Tuesday, 16 January 2018

Getting to Know the Pension Protection Fund

The last post of Financial Regulation Matters looked at the then-ongoing crisis at Carillion; now we know that the firm could not survive the crisis, with the situation being that an official receiver was appointed to liquidate the company immediately. Whilst this author is not of the habit of agreeing with Andrew Adonis, his recent likening of the situation to the Enron scandal, in terms of the extent of the scandal and who it will ensnare as it develops, seems to be an accurate depiction; our old friends KPMG are currently being scrutinised for providing positive audits just months before the firm spectacularly collapsed – no doubt, many financial (and political) players will be implicated as this remarkable corporate collapse continues to come to light. However, whilst Carillion and the collapse will be revisited in this blog and, no doubt, fill the business media for weeks to come, this post will take a different approach and use the story to better understand a different type of organisation – the Pension Protection Fund (PPF).

In the Financial Times yesterday, a headline read ‘Carillion pension schemes transfer to industry lifeboat’, which the ensuing story confirming that ‘around 28,000 members of Carillion’s 13 UK Pension schemes will now be transferred to the Pension Protection Fund… Pension scheme members… will receive 90 per cent of the pension they were expecting, up to a cap’; in February 2017, the same assistance was offered to pension holders at the collapsed High-Street store BHS. The PPF is therefore (a) an important component in the financial landscape in the U.K., and (b) may see its importance grow as other firms flirt with collapse like Carillion has been; so, assessing its composition, aims and objectives, and place within the overall framework will be a useful endeavour. Born out of the Pensions Act 2004, the PPF was established in April of 2005, with its stated mission now being to ‘provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation’. To fund this endeavour, the PPF has several defined sources of income, including an annual levy paid by all eligible pension schemes, recovery of money and assets, and returns on investment. In terms of its composition, the PPF is run by a Board, which is responsible for paying compensation, calculating levies, and setting investment strategies and include figures such as Arnold Wagner (Chairman) and Alan Rubenstein (CEO). Now that we know a little bit about the Fund, looking at how it operates provides a useful foundation to ask further questions, with the first point to note being that having this protection, from one specific viewpoint, is an extremely positive development. When we look at how the Fund managed the BHS situation, whereby the owners (and past owners) had pilfered the pension pot of that once-illustrious company, we can see that the Fund is very keen to promote the perceived independence of the initiative, with them consistently declaring to what-would-be worried BHS pension holders that they have been transferred into a scheme which is both very fair to them in terms of what they will be entitled to, and that the scheme has absolutely nothing to do with the firm’s previous management – ‘It will have independent governance and neither Sir Philip Green nor the Arcadia group will be involved in the management of the scheme’ is a definitive and revealing statement. Yet, the situation with Carillion, at the moment at least, is raising a whole host of questions about the Fund and its capabilities.

Whilst the figures being quoted for the impact that the PPF will have to absorb from Carillion’s collapse vary, they are all substantial. The Economist predict that the total impact could be close to £900 million, whilst other outlets predict between £587 and £800 million. According to the PPF’s last annual report, the Fund is operating with a reserve of just over £6 billion which means that whilst the Carillion hit will certainly not critically damage the Fund – meaning that headlines like ‘will pensions still be paid’ are slightly misleading – a minimum impact of £587 million is not insignificant, as the chances of clawing back some income from the Carillion rubble seem to be more remote by the day; the PPF was particularly reluctant to engage with the salvaging efforts of Carillion (its suggestion of transferring debt into shares would have made the PPF a major shareholder in the firm) which is looking to be a particularly astute call. However, whilst it is positive news that Carillion’s pension holders have this safety net to rely on, the situation raises another, more systemic question.

When a company fails, one of the biggest issues for its management is the pension pot – the reason for this, in one particular sense at least, is that the backlash will be amplified if the pension pot is drained in addition to the funds of the company, because shareholders are categorised, in the general public’s perceived persona at least, to be accepting of the risk of loss whereas pension holders are considered to be innocent victims in the arrangement; this was clearly demonstrated in the overly-public rebuking of Sir Philip Green’s treatment of the BHS Pension Pot. Yet, if we were to flip the focus, what does the PPF mean to corporate management? Whilst it means safety to pension holders, it means another layer of safety net with which directors can take greater risks for short-term rewards; today it was stated in the media that ‘the Government has ordered a fast-track investigation into directors at the failed construction firm Carillion’ but the chances of that culminating in anything more than a sacrificial lamb being offered up are extremely remote (the Government’s own complicity will no doubt be left out of that investigation). So, we know that an extra layer of protection will likely result in increased negligence from corporate management (Carillion being the case in point), and we have discussed on many occasions that the only real antidote is to alter the perception of what ‘crime’ is so that corporate crime is punished just like ‘conventional’ crime – the chances of risk taking would be instantly reduced. Nevertheless, it is difficult not be conflicted when assessing the PPF, because it is extraordinarily important as pension holders, who are often disproportionately incentivised to contribute to corporate schemes by way of corporate and governmental inducements, should not face having to lose everything because of corporate negligence. Yet, the extra layer of protection adds to other layers which make it extremely easy, particularly when paired to a lax punitive system for corporate crime, to commit corporate transgressions – now the moral dilemma of destroying pensions has been, effectively, removed in most scenarios (there are not many pension schemes which could deplete the PPF’s reserves single-handedly). The cyclical notion of that understanding results in the realisation that until corporate crime is properly designated as crime, very little will change.

