Sunday, 11 March 2018

Race, Gender, and Business: The Institute of Directors in the Spotlight

In Financial Regulation Matters, we have looked on a few occasions at the issue of gender in relation to the world of business (here, here, and here) and to a lesser extent the issue of race (here). However, in today’s post we will be examining recent developments coming from the Institute of Directors (IoD) that bring both of these issues sharply into the limelight. After gaining a better understanding of the IoD and what its role is, the two issues will be examined to gain a better understanding of the problem facing the business arena, all for the aim of providing context to the revelations that are making the headlines at the moment.

The Institute of Directors was founded in 1903 and, after just three years, was awarded a Royal Charter for the purposes of supporting, representing, and setting standards for business leaders across the country. The Royal Charter was the basis of the IoD establishing and implementing four key ‘principals’, which include: (Better Directors) promoting for the public benefit ‘high levels of skill, knowledge, professional competence, and integrity on the part of directors’; (Lobbying) representing ‘the interests of IoD members’; (Corporate Governance) ‘to promote the study, research, and development of the law and practice of corporate governance’; and finally (Support) ‘to advance the interests of members of the institute’. The IoD has had a long and storied past, with past members including future Prime Ministers (Stanley Baldwin MP), leading suffragettes and Peers (Lady Margaret Mackworth); the IoD has also played host to a number of leading figures like Harold Macmillan, Ronald Reagan, and Margaret Thatcher. In 2015, the IoD elected its first female Chair – Lady Barbara Judge – who is an American businesswoman has been known as a ‘champion of women’s rights and boardroom diversity’ which, when viewed in relation to the attempts to modernise the IoD, seemed to be a particularly shrewd move by the Institute. However, recent revelations have sought to sour that vision.

Last week, Lady Judge resigned from her position as Chair, as did two of the Institute’s most senior directors. Their resignations came as a response to an ever-developing scandal that is rocking the IoD at the moment, with claims of discriminatory remarks and practices being levied at Judge and the two directors (Sir Ken Olisa and Arnold Wagner) amongst others. After claims put forward by members and staff members at the Institute, Judge herself is now facing more than 40 allegations of inappropriate behaviour, with the media reporting that she has been recorded as saying things like ‘we have three inexperienced people doing a job [on the IoD’s secretariat] when one experienced person could do it and they are making mistakes. And so the problem is we have one black and we have one pregnant woman and that is the worst combination we could possibly have. No, two blacks and one pregnant woman. I couldn’t believe it!’ and that black people ‘can get aggressive’. Whilst Judge is rejecting any suggestion that she said the latter whilst admitting the former (she said that her language was not ‘of the modern standard’ but that the IoD ‘had breached her trust by recording a secret meeting’), the consequences for the IoD are proving to be damaging, with a legal investigation by the law firm Hill Dickinson providing a basis for sweeping internal reforms and, potentially, being held to be liable for breaching data protection laws regarding the leaking of information. There are also suggestions that the revelations will form part of claims by employees that will see the IoD answer for these issues in employment tribunals, whilst the damage to the IoD’s reputation is obvious, particularly considering the ethos it presents to the world.

There are, naturally, a number of associated consequences to this issue. Firstly, there are suggestions that the procedure for this investigation, and its subsequent transmission, was ‘fatally flawed’ which would suggest there will be legal repercussions for the Institute. Second, there are connotations for Judge, who sits on a number of boards and charities within which she could be described as a ‘gatekeeper’ in terms of setting organisational strategies – if commentary that ‘she always talked about these things. But she didn’t necessarily live as she spoke’ is to be believed, then the knock-on effects for the many organisations that Judge is a part of may be long-lasting. Yet, the issues raised do bring up points that are important to consider. There have been a number of analyses recently discussing the race-related inequality in the British workplace, particularly in relation to under-representation in senior roles, and the issue remains a poignant one. This author is reminded of a recent comment by the ousted Cabinet Member Priti Patel who recently stated that the BME (Black and Minority Ethnic) label is ‘insulting’ and ‘patronising’ – Patel bases this view on her belief that people should not be put into positions simply because they fulfil a race or gender-related criteria. Whilst Patel is obviously entitled to her view, there is a potential negative effect to the suggestion because it was not attached to any suggestion of how best to break the institutional and personal barriers that exist otherwise – in fact, the conversation was shaped with regards to her potentially running for the position of Prime Minister. She concluded by discussing that people should be ‘viewed on their individual merits’ which, whilst of course is true, is idealistic; Judge’s comments, when viewed in relation to her status, is just one very small example (of which there are many more) of why Patel’s views are not helpful; being viewed upon one’s own merits is impossible when such bias exists within people who control the entrance to certain positions within society. Whilst it is extremely positive that people from non-white backgrounds do succeed and gain positions of high status, it is vital that we not misunderstand that progression as the ‘norm’ – they are very much sparse exceptions to the rule.

