poor credit quality. These events made financial institutions reluctant to lend to each other since no-one was entirely sure how much exposure each had to the losses arising from the impaired US mortgage market. Inevitably with the shortage of liquidity the cost of money - interest rates - was driven upwards. In the UK, money market rates rose to close to 7% despite the fact that base rates were still at 5.75% (normally money market rates are very close to the prevailing level of base rates).

The reactions of the UK and US Central Banks were starkly contrasting. In the US, the Federal Reserve Bank pumped billions of dollars into the markets to restore liquidity. Additionally it prompted the Bank of America to take a stake in the troubled home loan company, Countrywide, thereby averting the risk of its collapse. In the UK the Bank of England was less interventionist and only offered limited support to the beleaguered markets.

But of all the financial institutions in the UK why did the Northern Rock turn out to be most vulnerable to the shortage of funds in the wholesale markets? Here we need to examine the underlying causes of the crisis.

Northern Rock was becoming more and more reliant on the wholesale markets

Recently the Northern Rock had been building up its mortgage portfolio very rapidly, with growth of 12% in the first half of 2007. Simultaneously it was becoming more and more reliant on the wholesale markets for finance, with 70% of its funding coming from this source. By contrast only 27% of its finance came in the form of ‘retail funds’ from personal savers. Additionally, like many other banks, the Northern Rock had been parcelling up their mortgage assets and placing them into ‘special-purpose’ companies. These companies raise funds in the wholesale markets to finance the mortgages by issuing ‘asset-backed securities’. By operating in this way banks are able to boost the amount of lending they are able to undertake. Northern Rock engaged extensively in this activity through its ‘Granite plc’ companies.

Building the mortgage portfolio using this approach is fine so long as the global financial markets are operating smoothly, with funds readily available, and the borrowing institution remains creditworthy. But with the drying up of liquidity in the wholesale markets the Northern Rock’s business model began to unravel.

Compare the Northern Rock’s position with that of the building societies who are legally unable to fund more than 50% of their business from the wholesale markets. The rest has to come from personal savers. Indeed the largest building society, the Nationwide, has a wholesale funding ratio of only around 30%. So as funds became scarcer in the wholesale markets the Northern Rock found itself in an exposed position and was unable to fund its mortgages and loans.

The crisis also exposed the maturity mismatch that banks and building societies have to manage. Most of their funding - be it retail or wholesale - is short term in nature and either matures or can be withdrawn by investors within months. By contrast mortgage advances are usually for long term periods of up to 25 years. This mismatch helps to generate profits since short term borrowing is cheaper for the banks than long term. But it comes with the risk of a liquidity crisis if those short term funds become scarce. Even with the store of liquidity that the Northern Rock was required to retain to accommodate possible outflows of savings, the high wholesale funding ratio and the subsequent ‘run on the bank’ by personal customers, when news of the emergency loan from the Bank of England materialised, were enough to send the Northern Rock into financial submission.

All this happened despite the fact that there is no evidence that the credit quality of the Northern Rock’s assets - its mortgages and loans - is in question. It currently has relatively low levels of both arrears and property repossessions. Despite some fears that house prices in the UK are currently overvalued, house price inflation remains close to 8% p.a. So what we are looking at here is not a credit crisis in respect of Northern Rock’s assets - rather an inability by the bank to fund those assets.

In response to the crisis the Chancellor of the Exchequer, Alistair Darling, announced that customers of the Northern Rock would have their savings guaranteed by the Government. This move effectively ended the ‘run’ on the bank. Subsequently he announced that the maximum investor protection for all UK savers would be raised from £31,700 to £35,000.

The whole episode has raised questions about the operations of the Bank of England. Critics say it moved too slowly to deal with the growing lack of liquidity in the financial markets. Would it also have been wiser not to disclose publicly the loan deal for the Northern Rock - since disclosure resulted in the collapse in the confidence amongst Northern Rock’s customers? The role of the Financial Services Authority (FSA) has also come under scrutiny. Did it fail to identify the scale of the financial risks being run by the Northern Rock with a business model that was so dependent on there being no disruption in the wholesale markets?

As for the Northern Rock, with its once respected brand in tatters, with the emergency Bank of England loan now totalling £16 billion, with its credit ratings cut and with its share price down by over 80% since the start of the year the bank is now prey to predators looking to make an acquisition.