Keywords – Carillion, Pension Protection Fund, Politics, Business, Corporate Crime, BHS, @finregmatters.

Thursday, 11 January 2018

Carillion Continues to Struggle – A Bail-out Test for the British Government

In November we discussed the impending crisis at Carillion, the large-scale construction business that has become intertwined with the U.K.’s economic future, by way of projects like HS2 – the large scale infrastructure project that is designed to herald a new era for the different parts of the U.K. by linking them together by high-speed rail networks. In this post, we will get an update on proceedings in this particular case because, as predicted, the situation is worsening by the day and the realisation that Carillion could collapse moves closer and closer as each stage of the rescue-process fails. Whilst the same points will be repeated i.e. the danger of such a collapse for an intertwined company, a new emphasis will be placed upon a potential ‘bail-out culture’ that may emerge as the U.K. heads into unchartered and particularly choppy waters post-Brexit.

At the moment, almost 200 creditors are engaged in negotiations regarding Carillion’s future, with analysts suggesting that the U.K.’s second-largest construction firm has nearly £1.5 billion’s worth of debt, as opposed to market capitalisation of just £81 million; these stories are beginning to coalesce, with suggestions being that the leading banks are reluctant to continue lending to the embattled firm, and creditors suggesting that a decision, either way, will be made before the end of the month. To compound the company’s problems, it is currently under investigation by the Financial Conduct Authority (FCA) with regards to stock declarations it made last year which, if found guilty, could be the turning point in the firm’s fight for survival – whilst a fine would not damage the company because, as we know, the FCA’s fines are hardly threatening, the reputational damage to a company seeking financial assistance could be critical. For the Government’s part, it is being suggested in the media that the Government has already put plans in place to cushion the blow if the company were to ultimately fail, which is something which is becoming more of a reality by the day, particularly considering the company’s stock value plummeting by almost 90% recently against debts of £1 billion (according to The Guardian) and a pension deficit of near £600 million. However, the actual tone of the Government’s response to the crisis can be read in two ways, with the Cabinet Office’s Parliamentary Secretary stating that ‘we of course make contingency plans for all eventualities… Carillion’s operational performance has continued to be positive [and] the company has kept us informed of the steps it is taking to restructure the business. We remain supportive of their ongoing discussions…’. The two ways in which we can read into statements such as these are either (a) the company is too-big-to-fail, as some analysts have suggested and, therefore, assistance will be provided anyway, or (b), which is almost a given, the Government is hamstrung in this instance because any negative narrative displayed by the Government would be, in all likelihood, an instant deathblow to the embattled company. We have spoken before about the so-called ‘public private partnerships’ (here and here) and, arguably, we are now seeing one of the two natural ‘endpoints’ to that arrangement.

Ultimately, the firm appears to be close to approaching the dreaded ‘point of no return’, and if it does collapse the impact will be massive for a number of distinct reasons. Firstly, the firm employs nearly 20,000 people and its pension deficit would have to be, mostly, absorbed by the national fisc, which would be particularly bad timing given the financial no-mans-land the country is seemingly heading to with regards to Brexit. Secondly, for a company to fail that is so intertwined within the country’s infrastructural future would present an incredible situation whereby projects that have been designed with Carillion’s capacity in mind will have to be taken up by other companies. However, perhaps the most crucial impact will be on that aspect that is touted, almost daily, as being the lifeblood of the business world – confidence. For Carillion to collapse, so close to the Country’s secession from the European Union, could have massive consequences for the economic and political landscape in this country. It is for these reasons that the analysts who have suggested that the company is actually too-big-to-fail will likely end up being proved correct; the intricacies of TBTF is that one is not considered in this category by way of their market capitalisation or anything financial, so to speak, but by how much they are intertwined with the country’s health – Carillion certainly fits that bill. The financial blow would be manageable, but allowing Carillion to fail will send ripples through the business community that may very well turn into waves at a rapid rate – the Government’s hands are, presumably, tied in this regard but, as always, it is the public who will pay the price. As the NHS buckles under the increasing pressure exerted on it in this austerity-driven era, it is likely that money will be diverted to protecting private business; quite the microcosm for the current political climate.

Keywords – Carillion, Construction, Public Private Partnerships, Finance, Company Law, Bail Outs, Politics, Business, @finregmatters

Tuesday, 9 January 2018

The Continuing Struggle with Debt: Focusing on the Real Stories

Here in Financial Regulation Matters we have looked at the issue of personal debt before, with posts ranging from the ever-growing crisis to the predatory lending that exists within the sector. In today’s post, we will be looking at the figures that have been released by a blog for Bank of England (BoE) staff – it is not a usual blog, but a vehicle for BoE staff to openly discuss certain policies and aspects that affect policies – that describe how the situation for everyday consumers is a cyclical, almost hopeless process that many stay trapped in for decades. This analysis will be counteracted by the news stories that receive plenty of attention in the media, with the aim being to illustrate how consumer confidence is almost enshrined within the modus operandi of the system, even in the face of opposing, and often devastating facts.