Keywords – race, bias, gender, Institute of Directors, Priti Patel, society, Business, Law, @finregmatters

Monday, 5 March 2018

Dining Crisis Continues: A Spotlight on the Legal Frameworks Surrounding Troubled Companies

Over the past few weeks, a number of the country’s leading casual restaurants have found themselves in financial difficulties, with a number collapsing altogether. With news recently that nearly 35 of the top 100 British restaurant groups are operating at a loss, this post will look at some of the reasons why this may be and the potential effect of such a damaging phase for a sector that employs so many people in the U.K. However, on the back of that review, the question will be raised as to what legal options are available to these companies as they suffer financial difficulties, and also whether they may be effective in allowing the sector to survive the current crisis.

The leading story in this particular field is that of the troubles being experienced by celebrity Chef Jamie Oliver. Oliver, and his Jamie’s Italian group have hit the headlines more than most in recent months, with stories revolving around the development that Oliver had to pump in £3 million of his own money into the struggling company and, as part of rescue negotiations with creditors had to close 12 of its 37 British branches in January. According to reports, based upon court documents, Jamie’s Italian had debts of over £70 million before the attempted restructuring took place, with HMRC being owed over £40 million and staff owed over £2 million. In addition, Oliver’s Barbecoa brand of steakhouses entered administration last month, with Oliver buying one of the chain’s businesses (the St. Paul’s outlet) right back through a process that we will discuss shortly. Yet, it is not just Oliver’s businesses feeling the squeeze at the minute (with Oliver blaming the effects of Brexit as just one reason for the downturn), with news that Strada, Byron Burgers, Prezzo, Chimichanga, and today Carluccio’s declaring that they are in financial difficulty. The reasons for this downturn are plenty, and many have been theorising as to the cause of this sector-wide depression, with suggestions ranging from Brexit to market dynamics where the largest brands are essentially pricing out the smaller competitors (even in the world of branded businesses). Also, another obvious reason is that oversaturation is now having the inevitable effect when faced with a more uncertain economic environment surrounding the sector; the margins of these firms are continually being squeezed, in what one commentator simply labels ‘a house of cards collapsing’. Yet, whilst these stories are making the headlines, the actual processes facing these companies has gone under the radar somewhat, and certainly deserve a mention.

The life-cycle of a company is, since the mid-1800s in the U.K. at least, surrounded by various laws. Whether it is from the creation of a ‘company’, through the management of a company and to its death, the modern day company-related laws (The Companies Act 2006 and The Insolvency Act 1986 mostly) provide for a coverage of rules and regulations aimed to both enhance business and ensure that, if a company fails, associated parties are protected as much as they can be (as the theory goes). Rather than cover these gigantic pieces of legislation in any great detail, the post will now look at some of the main options available to these struggling firms and then examine what the effect of their usage may be. When Jamie’s Italian first ran into trouble, it was widely reported that the company was negotiating with its creditors with the result being the closure of some of its branches. Whilst the company can negotiate with its creditors anyway (within certain parameters), the likely situation is that the company enters into what is called a Company Voluntary Arrangement, or a CVA. The CVA, which represents a ‘legally binding agreement with [a] company’s creditors to allow a proportion of its debts to be paid back over time’, represents what may be deemed to be the ‘first-line’ in relation to the processes which allow the company to survive a crisis. There are many potential aspects to a CVA, with a restructuring of some sort being the core reason for the CVA, and also to allow the company some ‘breathing room’ as it seeks to navigate its way through a crisis, just like Jamie’s Italian is doing right now. Yet, this ‘first-line’ looks good in theory, but there are question marks as to its effectiveness; for example, is the process just delaying the inevitable, and if so does it end up costing creditors even more money and resources? Unfortunately, there is no definitive answer to that, although a colleague of this author Chris Umfreville (@ChrisUmfreville) along with a number of colleagues are currently undertaking major research into just how many companies actually survive this process – the results will be discussed in a later post once the research is published, and can go a long way to answering the questions relating the effectiveness of the process.

