Wednesday, 18 April 2018

KPMG Continues to Suffer in South Africa

South Africa is currently still reeling from the ‘Gupta scandal’, but in recent news one of the leading global auditors has come under intense fire for a number of aspects, including its links to the Gupta family. In this short post, we will review the recent news and examine the future for the auditor in the country in the wake of incredible action by the South African government.

On Tuesday, it was announced that South Africa has banned KPMG from auditing public companies within the country. The move comes on the back of a number of scandals involving the auditor, including its ties to the Gupta family and also the recent collapse of VBS, a South African bank that despite being given a clean bill of health by the auditor collapsed a short time later. It has been stated by KPMG that senior officials within the South African arm of the company have left the company before they could face disciplinary action for failing to declare a financial interest in the bank. Although KPMG had sent a number of high-ranking people to the unit to attempt to ward off this current outcome, it was to no avail, with the South African auditor-general stating that the company would benefit from no future contracts because of the ‘significant reputational risks’ associated with it in light of recent events. The Financial Times has reported that a number of South African financial institutions have since cut ties with the auditor, or are in the process of doing so, which serves only to deepen the crisis for KPMG further; the unit’s chairman declared that they had ‘reached the breaking point’, and it is likely that this recent and unprecedented action may see his statement proven correct. However, other auditors have been banned from auditing public companies in other jurisdictions (like India and Japan), so it is likely KPMG will be working on a strategy to clean up its act to the satisfaction of the South African authorities, but it is certainly a testing time for the auditor in the region.

However, as the author is based in the U.K. it cannot escape my attention that, as was noted by Professor Shah, ‘in the UK, there is not even a whiff of this kind of attitude from the government or the regulator’, which begs the obvious question – why? In the U.K., the massive failure of Carillion, which after investigation has been found to have auditors’ fingerprints all over it, is surely a vehicle for which this type of action may have been considered. But, as Shah says, there has not even been an inference that anything so impactful would be considered by those in power. In truth, this is perhaps a damning indictment of the situation within the U.K., a situation which portrays a continuing and systemic ‘capturing’ of the British authorities. It is often said that what may be required is a massive crisis to jolt the system and redress the balance somewhat, but this is not true because the Financial Crisis did not redress this balance; in fact, it probably created further imbalance. Thinking further still, it is potentially even more incriminating that suggestions such as public bans have not really been proposed, never mind instituted. Yesterday’s news casts a shadow over other regions who have suffered in a similar manner to South Africa but have not acted.


Keywords – audit, South Africa, KPMG, accountancy, UK, regulators, @finregmatters

Wednesday, 11 April 2018

The Financial Reporting Council Attempts to Fight Back

As usual here in Financial Regulation Matters, today’s post looks at something we have assessed on a number of occasions (which likely hints at the systemic and continued nature of these issues that are identified on a regular basis here). Today’s post focuses on the Financial Reporting Council (FRC) as pressure upon continues to increase. Its position, and future as a regulator, is being called into question more and more recently on the back accounting scandals (like that seen with Carillion), but recently the FRC has announced measures which it hopes will be seen as being representative of a proactive regulatory culture within the organisation.

The news came yesterday that the FRC is endeavouring to incorporate new procedures into its regulation of the audit industry, with the regulator taking specific aim at the so-called ‘Big Six’ (in reality it is probably a ‘Big Four’). The new approach dictates that when one of the six firms cited – KPMG, Deloitte, PwC, EY, Grant Thornton and BDO – want to make a senior appointment, the regulator will have to vet them first to examine the candidate’s “appreciation of a high quality audit’ and their ‘experience and knowledge of driving accountability structures through organisations’; this process will include those applying to be appointed for non-executive positions, heads of audit committees, and heads of ethics committees. The regulator has stated that its aim is to limit the risk of ‘systematic deficiencies’ within the sector, which some industry onlookers have described as ‘long overdue’. However, despite the regulator insisting that the proposed structure should be seen as a response to the recent criticism (which intensified when the performance and actions of the auditors in the Carillion collapse were brought to light), the criticism of the regulator and its attempts to establish its authority have continued unabated.