The news has been awash recently with stories about consumers operating more shrewdly in the credit markets (in relation to switching between better arrangements with credit cards etc.), or that the amount of credit consumption actually dropped in December which, according to the news represents hope in this particular marketplace. Furthermore, HMRC has moved to ban the use of credit cards for the payment of tax, which is supposedly aimed at reducing credit dependency. However, there are still many who point to the remarkable explosion of the credit bubble in the UK alone, with some pointing at recent figures which suggested that, as according to the Office of National Statistics, the bubble now stands at £392 billion and counting, with the additional warning that household debt could go past £20,000 by the end of this current Parliament. It is this type of statistic that correctly frames the results of a recent study by employees at the BoE – although not acting in that capacity – which suggests that nearly 90% of all outstanding credit is held by those who were also in debt two years earlier; the inference, quite clearly, is that these people are trapped in the credit cycle, and despite being able to transfer balances remain within the cycle.

The media was quick to pick up on the fact that of those in debt, the spike is not down to excessively risky borrowers – i.e. ‘sub-prime’ borrowers, but there was an acknowledgement that the stagnation in real earnings was having the obvious effect of keeping people within the credit cycle. One argument is that the time of year is having a disproportionate effect, with figures released recently that suggest that around 7.9 million Britons are likely to fall behind with their finances on account of spending in the run up to the Christmas period and, across the board and not including mortgage repayments, the average Briton now owes over £8,000. Yet, it is very easy to get lost or misguided by the semantics being used within the common narrative.

There has been plenty of talk about ‘credit binges’ and all the seasonal data referenced above points towards the problem of stagnation in terms of real income affecting people’s sensitivities to what they perceive as their ‘standard of living’; the inference being that people have become accustomed to a certain way of living and have not adjusted their budgets accordingly in the downturn. However, other figures suggest that this Conservative narrative portrays a reality that is little more than a falsehood, because last year there were record numbers using food banks, to use just one example. The obvious counter-argument is that not all of those using food banks account for all of those in debt, which is correct, but the reality of the situation is that more people than ever – in the modern era – are operating just above, or in many cases below, the so-called ‘breadline’. What this describes for us is the understanding that the so-called ‘average’ person is struggling to cope with the onslaught since the Crisis and, even a decade on, one of the largest instances of wealth extraction continues to significantly and negatively affect the poorer classes specifically. This reality is not that one that has been dreamed up by this author, but in fact comes from the mouth of the new Secretary for Work and Pensions in the U.K., Esther McVey. McVey, speaking just a few years ago, stating quite boldly that ‘in the U.K., it is right that more people are… going to food banks because as times are tough, we are all having to pay back this £1.5 trillion debt personally…’ which should, of course, remind of us of the equally remarkable comments made by Jacob Rees-Mogg. Whilst the wealth of the current cabinet has not been calculated yet, on account of it only reforming over the past few days, it is safe to say that it is comprised only, if not majoritively, of millionaires which leaves us with the disgusting reality, once again, of millionaires telling the public that it is right that they struggle even though the effect of systemic wealth extraction has damaged them disproportionately. McVey’s appointment is the latest in a long and continuing line of events that confirms that, for those suffering, the end is not in sight. With people trapped within the credit cycle, and many others forced to use food banks, despite often holding employment, the reality of the situation is that the people who can affect real change not only will not do so, but believe it is ‘right’ that this imbalance both exists and continues. Whilst many news stories impact society, it is the financial news which, arguably, presents the reality of the situation, if deciphered correctly – deciphering this current batch of financial news makes for depressing reading, unfortunately.

Keywords – debt, politics, business, credit, economy, finance, consumers, poverty, food banks, @finregmatters

Sunday, 7 January 2018

KPMG Separates from the Grenfell Tower Inquiry: A Closer Examination

Today’s post reacts to the news that broke this evening concerning the massive accountancy (and advisory) firm KPMG’s withdrawal from the inquiry into the Grenfell Tower fire that occurred last June. Whilst this post will not discuss the Grenfell Tower disaster in any great detail – mostly because it is an extremely emotive subject but also because the Inquiry still has some way to go before concluding – it is worthwhile looking at two specific instances: the most important is to look at why KPMG today released a statement that it had ‘mutually agreed with the inquiry that we will step down from our role with immediate effect’, but it is also worth asking why KPMG was considered an appropriate source of advice in the first place – does the firm’s track record, particularly in the modern era, reveal for us the processes underpinning this most important of inquiries?

KPMG is one constituent part of the so-called ‘Big Four’ – the oligopolistic partners within the accounting industry – and its history is a long and storied one. Consisting of a merger between four different firms (with the oldest dating back to 1870 with William Barclay Peat and Co) that took place in 1987, the firm has catapulted itself to a position of genuine influence within the modern economy. However, that propulsion has with it a number of associated instances, with a number standing out. Using the turn of the century as a good starting point in relation to the behaviour within the accounting industry, KPMG’s transgressions, arguably, went under the radar whilst its then-competitor Arthur Andersen was publically decimated for its role in the Enron Scandal; whilst the fall of Arthur Andersen is oft cited, KMPG’s ‘deferred prosecution agreement’ with the U.S. Department of Justice (DoJ) for $456 million (plus $225 million in private settlements) is rarely mentioned, as is the sentences handed to a number of senior KMPG officials for their role in the providing of ‘tax shelters’ which allowed the wealthy to avoid paying billions in tax contributions. That particular era was to be followed with another phase in which the accounting industry (particularly the ‘Big Four’ would transgress en masse whilst other financial service providers would be publically shamed; the Financial Crisis. Whilst big banks, credit rating agencies, mortgage providers and insurers would correctly see themselves publically identified and vilified for their roles in one of the largest instances of ‘wealth extraction’ to have ever been witnessed, the ‘Big Four’ would see their transgressions, again, go somewhat under the radar. During the lead-up to the Crisis, the large mortgage financiers and big banks did indeed partake in what was nothing other than systemic fraud, and credit rating agencies negligently provided their assurances to the overly-risky products that were at the centre of the impending crisis (and the insurance industry allowed for secondary markets and so on and so on), but a fact that was not given the right amount of attention was that for all of these financial juggernauts the requirement to have their balance sheets checked by independent and thorough third-parties remained – and this is where the accounting firms’ transgressions play their part, although the lack of ‘coverage’ would have one thinking differently if one did not appreciate the ‘culture’ within the largest financial firms. More recently, we looked at the continuing fines being handed to the ‘Big Four’, with KPMG being fined recently by the U.S. Securities and Exchange Commission (SEC) for mis-advising consumers in the favour of big business, which is a common theme within industries that offer advisory services for a high price (even the briefest of analyses of the Big Four’s financial statements reveal that advisory services make up a significant proportion of their income, and with that comes unique pressures that affect the role and purpose of an auditor). There have been a number of other instances along the way and there will undoubtedly be many more, but on the back of this admittedly brief review of just some of the industry’s transgressions, we will now review the details of the firm’s connection to the Grenfell Tower Inquiry.