Find out more

• Join the discussion - how do you think the Government should have handled the crisis? Should banks change the way they operate?
• Calling companies to account
• Run on the Bank: Northern Crock - the Money Programme investigates the fall of Northern Rock
• Timeline: Northern Rock bank crisis
• Why do we get into debt? - is debt always a bad thing?
• You and Your Money - don't let your money be the boss of you
• Take it further - the Open University Business School offer a range of courses covering personal and institutional finance issues

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

Many of us have ideas for new gadgets or business services that would solve a particular problem or fulfil an unmet need, but, for better or worse, most of these remain unfulfilled ideas. Even those ideas that reach the stage of being protected by a patent of copyright may remain undeveloped – indeed across Europe around a third of all patents are never exploited.

However some entrepreneurial people take their ideas forward and convert them into a reality. This entrepreneurial activity is characterised by risk and uncertainty, and while ideas are free, their realisation will require a commitment of time and money. For small start-up businesses in the UK, the initial financial investment in most cases comes from the individual and their families, and the risk can often involve their life savings and loans secured on their house. The stakes therefore are high, as are the failure rates for start-up companies.

But risks can be managed. As ideas get closer to fruition, risk and uncertainty can be reduced by product development, market research and financial projections. At the same time the level of investment escalates. The entrepreneur needs to have a strong belief in the viability of their idea, but be prepared to cut their losses at the optimum time if for example market testing shows that the market is unlikely to sustain viable levels of demand or the price required to cover costs.

risk-taking entrepreneurs who innovate create higher than normal profits

Intuitively we might think that entrepreneurs are rare or special people. That indeed was the view of Joseph Schumpeter, the economist who more than any other emphasised the key role of the entrepreneur. Working in the early 20^th century Schumpeter placed the individual entrepreneur right at the centre of global economic activity. He argued that risk-taking entrepreneurs who innovate create higher than normal profits, and this drives economic growth. For Schumpeter, the leading entrepreneurs in any field were very special people with almost superhuman qualities of vision and risk-taking. Once they had blazed a trail, others saw the opportunities for profits and jumped on the bandwagon, thus causing widespread economic upswings that could lift economies out of recession.

In his later work Schumpeter acknowledged the importance of large companies that could invest huge sums in research and development (R&D) and organise for innovation on an industrial scale, reducing the opportunities for individual entrepreneurs to compete. Whilst this remains partly true for many sectors, history has subsequently shown that innovation depends on both large and small companies. Indeed, in many areas of the economy innovation thrives on an interdependence between large and small firms. In part, this is linked to the cycle of technological change. Whereas the basic research and long-term development that lays the groundwork for a new technology such as microelectronics or new materials can only be achieved by university research labs and large corporations, small entrepreneurial companies have the flexibility to develop the opportunities offered by the technology in a myriad of niches across the economy.

An exception to this pattern is biotechnology. Here small companies, that are often university spin-offs, are able to conduct R&D over extended periods because they are backed by investors who take a longer than normal view on their investment, in the expectation of larger than normal profits in the future. And again we find a symbiosis between these small firms and the large pharmaceutical companies who can exploit the outcomes on a large scale.

Though the risks remain, there are currently unprecedented opportunities for entrepreneurial activity to exploit the technological platform provided by, in particular, information and communications technologies including the world wide web, new materials and biotechnology. These platforms can support the creation of new service-based businesses as well as entrepreneurial firms developing products, hardware and software. On the horizon, the next potential technological platform – nanotechnology – remains at an early a stage, but, no doubt in future it too will provide the basis for thousands of entrepreneurs to come up with brilliant ideas to exploit market niches.

Find out more

• Join the discussion - how do you get creative? What can your company do to help?
• What makes an inventor tick? - Sir James Dyson and Professor James Fleck shed light on the creative process, in our video extras
• Radical innovation - sometimes a new idea changes the landscape, and even well-established companies struggle to cope
• Managing innovation - how do companies get the creative juices flowing?
• Innovation and Entrepreneurship by John Bessant and Joe Tidd, published by Wiley
• The Journal of Entrepreneurship, published by Sage
• The Open University has a range of courses, and free course material, about creativity and innovation

About the author

Paul Quintas is Professor of Knowledge Management at the OU Business School. He has been researching, teaching and advising in the area of the management of knowledge and innovation for over 20 years.