However, if the company does not survive this ‘first-line’, or if the situation does not merit such a light-touch approach, then the company can go into administration, which details the process whereby a licensed administrator is appointed to take control of the company and rescue it ‘as a going concern’; the administrator then has a number of options at their disposal to achieve that particular end, ranging from restructuring, to selling components of the business and then, if all else fails, placing the company into liquidation so that the remaining assets are distributed according to the rules contained within The Insolvency Act. This process has many elements to it, but the sentiment is straightforward. However, what is not straightforward is a process that was alluded to earlier when we spoke of Jamie Oliver immediately buying back the St. Paul’s branch of Barbecoa once it had been placed into the processes detailed above; this particular process is called a ‘pre-pack administration’ and, as a concept, is both helpful and hugely contentious. Essentially, the term describes a process whereby the troubled company is immediately sold upon entering administration, with some noted advantages being that the business is not disrupted as a result of the presence of the administrator, and that the value of the assets are somewhat reserved, particularly in relation to if those assets were to be sold through the administration process. However, the contentious element is that, quite often, the purchasers of these pre-packs are the very owners who were in control of the company when it failed, as is the case with Barbecoa. The effect of this is either an actual, or at least perceived subversion of the ‘natural’ process of a company i.e. failures should not be rewarded etc. However, the directors of the failed company, even if they form a new company to re-purchase the assets afterwards, are still liable to be investigated for their role in the collapse of the business, and whilst it may be seen as ‘unethical’ to allow the sale to the same directors, the sale must be completed at a ‘fair market value’ to protect against a flagrant subversion of the process. Furthermore, the rights of employees in the failed business are carried over into the new company where the same roles are preserved, which aims to safeguard against increased job losses. It is likely that these processes will figure heavily in the futures of the brands examined earlier, and as we have seen each have a number of both positive and negative connotations attached to them.

Ultimately, the demise of the dining sector has a number of causes; however, the vast oversaturation of the marketplace, when adjoined to economic uncertainty stemming from the obvious political decisions in a post-Crisis era, mean that there will have to be a substantial loss to the sector before it regains any ground. In an era of job losses, this should not make for comfortable reading for those who are employed in this sector. However, we also looked at some of the legal processes that are designed to allow the company every chance to survive such a downturn, and it is interesting to note that some companies are able to make use of them, whilst others have immediately gone into administration/liquidation, which perhaps hints at the precarious nature of the scenario these businesses find themselves in. What will be interesting to note, and we shall do so in a future post, is the results of the CVA research discussed above, because understanding the effectiveness of that particular ‘tool’ will have an effect on the sentiment that surrounds the ability to rescue a company at the ‘front-line’ i.e. a CVA; if it is found that it is not effective, even for the most part, then there is a potential for the demise (if even slight) of the CVA which will result in the need to readdress the other options available.

Keywords – Restaurants, Food, Business, Politics, Law, Company Law, Companies, Administration, Liquidation, CVA, @finregmatters

Sunday, 4 March 2018

Updates – Carillion, Sir Philip Green, and Toys ‘R’ Us

As is usually the case in this particular arena, business stories are continually developing and usually at a rate of knots. Therefore, today’s post catches us up with a few stories that we have looked at previously; all of these stories selected today were always going to be end up in a negative, and today’s updates confirm that with news that the Carillion collapse was not what it first seemed (predictably), that Sir Philip Green is continuing his war of words with British Politicians (and one in particular), and that the retailer Toys ‘R’ Us failed in its attempt to save itself.

The Carillion Collapse Reveals Predictable Skeletons

We have looked at the issue of Carillion on a number of occasions, ranging from the onset of the crisis to the collapse and subsequent call for the Pensions Regulator to much more in clawing-back some of the pension fund that was depleted by the company. Rather predictably on the back of such a large and interconnected collapse, the post-Carillion era has been littered with revelations regarding mis-management and poor performance from the company and the associated ‘gatekeepers’. This weekend it was announced that a previously unpublished report detailed the fact that the company’s managers ‘aggressively managed’ the company’s balance sheet to paint a rosier picture than was actually the case; whilst regular readers of Financial Regulation Matters and, in truth, almost everyone else, will not be surprised by this revelation in the slightest, the details make for interesting reading. The report, commissioned by Carillion for its lenders, suggested that income had been brought forward and payments delayed on the balance sheet, whilst subcontractors had their payment terms quadrupled to four months, with the BBC now reporting that many of those subcontractors face the inevitable as a result – bankruptcy. Whilst Carillion bosses felt the report was ‘too harsh’, Frank Field MP reacted by stating that the report clearly identified ‘gross failings of corporate governance and accounting’. However, whilst the internal governance mechanisms were clearly not suitable, it is interesting to note that the report was seen by interested lenders like RBS, Barclays, HSBC, Santander, and Lloyds, which suggests that the ultimate losers of the collapse – the pension holders, the supply chain, the contributors to the Pension protection Fund, and ultimately the public – were not considered at any point in the process. There is a general understanding that those ‘within the circle’ knew about the ever-increasing potential for Carillion’s demise far in advance of it happening, though there are other arguments for widening that circle to a number of other parties. Furthermore, the plot thickens with news that Ernst & Young had suggested to the firm that they would become insolvent in March 2018 (so, just a short while out from reality) and presented a plan that would see Carillion broken up and inject over £200 million into the pension fund (it is also being reported that the Government knew of this plan, and did not put any pressure on Carillion to accept it); the result of this is a realisation within one of two fields of reasoning – either, the management at Carillion genuinely believed that they could save the company, or they did not want to dismantle it as there was still money to be extracted before it failed. Which understanding one supports is down to the faith one has in the corporate field, but the sentiments of both are valid; if they did believe they could save it, then the Government needed to do more to push for the E&Y plan to be executed to save at least some money for the pension holders. If they continued past the point of no return for personal gain, then the directors and leading managers are in breach of a number of statutory rules within the U.K., and the punishment for that should be as severe as allowed under those same statutes. One thing is certain, and that is that there are plenty more skeletons in the cupboards of Carillion.