The particular details of the case are currently being played out across the media, so for our purposes it will probably be best to be as simple as possible. Officially, the story goes that KPMG were appointed to advise on the structuring of a project management office for the Inquiry, with KPMG declaring that ‘our role was purely operational and advised on project management best practice and had no role advising on the substance of the inquiry’. However, a concerted campaign was initiated in response to the reality that there were likely a number of conflicts of interests present within the relationship; the campaign culminated in an ‘open letter’ being sent to the Prime Ministers from campaigners, academics, and MPs declaring their belief that KPMG was too conflicted to provide independent advice to the Inquiry, and the details of the campaigners’ claim deserve to be looked at. Most glaringly, the auditor that was hired to provide assistance to the Inquiry is, inexplicably, the same firm that audits the parent company of Celotex, the firm that produced the insulation for Grenfell Tower which has, to this point at least, been identified as a key component in the disaster, as well as auditing the Royal Borough of Kensington and Chelsea and Rydon Group, the firm contracted to refurbish the Tower. This intertwining of the auditor in the business of three entities that had a massive role in the disaster should have prevented the firm even being considered for the role of advisor to the Inquiry, but is this the case in reality?

MPs and Campaigners have greeted KPMG’s decision to withdraw from the arrangement with a small amount of pleasure (relatively speaking), but have been quick to note that the inference of this sequence of events is a negative one; one campaigner noted that ‘this appointment was yet another example of the government’s deafness to local needs’, which is absolutely correct. However, here in Financial Regulation Matters we are consistently looking to analyse the inference as well as what is stated and, rather unfortunately, this chain of events can be seen to illustrate something which is particularly tragic, but illuminative of the society we currently inhabit. Yes the Inquiry is extremely important, but the reality of the situation, when articulated, makes for tragic reading. The first instance to note was the Government’s, and particularly Theresa May’s, absolutely abysmal handling of the aftermath of the disaster, which came complete with a number of broken promises like the fitting of sprinkler systems to similar residences (something which the Prime Minister would later say could not be afforded). However, even more devastatingly, at the time of writing residents of Grenfell Tower have still not been rehomed, which has led to a string of criticism but still very little action from the Government; David Lammy MP, one of the most vocal critics of the Government’s handling of the disaster, is clear in his understanding that there is a chasm between the citizen and their representatives in this, and many other circumstances; perhaps, as Lammy notes, that may indeed be at the core of the problem. Theresa May was asked in the House of Commons how safe she would feel living on the 20th floor of a large Tower Block with no sprinkler system and erroneous safety advice (and inadequate cladding and insulation and so on and so on) and the simple answer to that poignant question is that she simply will never experience that scenario – so, how representative can she really be? What she, and the Government moreover do understand however is business, and the protection of big business to be precise. Yet, it is too easy to suggest that KPMG was allowed to advise the Inquiry because of its ashamedly pro-business culture, because in reality what we are witnessing in this scenario is just the latest in a long line of division that underpins most of modern society (particularly in the U.K.) – the people who tragically perished in Grenfell Tower were, by and large, poor people, and overlooking that fact is, and always will be a tremendous error. The cladding that was attached to the building, the cladding which allowed for the fire to spread at an alarming and debilitating rate, was erected to mask the aesthetics for those who owned homes in the much richer parts of that particular borough. The companies which were contracted to carry out significant and important work on the building are owned by wealthy individuals. Now, the Inquiry that has been set up to, seemingly, provide answers to the public as to the events that led to that horrific sight of a large building being gutted by fire with its occupants trapped, is being advised by a company that all the other companies pay for services on a number of other occasions. It is easy to dismiss this connection as being demonstrative of a larger and more brutal reality, but it is vital that we seek to assess situations within this particular paradigm; if the scenario does not fit the paradigm then that is great, but the incredible amount of times that it is does presents an awful reality in which the poor are being consistently abused, and without any conceivable recourse. The actions of the campaigners who highlighted these conflicts and brought about KMPG’s withdrawal is just one heroic action in a long list of heroic actions that have followed the disaster as many attempt to seek justice for those who were tragically killed last year – that they have to do so much to get justice is, perhaps, illustrative of the real problem we face.

