The chocolatey snack that beat the taxman: What Jaffa Cakes teach us about banking and finance
“There are some days in spring when the weather is such that, no matter where you are, either in town or countryside, England is at her best and it’s good to be alive.”
=== Geoffrey Wellum, First Light, (Penguin Books) 2002
Summer in England can be a golden time when the sound of leather on willow (i.e. a cricket match 😁) drifts across village greens, and ice clinks in glasses of chilled Pimms. This article was sparked during just such a moment: a fun chat with fellow The Certificate of Bank Treasury Risk Management (BTRM) Faculty about our favourite chocolatey snacks. Mine? It’s a toss-up between Cadbury’s Chocolate Fingers and Jaffa Cakes.
What began as a light-hearted exchange quickly turned into something a bit deeper, touching on tax law, financial classification, and the curious ways our systems try (and sometimes fail) to impose order on human behaviour. Because, believe it or not, a chocolate finger or a Jaffa Cake offers more than just nostalgia and nice accompaniment to a cup of char; they come packed with financial insight!
A brief history of the Jaffa Cake
Jaffa Cakes were introduced to the British public in 1927 by McVitie & Price, inspired by the famed Jaffa oranges from the historic port city of Jaffa in Palestine (now part of Tel Aviv-Yafa). They consist of a Genoise sponge base, a layer of orange-flavoured jam, and a chocolate coating, creating a product that straddles the line between cake and biscuit in both form and function. The name “Jaffa” was deliberately chosen to evoke the sweet, sun-kissed oranges that were popular in Britain in the early 20th century, enhancing the product’s appeal.
Timeless treat
The famous court case: Cake vs. Biscuit
A pivotal moment in Jaffa Cake history came in 1991, when the UK tax authority (HMRC) challenged McVitie’s on whether Jaffa Cakes should be classified as cakes or chocolate-covered biscuits. The stakes were high: cakes are considered a staple food(!) and are zero-rated for Value-Added Tax (VAT), a tax on consumption, while chocolate-covered biscuits are taxed at the standard rate of 20%.
Key arguments and the court’s reasoning:
Texture When Stale: Cakes harden as they go stale, while biscuits soften. Jaffa Cakes harden, supporting their “cake” status.
Ingredients and Base: Jaffa Cakes use a sponge base, akin to traditional cakes.
Size and Marketing: While small and sold alongside biscuits, McVitie’s consistently branded them as cakes.
Consumer Perception: Despite being eaten like biscuits (with tea, by hand), the court found the physical and compositional evidence more compelling.
The verdict: Jaffa Cakes are cakes, not biscuits. This saved McVitie’s a multi-million VAT bill (not to mention an instant 20% uplift in cost to the consumer going forward!), and set a precedent for how seemingly trivial distinctions in perception can have major financial consequences.
2025: The Jaffa Cake debate reignites
This summer, the Jaffa Cake classification debate returned to the news, with McVitie’s issuing a cease-and-desist order to a biscuit museum over how Jaffa Cakes were displayed and described. So we can see how the legal and commercial implications of classification remain relevant, even decades later.
Chocolate Fingers: A crisis of classification?
Meanwhile, across the Channel, Cadbury Chocolate Fingers have been known to spark a different kind of outrage. French customers can face eye-watering prices of €54.99 (£46) for a packet of the beloved chocolate biscuit amid widespread shortages, compared to their usual £1.80 cost in British shops.
The chocolate biscuit shortage has caused aggro amongst French consumers following their disappearance from supermarket shelves, becoming a surprising cost-of-living flashpoint. The crisis has prompted public petitions demanding their return to stores.
Even more astonishingly, the prices now rival those of luxury patisserie brands like Pierre Hermé, putting a humble British snack in the same bracket as Parisian haute chocolate éclairs! (A reasonable comparison in consumer utility, if you ask me! 😁)
Fingers fuel biscuit frenzy
Vague classifications and flawed assumptions in finance
These stories of Jaffa Cakes and Chocolate Fingers serve to highlight a broader challenge: in both cases, rigid labels fail to capture reality. Whether it’s a tax authority arguing over cake texture or consumers petitioning for the return of a childhood snack, the consequences of classification ripple far beyond their surface.
And yes, this same dynamic plays out in banking and finance.
Regulatory frameworks and traditional economic models often assume clarity, consistency, and rational behaviour - the financial equivalent of treating everything like a neatly labelled shelf of snacks. But real-world decision-making is far from tidy. Investors, like consumers, are influenced by emotion, urgency, and perceived scarcity as much as by facts and fundamentals. Mike Gelband, ex-Lehman Brothers, noted:
“While sophisticated algorithms and statistical tools can detect patterns and correlations, they cannot reliably predict how individuals or institutions will react under uncertainty. Psychology resists precision.”