Sir Philip Green Calls for a ‘Truce’ in the Only Way He Knows How

We only covered the latest development in the so-called ‘feud’ between Sir Philip Green and Frank Field MP very recently, so we will not go into much detail on the ongoing ‘saga’ here. The post last month essentially related to the calls from Field to closely monitor the proposed sale of Arcadia to a Chinese firm if and when that transaction took place, mostly on account of Green’s poor record of fulfilling his responsibilities to employees and pension holders (mostly because of the collapse of BHS). Whilst one should not be surprised at Green’s inappropriate level of bravado, recent developments offer a clearer demonstration for his contempt of due process and the requirement to be a responsible business leader. Recently, Green sent a letter to the House of Commons Work and Pensions Committee, and in that letter he has called for a ‘truce’ to what he perceives is a long-running ‘spat’ between the two, stating that ‘everyone is bored with this story’. Green continues by stating that there is no truth to the proposed sale to Shandong Ruyi and that ‘all the Board are aware, if the company is sold, there are pensions obligations and there is a process’. Yet, rather than leaving it there, Green continues by accusing Field of building his ‘press profile on the back of me’, and that is it time to end the spat that Field ‘so enjoys’. Finally, Green suggested to Field that he should ‘go and tackle Carillion or someone else’. Field responded by stating that ‘Philip Green never ceases to amaze’ and that ‘he doesn’t know how to behave like an adult’. Yet, if we remove this back and forth, the facts of the matter present a telling picture; Green, a Billionaire who attempted to make off with the pension funds of his BHS employees and was forced to pay (just) a proportion of it back is now telling the elected official in charge of overseeing the fight against such practices that he is pursuing a ‘press profile’. The arrogance and narcissism displayed by Green is obvious and predictable, but it does not excuse his incredibly poor behaviour; if ever one wanted a demonstration of why white-collar crime is rife, then this is it – the lack of penalty means that not only does it continue, but perpetrators actually attempt to engage and bully those who are tasked with representing people who cannot represent themselves. Ultimately this saga will continue, no doubt, but the acknowledgement that Green represents the darker sides of the corporate ideal need to be recognised at every turn.

Toys ‘R’ Us Fails in its Attempts to Save Itself

Very briefly, we looked at the demise of the famous ‘Toys “R” Us’ brand recently, with the British segment of the business facing collapse if it could not find a buyer to save it from collapsing. Last Wednesday, the firm – and, coincidentally fellow retailer Maplin – failed in its attempts and fell into administration putting 5,500 jobs at risk between them. Part of the administration process is to attempt to bring the business back to health, although reports are suggesting that administrators are seeking to have the businesses sold as businesses, rather than breaking them down into parts to be sold. It is interesting to note that the collapse of Maplin, an electronics specialist, on the very same day paints a particularly bleak picture for the world of high-street retailers in the face of pressure from online retailers like Amazon. The Labour Party has called for the Government to work with Unions to safeguard the jobs that are at risk but, unfortunately, this seems to be a political move rather than a genuine call because, in essence, these types of firms are losing relevancy all the time in the modern marketplace – a fact demonstrated by a large number of job losses in the retail sector this year alone (and it is only March). The year-on-year losses experienced by Toys ‘R’ Us were a statistical representation of the reality that is coming to many a high street in this country (and many other countries) – the battle with the online marketplace is close to being lost, particularly in the niche sectors like toys or electronics. It appears, from recent developments, that spending habits in the current era will continue to re-shape the landscape that many have known for a large portion of their lives.