Keywords – KPMG, Grenfell Tower, Theresa May, Politics, Business, Audit, @finregmatters

Saturday, 30 December 2017

2017: A Busy Regulatory Year

As Financial Regulation Matters ends its first year, this post will review some of the main themes that have emerged (or persisted) over the last year. With nearly 200 posts since starting in February, it will be too much to review each post, but assessing the themes that have been discussed throughout the year will be useful; in what is a turbulent era politically and socially, understanding the role that financial regulation plays in that arena, and how that arena affects the development of financial regulation, is of interest. With that in mind, we will look at some of the main stories that have been discussed in Financial Regulation Matters from within a few specific areas: fraud and corruption; industry developments; social and political developments; and lastly developments for financial regulators.

Fraud and Corruption

As the world (particularly the Western World) comes to terms with the devastating Financial Crisis and its ensuing effects, fraud and corruption has consistently come to the fore within the business media. In this respect, there have been two particular categories that have emerged, with each having a significant impact upon the field of business, and society moreover. The first category we will look at is the issue of systemic fraud and corruption, and nowhere is that demonstrated better than in looking at the massive stories of money laundering and the financial practices of the elite. Following on from the revelations stemming from the law firm Mossack Fonseca – the so-called ‘Panama Papers’ leak - the year started with revealing investigations into the actions of HSBC, who were identified as having particularly lax anti-Money Laundering (AML) systems in place, with that story being followed in the summer by the journalist-led investigation into what was termed the ‘global laundromat’. The ‘global laundromat’, which described a network of banks around the world laundering money that emanates from Russia, took on added significance with the political aspect of American-Russian relations continuing to teeter on the edge; whilst national regulators sought to address concerns at banks domiciled in their own regions, the fact that over 700 banks from more than 90 countries were implicated pointed towards a systemic problem that also demonstrated an underlying understanding that legal and illegal financial procedures operate almost simultaneously, if conducted in an opaque enough manner. This was continued with the massive story (that would not go on to survive too many news cycles, in truth), in which files from the offshore law firm Appleby had its documents leaked – the so-called ‘Paradise Papers’ leak. The leak saw the elite’s business practices publically displayed, with members such as the British Royal Family, Business leaders like Robert Kraft, and celebrities such as Madonna having their investment practices revealed. Whilst there was plenty of commentators keen to make the distinction between tax-avoidance and tax-evasion, the short-term effect was for the public to negatively react in relation to the pain being felt by the general public at this time of continuing austerity. However, the extent of that reaction, and the media coverage of it, was to be extraordinarily limited, and there may be a number of reasons for that. Before we get to those reasons, there were plenty of instances of corporate fraud, bribery and corruption that deserve a mention over the past year.

In terms of corporate fraud, it was interesting to note the amount of corporate bodies who were, or who continue to be charged with fraud over the past year (which saw us concentrate on a small number of regulatory bodies leading that fight, like the Serious Fraud Office (SFO) in the U.K.). In the banking industry, a number of leading banks were charged throughout the year, with Barclays, RBS, HSBC, and a number of others charged for various offences. Furthermore, both RBS and Lloyds have become embroiled in bitter battles over the compensation for those who have been proven to have been effected by their fraudulent practices (or those carried out in their, or companies they have acquired, name); RBS is currently attempting to stem the bleeding from their ‘Global Restructuring Group’ unit, whilst Lloyds are still yet to compensate the victims of HBoS’ Reading Unit – both instances concern the banks and their affiliates deliberately pilfering failing (and sometimes healthy) SMEs. In other sectors, two of the ‘Big Four’ accounting firms were charged and fined by the U.S. Securities and Exchange Commission, the massive Aerospace Company Airbus is currently under investigation in the U.S. for flouting compliance regulations, and in the Automotive sector Rolls-Royce entered into the largest ‘Deferred Prosecution Agreement’ with the SFO in British history. There have been many other instances, like those seen in the tobacco industry and the current investigations into the Oil and Gas industry as we saw yesterday; however, certain instances have suggested that we should be guarded when lauding these developments in the fight against corruption, fraud, and illegal financial activities.

In the U.S., their largest actions have come in relation to the massive trade-related confrontation that began in the aerospace industry with the trade battle between Boeing, Bombardier, and later Airbus; this falls in line with the proudly-declared protectionist rhetoric uttered by President Trump during and after his run for office. In the U.K., advances in the fight against financial crime have been consistently trolled by the underlying reality that, for whatever reason, the political elite in the U.K. seek to eliminate the Serious Fraud Office, which has been demonstrated by their endeavour to either underfund, directly dismantle, or covertly dismantle the regulatory body that is, by far, leading the fight against financial crime in the U.K. and around the world in certain cases. The reasons for these developments are plenty, but the time afforded to either (a) the successes or (b) the developments of the financial-crime related stories is extraordinarily telling. Whilst ‘real’ crime is given excessive air time, the crime of the financial arena is barely discussed – focusing on the airtime offered to the revelations stemming from the Panama and Paradise papers illustrated quite clearly that the public will have to look intently for these stories; they will not be told. The inference is that other crime is more important for the public to understand and comprehend, but in truth no crime affects society more than financial crime, particularly when it is systemic in nature. When the stories are taken in isolation, they can be written-off as a ‘culture’ within a certain industry or amongst a very few individuals, but when taken as a collective, the impact is abundantly clear. To that end, we will continue now by looking at the developments within certain industries to achieve that aggregated outlook.