Amen!
The LTCM Collapse: A Lesson in Ignoring Human Behaviour
This story is so well-known it’s almost embarrassing to recount it, but it’s such a good case study in hubris, arrogance, and conceit that I’m going to cite it anyway! Long-Term Capital Management (LTCM), a hedge fund founded by Nobel laureates, relied heavily on quantitative models to exploit perceived inefficiencies in bond markets. These models assumed rational markets, historical price convergence, and diversification as a buffer against risk.
But in 1998, the Russian debt default and the Asian financial crisis triggered a global flight to safety. Markets seized up, and LTCM’s highly leveraged positions rapidly deteriorated. The firm’s models failed to account for fear-driven, herd-like behaviour, not to mention a complete ignorance of the importance of both funding and traded liquidity. The rest (large, correlated losses, and a Federal Reserve bailout to avoid contagion), as they say, is history.
The key lessons:
Be aware of how markets interact across sectors and currencies.
The interplay between funding liquidity and trading liquidity must be understood.
Models, no matter how sophisticated, are vulnerable when they ignore human psychology. In times of stress, emotion can override logic.nbsp;
Our conclusion: Sound financial decision-making requires judgment, behavioural awareness, and rigorous stress testing. And expertise in all of these areas are acquired through experience, over time.nbsp;
I address this interplay between human behaviour and financial decision-making in The Principles of Banking:
“An incorrect assessment of risk by senior management is [often] a behavioural issue…..[for example] the personality cult at Lehman Brothers made effective board oversight of company direction difficult.” .” —Choudhry, M., The Principles of Banking. 2nd ed., Wiley, p. 560.
This also reflects my skepticism that “ethics” can be taught, or that textbook theory alone can shape behaviour. Governance and regulation must explicitly address the predictable flaws in human judgment. That’s why balance sheet management, institutional culture, and strong oversight are not optional, they’re essential to a bank’s long-term resilience.
When finance meets human impulse: Sovereign Bonds vs. KitKats
People don’t always think in terms of yield curves and duration - sometimes, they just want a KitKat. Financial choices often mirror snack decisions more than spreadsheet logic (okay maybe I’m cracking a gag here! 😁). Consider the contrast:
Financial choices vs. Snack decisions
While bonds offer moderate liquidity and abstract utility over a long shelf life, they often fail to address the immediate emotional and psychological needs of individuals. KitKats, by contrast, are highly liquid, immediately gratifying, and provide a short-term emotional hedge against stress or boredom.
Please forgive the chocolatey metaphor, but it does underscore a serious point: financial systems built on assumptions of perfect rationality and long-term discipline are typically at odds with how people behave. Policies and products that ignore this risk are more likely to lose touch with the consumers they aim to serve.
Lessons for finance and beyond
Classification defines consequence: The Jaffa Cake case is a vivid reminder that labels and definitions in law, tax, and finance can shape outcomes far beyond their apparent triviality.
Details matter: From packaging and texture to legal language, small differences can have multimillion-pound impacts.
Behaviour under stress reveals truth: Just as Jaffa Cakes harden when stale, the real nature of financial instruments is revealed under market pressure, not just by their legal label and not during stable “BAU” conditions.
Reality vs. Models: Our systems may assume more discipline than people have. Recognising this disconnect is essential for crafting policies, financial products, and regulations that work both on an average day and on a bad day.
As you ponder the next “Jaffa Cake” in your portfolio or regulatory filing, remember: reality is rarely as tidy as our frameworks, and the tiniest definitions can shape billion-dollar outcomes.
Going forward….
In banking, having technical knowledge is one thing, knowing how to apply it under pressure is another. The Principles of Banking includes real-world examples, technical frameworks, and universal takeaways that professionals can immediately apply in their day jobs. But no need to take my word for it: here’s my second favourite ever book endorsement: “The Principles of Banking is easily the most important text for anyone in banking today and should be required reading for all personal development plans. When I was a regulator at the UK Financial Services Authority, managing the Change In Control team, I was responsible for assessing and granting regulatory approvals for complex banking transactions, such as Virgin Money’s takeover of Northern Rock. I relied heavily on Professor Choudhry’s text as a reference throughout the banking license approval process. “Since then, I have referenced his book often, as a guide continuously during my career in banking as regulator, consultant, investor, CRO, and now on the strategy/commercial side, and crucially while setting up a new bank and going through the bank license approval process myself.”