Keywords – Business, Politics, Law, Regulation, Pensions, Corporations, @finregmatters

Tuesday, 27 February 2018

Geely Automotive Becomes Daimler’s Largest Stakeholder: The Latest Demonstration of an ever-tightening Market

We have looked at the Auto Industry on a few occasions here in Financial Regulation Matters, with posts ranging from industry reorganisation with Peugeot’s purchase of Opel-Vauxhall, the increasing securitisation of auto finance packages, to corruption within the industry. Today, we will review the latest demonstration of an ever-tightening marketplace by looking at the news that Geely Automotive, a significant player in the Chinese electric vehicle market, has recently invested $9 billion for a 9.7%, and largest stake in German automotive powerhouse Daimler. There have been some concerns raised as to the potential effects of the deal, so whilst we shall be focusing upon those, we will also look at the sentiment that this news provides for the direction of the automotive industry.

Geely’s purchase of the Daimler shares, making it the largest shareholder, comes on the back of a concerted wave of action by Chinese automotive companies outside of Chinese markets. Geely is the full owner of the Swedish automotive company Volvo, whilst also relatively recently acquiring the London Taxi Company. Great Wall Motor has recently signed an (outline) deal with BMW to have the new electric-powered Mini Cooper cars built in China (as well as in the U.K.), whilst there have also been investments in recent years in companies like Peugeot-Citroen. There are a number of reasons for these collaborations, in both directions, but we shall get to them shortly. If we focus on the current deal for a moment, it will be clear to see why the recent wave of investment benefits all parties (although there are some added complexities to these deals).

In announcing the deal, Geely stated that the emphasis was on accompanying Daimler ‘on its way to becoming the world’s leading electro-mobility provider’, adding that to deter ‘invaders from outside’ firms must cooperate and work together through the forming of partnerships like that created by this current deal. As part of the deal, Geely is said to be looking for greater input into its electric vehicle portfolio, mostly as a result of increased emission-related regulations that come into force next year; the recent partnership between BMW and Great Wall Motor, and also between Ford and Zotye reflect the pressing need to adapt to the forthcoming rules that are designed to reduce the pollution experienced in many Chinese cities. Yet, these deals (particularly the Geely deal) have raised some issues which suggest there is a potential shift on the horizon.

Germany’s Economy Minister recently stated that the German Government would be ‘keeping a watchful eye on developments’, as fears grow that the investment could a. ‘be used as a gateway for other States’ industrial policy interests’, and b. bring about a negative effect in the development of the German automotive industry. Whilst Angela Merkel was quick to suggest that the deal was all above board, this has not been enough to stop an investigation anyway, with Reuters reporting that a German Parliamentary Committee will tomorrow question whether any disclosure rules were broken, and whether securities trading law needs to be reassessed in the country. However, whilst these financial issues (potentially) remain, the larger issue is with regards to the foreign access to Daimler’s lauded technological developments, particularly within the realms of electric vehicles which, of course, represents the future of the industry; Germany itself broke with the E.U. to an extent last year and tightened its takeover rules on the back of Chinese companies gaining access to elevated technologies in a number of sectors (it must be stated, however, that Geely is not Daimler’s only foreign investor). Whilst we wait for developments in this regard, it is worth considering the benefits for the two ‘sides’ in this equation and the potential effects of this increased collaboration.

For the Chinese companies investing in these Western automotive firms, the allure is fairly obvious; they are purchasing the technological know-how they need to fall in line with the new regulations – the first phase of these regulations comes into force in 2019 and requires firms to, essentially, contribute to the phasing out of fossil-fuelled powered cars. There are also issues in relation to the relatively low number of exports on behalf of Chinese automotive manufacturers, with recent endeavours resulting in very little progress; the sentiment is that by potentially incorporating this technological know-how Chinese cars will be seen as much more viable options for car purchasers around the world. For non-Chinese firms, the need to work with Chinese companies is both enforced on one hand, and sensible on the other. Non-Chinese companies must work with a Chinese enterprise to bring their products to the Chinese market by way of Chinese regulations, but the suspected development of the automotive marketplace in China over the next few decades makes for incredible investment opportunities for foreign firms; the world’s largest car market now, is predicted to grow substantially, with the usage of electric vehicles estimated to stand at 176 million cars in China alone by 2040 (equating to 46% of all cars on Chinese roads). Volkswagen’s recent $12 billion investment in electric vehicles within the Chinese market is just the latest demonstration of non-Chinese companies realising the immense potential that the Chinese regulations will bring to the industry. However, what may be the effect of this phase?