Industry Developments

Industry in this section relates to developments within certain sectors, so obviously it will be impossible to adequately review every sector that has been discussed over the past year. However, some stand out and the sentiment these analyses offer is one of a battle against a systemic culture, which is a key element in understand why certain actors in the way they do, and how one may realistically predict developments – the need to analyse from within the actual v desired framework that will be promoted in a forthcoming monograph by this author will be clear. Starting close to (this author’s) home, the credit rating agencies have been discussed on a number of occasions, with their transgressive nature being used as a warning as the ‘Big Three’ endeavour to spread their products and presence to a number of new markets, like Saudi Arabia and the developing sustainable finance ‘movement’. In the banking industry, smaller banks have been facing trouble (like the Co-Operative Bank and a number of Italian Banks) whilst larger banks have enjoyed protection based on their size a.k.a. too big to fail which, as a concept, was successfully challenged by the insurance industry as demonstrated by AIG’s removal from the at-risk register in that regard. In the banking industry, there have been a number of remarkable failures over the last year like the increased closure of branches, the removal of whistle-blower protection, widespread AML failures, and disregard for their victims, but all of these issues have been buttressed by a political and regulatory foundation that continues to offer unwavering support, as demonstrated by Trump’s insistence on deregulation and Philip Hammond’s insistence that we ‘live in the real world’ in relation to taxpayers paying for the crimes and failures of the financial elite re RBS, as just two examples. There have been many other instances, across the financial and commercial sector, that suggest the current environment is one of appeasement with only one loser; the public. Whilst this is the undercurrent of a lot of posts here in Financial Regulation Matters, is with good reason. Throughout the year, there have been countless instances of the sheer disdain from the powerful for the general public, and the following are just some of the examples that we have looked at.

Social and Political Developments

We began the year by looking at the findings of the ‘Financial Exclusion Committee’ that was tasked by the House of Lords in the U.K. to assess a number of aspects whereby the financial world negatively impacts upon society, and they certainly had their work cut out. Just some of the angles they examined was the remarkable increase in predatory lending that continues to plague the vulnerable. In relation to the vulnerable, the issue of the incredible but unfortunately necessary (in the current paradigm) explosion of the usage of food banks across the country (including in Universities), as well as the simultaneous mental health epidemic (amongst a whole host of societal issues) was covered frequently, as too was the disgusting sentiments offered by Jacob Rees-Mogg with his declaration that the use of food banks was actually ‘uplifting’. Returning to mental health for one moment, we saw how the increased pressure that austerity and the effects of an era-defining financial crisis, or wealth-extraction event was negatively affecting the general public, particularly those in vulnerable positions or high-pressured position in relation to their life chances i.e. students facing an onslaught from tuition fees to exploitative accommodation prices; the mental health crisis that exists within the U.K.’s Higher Education system is as clear an indicator as is necessary. Yet, for all the posts that discussed these issues throughout the year, the post that responded to the ‘landmark study’ that suggested the austerity-era policies account for nothing more than ‘economic murder’ was perhaps the most revealing; to have an extra 120,000 unnecessary deaths, with an extra 150,000 predicted between 2015 and 2020 all related to austerity-era policies, on the back of an event that has saw not one person of any real significance jailed demonstrates the reality of the situation. The pattern is clear to see; on the back of the largest wealth-extraction event since the Crash of 1929 and the ensuing depression, it is the vulnerable who pay the real price. The ultimate question, then, is who is supposed to prevent, or at least reduce the impact of such a pattern? The answer to that is financial regulators, and in a number of posts this year we have assessed some of the major regulatory players in detail.

Developments for Financial Regulators

We have focused on a number of regulators throughout the year from within a number of jurisdictions, ranging from China, Australia, Europe, and the U.S. However, we have spent a lot of time looking at British regulators, with the Financial Conduct Authority, the Financial Reporting Council, and the Serious Fraud Office mostly taking centre stage (in addition to national treasuries like the Federal Reserve and HM Treasury). A common theme that has emerged, rather predictably but still unfortunately, is that these regulatory bodies are particularly underfunded and intrinsically bound to national protection, which as we have seen consistently trumps the requirement to protect the public: regrettably, the impact of a failed bank or even the perception that would be created if leading financial figures were to be imprisoned is more important than public protection. The issue of regulatory budgets came into focus in August, and what we found was that many, if not all, regulators are directly underfunded, and continue to have their budgets slashed, just as their importance continues to develop; the overriding inference, as directly articulated by Trump and his followers (as is their way) is that regulation is bad for business, and that if one wants economic growth then one must deregulate to achieve it. What is rarely questioned, in the mainstream at least, is what does this yearning for economic growth actually mean? What we learned recently, or perhaps had confirmed, as was brutally demonstrated by Trump’s new tax laws, is that deregulation is designed to provide a green light for the financial elite to begin processes that systematically extract wealth from the system; Greenspan’s efforts were the direct precursor for the financial crisis – the elite understood the system and executed their respective roles in a ruthless manner. Whilst the cycles of the economy oscillate away from the Crisis, the lessons of history have been ignored, yet again, on a grand scale – the threat of political populism threatened a return to the post-Depression era that was mired in war and death on a remarkable scale, but the effects of the post-Crisis era are still to unfold, even a decade later. Reviewing the actions of regulators in the post-Crisis era has demonstrated that whilst words are easily spoken, the actions of influential regulators are the same as ever – they are pro-business and always will be; the situation with RBS and the regulator’s complicity in helping them to cover up their actions drew scorn, but was not in the least bit surprising. Whilst one would not to be entirely pessimistic, the reality of the situation historically leaves little room for optimism, although what the future holds in terms of the cyclical development for business, regulators, and the public remains to be seen.