The Executive Director of Audit at the FRC – Melanie McLaren – stated that this approach is not a ‘direct response’ to the recent criticism, but a number of scholars have been clear in their scathing assessment of the regulator, with one describing the approach as a ‘defensive response’ which does not address the issues of accountability at all. Whilst that sentiment may be debated, the fact that the FRC has now power over the process, but can only ‘advise’ the companies on their recruitment, will not help the FRC’s cause as it strives for legitimacy in the face of private and public pressure. In a recent ‘sanctions review’, the FRC announced that the level of fine available to the regulator would rise to £10 million for ‘seriously poor audit work’, although it should perhaps come as no surprise that the instant response from onlookers was that the new tariff ‘may not have enough of a deterrent effect’; KPMG’s revenue last year stood at $26.4 billion.

With the news coming that two leading board members of the FRC have been ‘stood down’, with both having close ties with the regulated auditors, it is apparent that change is in the air at the FRC. However, whether it can survive this current storm is questionable. The criticism from academia is persistently ‘ramping up’, and now the political machine is seeking to ask serious questions of the role of the FRC after the auditors were identified as ‘feasting on the carcass’ of Carillion; a collapse which has brought the issue of public monies and private business sharply into the limelight. Perhaps there are only two ways the regulator can survive, with the first being the hope for them that something else dominates the political agenda so that their deficiencies are relegated against something much more pressing, or alternatively they change their strategy. There are many arguments for the approach of the FRC, but they are starting to be dominated by the criticism. For a regulator to be so heavily tied to their regulated entities, to be so reliant upon self-regulation, and to have their regulatory weaponry be so obviously blunted (£10 million is no deterrent whatsoever for the Big Four), the only thing that can save that regulator is a good track-record; the FRC, regrettably, does not have that. What it does have is a track record of facilitating the growth of the audit industry as it sought to incorporate the sentiment of prioritising high fees rather than accuracy, and for that the regulator will likely pay a heavy price.


Keywords – Financial Reporting Council, Audit, Accounting, Business, regulation, U.K., @finregmatters

Monday, 9 April 2018

More Warning Signs for the Auto Industry

In Financial Regulation Matters, we have looked at a number of issues within the automobile (hereafter ‘auto’) industry, ranging from the positive – the ever-growing expansion of the electric auto market – to the negative – concerns over the finance bubble which is continuing to grow within the sector. Today’s post looks at the latter issue, with news recently suggesting that the inevitable conclusion to the growing ‘bubble’ is drawing ever nearer.

In a post in May of last year, we discussed how the fears regarding a growing credit bubble in the auto industry were beginning to get louder and louder, with the Financial Conduct Authority and the Bank of England raising specific concerns over an increased rate of indebtedness within the sector. Now, in the United States, those same concerns have manifested in the first stages of a process we are all living the result of today. Only a few days ago Bloomberg reported that a ‘growing number of small subprime auto lenders are closing or shutting down after loan losses’, which the outlet had reported would come to fruition earlier on in February. Bloomberg had stated in February that ‘loans to American consumers with some of the patchiest credit histories are packaged into securities to be sold to big investors’, adding that ‘car-owners are increasingly falling behind on bigger loans with longer repayment terms made against depreciating assets’. That scenario has been confirmed now, and the diagrammatical data suggests the curve is only going one way:



There are a number of onlookers who have been quick to note the differences between this bubble and the bubble that exploded in 2007/8, with the common differentiator being that of size. It has been noted that this bursting of a credit bubble is expected to be much different because ‘auto lending is a smaller business relative to mortgages’, with the difference being cited as $280 billion outstanding for auto loans today compared to $1.3 trillion outstanding on mortgage loans at the height of the crisis. It has also been suggested that a decrease in lending within the sector, mostly based on increased competition and subsequently less margins, has sought to negate the continued expansion of the bubble, although that perhaps does not tell the whole story.