Ultimately, but certainly not definitively, there is a potential shift in the midst. The increased investment into the Chinese ‘infrastructure’ in this particular industry carries a gamble for these non-Chinese companies, and that is mostly based upon ‘brand-power’; Chinese endeavours outside of their own market have fallen short mostly because of a perception surrounding the quality of the products being offered, but if the product is enhanced significantly (as this wave of investment will surely do), then competition in this tight-knit marketplace may be about to explode. If that happens, on the basis that the divergence created by ‘brand-power’ will be reduced, then there are likely to be many casualties, with a number of ‘well-known’ automotive brands being enveloped within the larger conglomerates; Geely Chairman Li Shufu’s declaration that he is attempting to build a ‘new Volkswagen’ is a telling one, with the potential for just a very small number of massive conglomerates ruling the industry becoming that much more of a reality.

Keywords – automotive industry, Daimler, Geely, China, Business, Finance, Electric Vehicles, @finregmatters

Tuesday, 20 February 2018

Treasury Select Committee Publish RBS ‘Global Restructuring Group’ Report: What Next?

Before this post starts with any preamble, it is important to note a couple of things. Firstly, this post will not be covering the issue in tremendous depth, mostly because the issue is so large that to attempt to do so in this forum would not do the issue any justice at all – there are many fabulous campaigners that do the issue tremendous justice on account of their continuous and tireless campaign against what is now confirmed as being a systemic issue (see @Spandavia and @Ian_Fraser for just two excellent examples of this). The second thing to note is that the report, which we will focus on in this post, is particularly extensive and requires a thorough examination (the report can be found here). With those aspects acknowledged, what this post will do is look at some of the ramifications from the report, the scenario within which it was released (which is a remarkable story in itself), and also what it potentially tells us about the relationship between the regulator and the regulated.

Earlier this month we looked at the ever-increasing angst that RBS and its ‘Global Restructuring Group’ was causing within regulatory circles. This is not to say that the regulator responsible, the FCA, was showing much concern on this issue, but that the Treasury Select Committee was putting the FCA under considerable pressure to release the full report, without redactions, in the light of building public pressure to do so. The Committee gave the FCA until Friday to comply and, rather predictably, it did not; today the Committee stayed true to its word and released the report, in full, after a long and storied battle with the regulator who, lest we forget, is tasked with protecting consumers and not the regulated. The report, which spans 362 pages, was commissioned by the FCA but, as we know, was only released in what can only be described as ‘abstract’ form. Whilst the report is extensive, it does not take long to find some of the highlights, and they are particularly damning for RBS and now, by way of contamination on the back of their poor performance, the FCA. On page 119, in relation to an assessment of the GRG’s operating objectives, the report states that there were ‘clear risks to customers inherent in the GRG model. Whilst the existence of a commercial objective was not inappropriate of itself, it gave rise to inherent potential conflicts of interests and risks to customers. That was exacerbated by the way in which GRG was required to be a “major contributor” to the bottom line and a profit centre’. Whilst acknowledging that working for profit is not appropriate, this extract suggests that this fact was taken as read and that, in fact, the GRG was operating to bring in major revenues at the cost of the troubled SMEs – it is worth noting that this issue, that the ‘customers’ of GRG were, as a rule, struggling SMEs, is an extremely important aspect of the story and one that needs to be kept at the very forefront of every examination into this debacle. The report acknowledges these aspects in the surrounding pages, and makes note on page 120 that there were serious governance issues, including a lack of oversight as to GRG’s processes, a lack of identification of the key risks facing GRG customers, and ultimately a lack of opportunity for redress and organisational reorganisation on the back of failings.

Moving ahead abruptly to page 265, the report is keen to note that one of the ways in which the GRG maintained its operations was to play fast and loose with the methodological aspects of assessing the ‘success’ of the group, particularly in relation to the outcome for its ‘customers’. This was that much of an issue, in fact, that the report had to alter the methodologies used just to gain some sort of understanding as to the outcome for the GRG’s customers, with its findings declaring that, on page 266, the data put forward by GRG and RBS ‘appears not to reflect the reality for customers’ and, that ‘the way in which GRG measured and recorded the outcomes of the SME cases it handled gave a misleading impression from a customer perspective’. Yet, as was mentioned in the preamble, there is much more in this report which needs to be digested. However, the noises made today upon publication also make for a fascinating scenario whereby one of the premier regulators in the U.K. is being openly (and correctly) rebuked for its performance.

