For all the credit-crunched banks that boarded the sub-prime gravy train before it derailed in such spectacular fashion, there are still some financial institutions around that resisted its lure and so enjoy a rare stability. Rathbone Brothers is one of them.

When Rathbones FD Paul Stockton was having his interview pictures taken outside the company’s New Bond Street offices in London, a fund manager colleague called out: ‘Looks expensive!’

‘I’ll send him an email explaining we weren’t paying for that one!’ jokes Stockton.

It’s a neat illustration of the cost management ethos that prevails at the 267-year-old investment management business. Stockton cites it as one of the main reasons for Rathbones’ longevity. The FTSE 250 business has survived so long because it successfully manages costs in a downturn and incremental growth in the upturn.

‘I feel I can add to that, but without being too radical,’ says Stockton. He adds that while the Rathbones catchphrase ­ ‘established in 1742’ ­ is well deserved, ‘to be honest it’s not traditional when you join it. It’s very dynamic in growth’.

In spite of the market gloom, Stockton says there is still wealth looking to be invested.

‘We’ve had more calls from clients about “Where do I put my cash?” Not necessarily in their Rathbones portfolio, but “Should my cash be in Bank A or Bank B?”.

‘And that says two things: A, clients have other cash, and B, they are calling our fund managers about their overall financial relationship. It’s been quite interesting to see how clients have reacted to the downturn.’

Stockton has been FD since mid-August, and the married father-of-one is an avid Liverpool supporter. It seems fitting as that 1742 date refers to the earliest record of the business enterprises of the Rathbones, a prominent Liverpool merchant family.

The bulk of the company’s 35-strong finance function is still based in the city, although some of it is in London. Stockton says that the group function and city-facing activities are handled in London, close to the executive team. The operational side ­ the investment management business ­ is based in Liverpool, as are most of the banking and treasury operations.

Stockton says Rathbones subscribes to a ‘steady as she goes’ philosophy. The business doesn’t rely on wholesale funding ­ it was the closure of the wholesale markets that crippled major banks like Northern Rock ­ or do its own proprietary trading. Its loan activity is also small compared with the overall size of the balance sheet.

It has all contributed to keeping Rathbones safe from the ravages of the financial crisis.

‘It gives a lot more stability and a little more to spend on future acquisitions,’ Stockton says.
But Rathbones has also taken steps to avoid future wrangles with the taxman by selling its Jersey offshore trust operations recently.

‘We didn’t feel it was the right strategic fit, so we sold it to the management for a £29m consideration. From our perspective our core business is investment management. We looked at the general risk profile: do we expect more focus from HM Revenue & Customs on offshore tax structures? We felt the answer was yes.

‘Therefore in terms of an overall risk call and an overall strategic fit for the business we thought that the business would flourish much better away from UK plc ownership’.

The Singapore offshore trust, which has also been earmarked for sale, is a much smaller part of the business, but how it was treated on the books once the sale had been agreed brought its own challenges for Rathbones.

‘The Singapore deal was certainly subject to due diligence going forward. Clearly from an accounting perspective we have to respect that if a deal goes to a certain level of commitment, then available for sale is the right treatment. We had a long debate with auditors PricewaterhouseCoopers about what “available for sale” really meant.’

But the knock-on effects of a difficult economic climate can prejudice disposal prices and some disposal discussions.

‘There was a natural tension when we started to talk about that, but we came out on the side of disclosure,’ says Stockton.

The business’s Swiss and British Virgin Islands offshore trusts may also be in the shop window. ‘It’s very much part of our current strategy to review those. We’ll likely be looking at options for those businesses on similar lines.’

The UK is still committed to being competitive although most businesses face a rising tax burden.

Stockton predicts more to follow as penalty regimes get tougher in the face of greater self-regulation and compliance demands.

‘Inevitably the UK is going to get tougher from a tax perspective,’ he says.

Looking inward, Stockton says the finance function itself is in ‘pretty good nick’, but still sees room for improvement. ‘There are some things which need to be done.’

In such a cost-focused environment, Stockton believes that the challenge is to make sure that information is timely and relevant. ‘I think we can do a lot in that space to support decision-making,’ he says.

Before moving into plc work, Stockton spent more than a decade with Price Waterhouse after university, even gaining the chance to spend some time in New York before coming back to London, but then wanted to experience the other side of the coin.

‘I was thoroughly enjoying practice, but after 12 or 13 years in the profession, it felt time to get a little more practical, a little bit more hands-on. I’d seen a lot of businesses being run and I was itching to be part of that.

‘I spent the last four to five years working very much as an operational FD. I really enjoyed the day-to-day systems reporting accuracy, process risk control type of work, but having had the chance to join Rathbones it was a great opportu nity to face investors and deal with a lot of people who are challenging you all the time on where the organisation is going.’

With the fair value storm still raging and accountants caught right in the middle of it, Stockton says that the IAS 39 accounting standard as it stands causes issues for the banking industry at large.

Rathbones manages a lot of client portfolio money, which means that it avoids most of the effects of IAS 39. Its banking book and treasury book typically deal with certificates of deposit, gilts and money market funds.

‘That level of conservatism has been a big advantage in terms of any financial statement valuation issues,’ Stockton says. ‘It [IAS 39] is a very tricky topic in terms of current value accounting, but what other value do you use? Inevitably you have to strike a value at some point.’

Pension fund accounting is another bugbear for Stockton. ‘Corporate bond spreads have widened this year and that discounts the liability value of your pension fund at a higher rate, shrinking the size of the shortfall. You can potentially understate deficits and overstate surpluses. It’s a measurement challenge in addition to IAS 39 for this year-end.’

Stockton says that the business is founded on long-term relationships with clients very used to changes in the marketplace, even the more dynamic ones being observed at the moment. That’s not to say that anyone is being lazy, he says. ‘It’s a relationship that we want to keep, so we have to manage our clients through the situation.

‘I look forward to more fun and games as we go forward.’

The all-important audit relationship

When Accountancy Age drops in on Stockton he has just come out of fee discussions with PricewaterhouseCoopers. ‘Always a challenge,’ Stockton quips about the sensitive negotiations in general.

‘Whenever or wherever I’ve worked, I’ve used the auditors as a trusted business adviser. I value that now in a way even more than I did when I was working in the audit world. An element of not being able to see the wood for the trees existed.

‘Back then I was struggling to see the value of an audit to an organisation because I was doing it day in and day out. Having been a finance director for some years now, and looking back, having your auditors as a good technical backstop as well as an adviser that can share best practice is an essential relationship.

‘Audit relationships are crucial. I make it a point to let them know of issues early and we can work them out.’

Cash is king in any business and the economic downturn has also had to be factored into negotiations.

Stockton says: ‘In approaching the fee discussions I’m applying the same methodology that I’m applying in the budget discussions and that’s been responded to by our auditors, who understand the pressure we’re under. Equally, they’ve been very good about letting me know about the pressures they are under and we try and strike a balance between that.

‘The key point for me is audit quality rather than being parochial about fees. I value the relationship and will always reflect that in any discussion about fees.’

Stockton is happy with the relationship with PwC, but points out that he has to keep his options open, as any business does with service providers.

‘Continuing to remain commercial at this time in the marketplace is even more important, so if we believe there is more value elsewhere, then we will look in the market’