Ultimately, the year in business has been directly representative of the global undercurrent that has been developing since the Crisis. We have seen extensive political upheaval and reconfiguration, with China and Russia repositioning themselves to increase their influence against the backdrop of isolation and protectionism from established leaders like the U.S. and the U.K. What is a common theme, particularly since 2016, is one of uncertainty, and the common adage is that business hates uncertainty. However, we are seeing business, and particularly big business, avoid accountability for their actions and, quite remarkably, we are seeing their interests actually dominating the political dialogue. Yet, is that really remarkable? In reality, is probably unremarkable, but the continued assault on the public, and particularly the vulnerable sectors of the public, continues to astound. It continues to astound not because of its existence – it is hardly a Marxist view to suggest that the poor lose out in the current system – but it is the severity, and the unrepentant rhetoric that astounds, because irrespective of political affiliation it is surely never acceptable to see nurses, students, and the disabled funnelled into food banks and made destitute whilst executive pay continues to rise, criminal prosecutions in the financial arena continue to be confined to the confines of make-believe, and politicians continue to deflect attention towards nonsensical issues like the colour of passports etc. Ultimately, it is hoped that that the assault at least subsides in the coming year to allow for some much needed relief, in whatever limited form, for those who bear the brunt of the system – the impending secession of the U.K. from the E.U., and the continued presence of President Trump in the Oval Office suggest that one may have to wait for that hope to become reality.

Keywords – financial regulation, banking, regulators, business, politics, poverty, economics, @finregmatters

** As it is the end of the first year for Financial Regulation Matters, I would like to take this opportunity to articulate my sincerest gratitude to a number of people. I would like to start by saying thank you to a dear friend who helped to me to develop the blog initially, and encouraged me to continue to develop it in the early stages, that support was and is very much appreciated. I would also like to thank my contributors over the year who have kindly written for the blog and who have helped enhance it considerably. Lastly, but certainly not leastly, I would like to express my sincerest gratitude for the support the blog has received over the last year. Having only started in February the blog, with almost 200 posts, has garnered hundreds of thousands of views and hundreds of subscribers, and that support has been invaluable as the blog has continued to go from strength to strength. For those of you that read and subscribe to the blog, your continued support is very much appreciated and is a constitutive component of why I continue to critically assess these developing business stories – your continued support by way of readership, subscriptions, and spreading knowledge of the blog across your social media platforms will also be genuinely appreciated, and will help the blog elevate to that next level in 2018 and beyond. To all of you, wherever you are around the world, Financial Regulation Matters wishes you the happiest of New Years!

Friday, 29 December 2017

The Oil and Gas Industry as the Latest to Become Embroiled in Corruption Allegations

On quite a few occasions here in Financial Regulation Matters, we have looked at the issue of corruption; that subject has taken across a number of industries, ranging from automobiles, tobacco, aerospace, and technology. In today’s post, the focus turns to the Oil and Gas Industry with news coming earlier in the month from Italy that one of the ‘biggest corporate bribery trials in history’ will start in 2019. So, we shall look at some of the details of the forthcoming case and assess it against a backdrop of legal action which is, on a global scale, looking to take the fight to corporate corruption.

It was announced on the 20th of December that industry-leading corporate giants Royal Dutch Shell and Eni would have to face trial in 2019, in Milan, to face allegations of corporate bribery in relation to a Nigerian oil-field. The trial is to focus on payments made by the companies in 2011, with the allegation being that the payments constituted bribes to secure a Nigerian offshore exploration contract, as well as a particular production block. The legal filings, which initiate proceedings against the two companies and key personnel like Eni’s Chief Executive, allege that, in the words of anti-corruption campaigners, ‘the Nigerian people lost out on over $1 billion, equivalent to the country’s entire health budget’; Reuters reports that the actual figure is closer to $1.3 billion, and concerns the former Oil Minister specifically. Mr Etete, the former Oil Minister, is said to have personally profited from the large payment, and thus deprived the Nigerian people from funds that should have entered the public fisc; Reuters continue by confirming that Etete, in 2007, was convicted by a French court for money laundering related to the same area.

Quite rightly, anti-corruption campaigners have been particularly vocal regarding these developments, with some suggesting that this may prove to be a ‘landmark case’ which should be ‘something of massive concern for the companies involved’. That may well be the case, with simultaneous investigations underway in Nigeria, Italy, and the Netherlands. However, the companies are adamant that the payments were legal and they do not know, and are not expected to know, what happened to the money once it was paid – the inference being that this case is an embezzlement case against Etete. Yet, anti-corruption group Global Witness and Finance Uncovered argue that, in what is really the crux of the case, the two companies’ executives knew the payments were going to Etete’s front-companies, with the reason being to allow Etete to bribe the relevant officials. Nevertheless, the real question is whether the suggestion that ‘this case heralds the dawning of the age of accountability’ represents reality.