Nicky Morgan wasted no time whatsoever with getting the ball rolling, stating that ‘the findings in the report are disgraceful’, whilst an analyst at Hargreaves Lansdown was quoted today as saying ‘the report shines a light on the gruesome culture within GRG…’. For its part, RBS stated today that it was ‘deeply sorry that customers did not receive the experience they should have done… [but that] the most serious allegation – that we deliberately targeted otherwise viable businesses in order to distress and asset-strip them for the bank’s profit – has been shown to be without foundation…’. This is obviously in relation to the so-called ‘rogue’ unit within HBoS that deliberately plundered viable businesses, but to hold oneself against that level is probably a particularly telling point. The issue here is that RBS promoted a unit as being able to assist struggling SMEs, for a significant price, and for the most part doing no such thing; how is that any better?

That question leads directly onto an aspect raised today in the media that ‘the FCA is winding up a second probe, which includes looking at what management knew, or should have known’, which Morgan immediately responded to by stating that ‘as well as continuing to monitor the FCA’s further investigation into GRG, we’ll keep a close eye on RBS’ Complaints Process…’. This aspect needs to be considered, an incredibly critically, because the underlying sentiment to it is remarkable. In essence, we were able to read today, with no help from the FCA, that a major global bank had set up a department with the inherent organisational objective of making as much money as possible from customers who had to be struggling to be a ‘customer’. In addition, when this was reported to the FCA, they refused to communicate this to the public and when pressed to do so by politicians, they refused again. So, in light of that, is it really appropriate to have the FCA conduct any more investigations into RBS? Leaving aside issues of resources for one moment, the FCA has provided clear evidence that, if it finds more wrongdoing, it cannot be guaranteed that it will release the information; so why investigate at all? Is it really the case that there has to be a sustained campaign and pressure from one of the most influential parliamentary committees just to get information of wrongdoing released? The impact of these developments upon the validity of the FCA as a regulator is remarkable, and news today that the incoming head of the FCA – Charles Randall – used a tax break scheme between 2006 and 2011 which was, according to him, an ‘error in judgement’, makes things much worse.

This report has a number of lessons contained within it, and whether or not those are learned is another matter entirely. Whilst there are many lessons to be learned with regard to the ability of profit-making banks to offer impartial and progressive assistance to struggling customers/SMEs, there is a lesson for the regulatory framework that needs to be addressed. In short, that lesson is that the FCA needs to be assessed thoroughly and its position put under real question; this is a massive blow for its legitimacy. When the Financial Services Authority was broken up, it was done so on the premise of creating a more focused regulatory framework to better protect against the excesses of the marketplace, and today’s report shows no such evidence of that. Rather, today’s report signals clearly the existence of a close relationship between the regulator and the regulated, with the loser in that relationship being, as always, the ‘little people’ – regular readers of Financial Regulation Matters will not be surprised to hear this author state that this is just not acceptable, but the reality is that this is a systemic dynamic that seemingly only grows stronger, despite the increased access to information that we all have. Yet, whilst a negative connotation, it cannot be used to stop calls and action for a rebalance, and one place to start is the FCA; its very legitimacy is hanging by a thread, and correctly so.

Keywords – RBS, SMEs, Financial Regulation, FCA, Treasury Select Committee, Business, Politics, @finregmatters

Pensions Regulator Comes Under Fire over Carillion

The case of Carillion has made for a number of posts here in Financial Regulation Matters, ranging from the commencement of the crisis to the fallout, both in regards to the effect upon the sector and also the effect upon the pension fund and the protective framework that exists to protect pension holders from these sorts of crises. However, news that broke today concerning the performance of the pensions regulator in the U.K. and, specifically, its performance in the previous few years regarding the ever-deteriorating situation at Carillion has brought the pensions regulator’s performance to the forefront of discussions. In today’s post, we will review this breaking news and further examine the pensions regulator as, one would assume, the crisis continues and associated authorities are dragged further into the mire in relation to this massive collapse.

Rather than restart the examination of Carillion in any great detail, it is best to start with the issue at hand. Today’s news consists of warnings that were put forward by Carillion’s (Pension-related) Trustees, which they must do in relation to the relevant laws contained within the Companies Act of 2006 (section 898). However, whilst it appears that the trustees performed as they should, the news today revolves around the notion that, despite a number of warnings to the pension regulator about underfunding, and a generally poor attitude by company bosses when concerning properly funding the company’s pension schemes, those warnings were not heeded by the regulator. When the warnings were acted upon, details today reveal that the regulator did put pressure on the company to put resources into the pension fund, albeit below the level requested by the trustees. The story goes that the trustees had strongly suggested to the company that it should provide £35 million a year for the fund to be properly maintained, with the company only then offering to pay just £25 million; after this was branded as ‘unacceptable’ by the trustees, the trustees returned with a further warning that contributions totalling £65 million a year over a period of 14 years were what was needed, with the company responding by offering just £33.4 million a year over 15 years. It was at this point that the trustees sought the intervention of the regulator; the regulator has responded by stating that they did intervene, and that their pressure amounted to a ‘significant increase’ in the amount of money that the company were willing to pay into the pension pot. However, with the trustees claiming that the actual deficit in the fund was far larger than Carillion bosses would admit to (it has been revealed now that the likely deficit is just short of £1 billion), the question now revolves around the regulator’s insistence that it applied pressure, despite the fund’s deficit increasing beyond expected levels – the regulator is due to give evidence to Parliamentary Committees next week. Frank Field, who we discussed yesterday, has suggested that he is expecting, or at least hoping, that the pension regulator performs more diligently in the attempted clawing back of some of the money that was paid out in bonuses to company officials, although that comment represented more of a dig at the regulator than an instruction. With the regulator facing questions next week, the issue here is what the future may look like for the regulator once the dust settles from the Carillion crisis.

The regulator’s actions, in presumably applying ‘pressure’ but not taking direct action, fundamentally places the regulator within the conversation concerning the best way to move forward in light of such massive corporate collapses. On the one hand, the regulator does have powers to intervene, but was happy with the reported financial situation at the company (admittedly, backed by auditor’s reports, which raises questions about the role of auditors). However, the obvious issue with this is what is the point of the regulator having these powers to intervene if they are not going to use them? In this scenario, there is clear evidence of trustees raising the red flags, operating according to procedure and taking the issue to the regulator, and then the regulator not acting. Whilst it is not a case of right or wrong, for the most part, it is clear to see that the warnings put forward by the trustees were well founded. Perhaps, this is just the latest example of the pro-business mantra developed by regulators that has come to encapsulate the current era; siding with the business when there is any room for manoeuvre is, apparently, the modus operandi of financial regulators and it is vital that this stops. There is far too much evidence to demonstrate that whilst business needs to be allowed to operate, having a pro-business attitude when regulating financial entities causes substantial social problems, but yet it persists. The issues raised by white-collar crime studies, like the almost absolute absence of prosecution in these matters, are raised time and time again, and one wonders what the breaking point may be to tip the scales, if at all.

Keywords – Carillion, Financial regulation, pensions, Business, Law, Crime, @finregmatters.

Monday, 19 February 2018

Update – Tesco’s takeover of Booker Not Yet a Done Deal

This very brief post provides a small update on a continuing story that has been covered throughout here in Financial Regulation Matters. Tesco has been in the news a lot recently, whether that be on account of aiming to move into the ‘discount supermarket’ marketplace, or on account of a massive amount of job losses as the company goes through a restructuring process, both on the shop floor and across management. However, our focus today will be on providing an update to the ongoing attempted takeover of the wholesale firm Booker.

The proposed takeover of Bookers has been a protracted one, and although the deal has been given the go-ahead, slightly controversially, from competition regulators, there are still a number of hurdles to clear before the deal can be completed. Whilst the approval from the competition regulator was a major hurdle, getting everybody on side is perhaps the largest hurdle and, in that sense, the deal still has some way to go before it can cross the finish line. This was demonstrated towards the end of last week when the advisory firm Institutional Shareholder Services (ISS) advised Booker shareholders to reject the deal as it is being proposed, on account of there being, in their view, ‘limited potential benefit’ for them as Booker shareholders, ultimately concluding that the deal should be rejected in its current form.

This development follows Sandall Asset Management, who themselves hold 1.75% on Booker, also declaring that they are against the current deal, at least in its current form. For them, they believe that the deal undervalues Booker significantly, with their claim being that the company is worth between 255 and 265p per share, not the 205.3p currently on offer from Tesco. To resolve the issue, Sandall Asset Management are calling for the firm’s 2018 profits to be paid out, in full, as part of a closing dividend to its shareholders to account for the envisioned loss; whether or not this becomes a reality is another matter entirely – Tesco is currently only offering 65% of 2018’s profits as a closing dividend.

What this saga does show is the precarious nature of a corporate takeover, and the many elements which must be in place before the takeover is completed. What is likely going to be the case is that Tesco raises their offer ever so slightly, with the offer then being just enough to tempt doubters into taking what they can get over and above what has already been suggested. However, it is worth paying close attention to developments within Tesco in the coming months and years, because their restructuring that was designed to right some of the wrongs committed under previous leaderships i.e. an aggressive global expansion that did not have the desired effects, is well under way and will see the famous store repositioned within the marketplace. If we add to that the effects of the U.K.’s secession from the European Union and the effect that may have upon consumer spending, how Tesco negotiates these choppy waters may determine its future for quite some time.

Keywords: Tesco, Booker, Competition, Takeover, Business, Brexit, Shareholders, Investing, @finregmatters.