Ultimately, there have been a number of positive developments in relation to the fight against corruption. Using the U.K. as just one example, the recent successes of the Serious Fraud Office in securing a £800 million + ‘deferred prosecution agreement’ with Rolls-Royce seemed to be the heralding of that new era in the U.K., which will have to play a central role in developing that new era owing to the centrality of London within the financial landscape. However, whilst on the surface it may look like developments are being made, there are worrying signs that Rolls-Royce have been designated as the scapegoat in this regard (although that should not detract from their transgressions) and that their penalty represents a veneer. We spoke recently about the political posturing that is currently surrounding the Serious Fraud Office on the personal whim of Theresa May and Amber Rudd, and recent news concerning the tobacco industry makes for worrying reading. It was reported today that senior MPs for the Conservative and DUP party, the ruling parties in the U.K. by way of their enforced alliance, have been hosting a string of receptions, lunches and dinners with senior members of leading tobacco companies like British American Tobacco and Philip Morris International. Whilst the news stories focus more upon the health effects of the companies’ products, the reality is that large international firms who have been proven to be partaking in bribery and corruption are not only courting senior political figures (as one would expect) but are having those advances reciprocated. Whilst the hope in relation to Shell and Eni is that the case will herald a new era, we know by now here in Financial Regulation Matters that one needs to focus on action rather than words, and in that regard there appears to be very little difference. The case will be an interesting legal event in that it pits exceptionally large multinational corporations against a country that is heavily dependent upon their business, but can one really foresee Executives being imprisoned? No. Can one expect to see the Nigerian people have their $1.3 billion returned to them? Perhaps in some limited form. The obvious result of this case is that Etete takes the fall, and whilst that may be justified if certain events are proven to have taken place, the underlying structure and processes will remain.

Keywords – Corruption, Nigeria, Royal Dutch Shell, Eni, Oil and Gas, Business, Politics, Law, @finregmatters

Tuesday, 19 December 2017

Another Famous Brand Faces the End

In this very short post, the focus will be on the difficulties being faced at the moment by the famous ‘Toys-R-Us’ brand, founded almost 70 years ago in the United States. Founded in 1948 by Charles Lazarus, the company would go on to be a huge success, essentially coming to be synonymous with the children’s toys market; the company has since gone on to establish itself in countries all around the world, and today’s post will focus on its U.K. operations, which began in 1985, and the troubles facing the company as a whole.

It was reported earlier today that rather than demonstrate the continuance of this success, the British arm of the Toys R Us Company is facing the prospect of going into administration – the process whereby an administrator takes charge and attempts to rescue the company as a going concern. This negative development will, according to reports, put more than 3,000 British jobs at risk, with the prospect of administration drawing ever closer after an attempt to reorganise the company was blocked by the Pension Protection Fund (PPF), the company’s largest creditor, on the basis that the company is already operating with a £25-35 million shortfall in its pension reserves which, according to the PPF, would be worsened by the proposed reorganisation. Before a company goes into administration, it can enter into what is termed a ‘Company Voluntary Arrangement’ (CVA) which is, essentially, a last ditch effort to reorganise upon favourable terms – it is this that the PPF has refused to enter into. Under the terms of their arrangement, the PPF has the right to enforce a £9 million payment, and whilst Toys R Us UK proposed to pay only £1.6 million, the PPF is standing firm; the impasse comes because, quite simply, Toys R Us UK cannot afford to pay any more. Usually, the obvious resolution would be for the subsidiary to receive assistance from its American parent, but in September of this year the parent company filed for Chapter 11 Bankruptcy protection, with it owing nearly $5 billion. Therefore, regardless of whether the company is suffering because it is ‘dated’, under pressure from online retailers, or mismanaged, it is likely that we will see Toys R Us, in the U.K. at least, go into administration. However, it is worth asking what this really means.

Technically, it means that the company needs to be reorganised, and that a professional administrator, with all the tools they have at their disposal – including being able to institute a moratorium which means an instituting of a freeze on all claims against the company whilst it is being reorganised – is best placed to perform that reorganisation. However, in reality, the processes that Toys R Us are facing are critical junctures in a company’s life-cycle, and ones that not many survive. Research suggests that more than two-thirds of businesses going into administration never make it out, with around 10% surviving and remaining active for an extended period of time; between 2011 and 2016, ‘Company Watch’ found that of just over 2,600 administrative procedures that were completed in that time, 2,344 companies were eventually liquidated, with only 263 using the CVA process to their advantage i.e. surviving the process. Whilst there are some small caveats to these figures – some companies are dismantled and redeveloped through a process called pre-pack administration – the point still stands that the U.K. is about to lose another recognisable brand, and thousands of employees are facing redundancy, just like those of BHS, Jaeger, and the remarkable amount of stores declaring mass store closures across the U.K. and the U.S. The question, then, is whether these ‘rescue culture’ procedures need to be redesigned, or even reimagined.

Ultimately, that is an ongoing development that is being tested all the time as large and recognisable businesses face the onslaught of the post-Crisis environment; despite news of record highs in stock markets and whatever else is being used to declare economic strength, the world does not right itself so soon after such an invasive attack. Unfortunately, it is hard to imagine that Toys R Us will be the last company to fail in the near future, which continues the distress felt by those who usually suffer from the follies of the financial elite – the general public. Whilst the process of rescuing companies needs to be reimagined, if that is even desired, it is likely that any positive effect in that field will not come in time to save thousands upon thousands of jobs, and the most recognisable of brands.

For more on this subject and the continued study of these rescue-culture procedures, please do follow @ChrisUmfreville, a researcher who focuses on developments in this area.

Keywords – Toys R Us, Administration, Business, Company Law, High Street, Companies, Financial Crisis, @finregmatters