Whilst lending in the sector has decreased somewhat, and the relative size to the housing bubble is much smaller, this does not necessarily mean that the effect will be much less dramatic. The environment that this bubble is expanded within is a much different environment that the housing bubble expanded within, with the potential for contagion and the associated effects being particularly acute in the post-Crisis era. Also, whilst onlookers are keen to play down the exposure of the elite financial institutions to this bubble, it is not the case that they are not involved. Goldman Sachs, as just one example, has been noted to be involved in the underwriting of these securities (as one would expect), as to have Wells Fargo and JPMorgan Chase. Furthermore, underneath all of the excessively complicated financial data, the same aspects of the Financial Crisis can be witnessed here, with examples of fraud and predatory lending being cited as growing in response to the tightening margins; this is not surprising in the least, and has been suggested as being representative of the same Ponzi-scheme-like process that we witnessed in the lead-up to 2007/8.

Ultimately, there are issues raised within the current news cycle that can be extrapolated to paint a picture of the regulatory framework’s failures in the post-Crisis era. It has been noted that many of the protections that were designed in the wake of the Crisis do not apply to the auto industry, which suggest a narrow-mindedness on behalf of the legislators and regulators. Alternatively however, perhaps it represents something else. Perhaps it represents the constant gamification of the financial arena where the regulators and legislators are inherently one step behind, always reacting. If this is the case, then it is difficult to see how these bubbles can ever be prevented; it is in the modern finance entity’s nature to chase profits and margins, and superimposing a ‘system’ onto a different sector was perhaps the easiest way within which they could achieve the same objectives. There is plenty of blame to go around, as usual, but perhaps it is worth taking a step back for a moment. Rather than looking at financial practice, or the reactionary stance of the regulatory framework, perhaps a fundamental recalibration of the understanding of money is required; the answer to the Crisis within many jurisdictions was to make credit available at all costs, and to increase the availability of credit to consumers as quickly and efficiently as possible. It is arguable that this is the epitome of short-termism, because that system of credit is, essentially, what allows this ‘ponzi-scheme-like’ system to work; what if, and it may sound like a fanciful theory admittedly, the sentiment and narrative was altered to one of saving and responsible purchasing? This revised narrative would work and would have a demonstrable effect upon the ability of high finance to manipulate the system, but perhaps that view is too simplistic. Rather, there is an argument to say that the flow of credit has become a vital component because of the stagnation in wage growth, relatively speaking, or the continued effects of the era of austerity upon many segments of the population – perhaps people’s standard of living would be decimated without the availability of credit, even more so than the devastating effects of austerity? There are then many aspects to this issue, with no clear answer in sight, but what is clear is that there is a game in play in which many within society will pay the cost, and that is unfortunately becoming an understanding that is being more normalised by the day.


Keywords – Auto industry, subprime auto loans, finance, business, banking, investing, @finregmatters

Sunday, 8 April 2018

Barclays’ Redevelopment Continues to Falter

We have looked at Barclays on quite a few occasions here in Financial Regulation Matters, and today’s post continues with that theme. Following on from developments surrounding financial penalties for the firm, and also the scandal involving Jes Staley and his attempts to uncover a whistleblower, recent news regarding the potential future for the Bank deserve to be discussed as it continues to attempt to redevelop itself within the post-Crisis era.

Earlier this month, the Bank made the headlines for successfully ‘ring-fencing’ their consumer-focused element of the company, which the Bank described as ‘the biggest banking start-up ever’. In responding to the British Government’s insistence that ‘the largest UK banks must separate core retail banking from investment banking’, the bank successfully completed the transfer of more than 24 million customer accounts, which equated to more than £250 billion worth of assets. In addition, which is extremely topical, the ring-fencing system also means that the ring-fenced bank i.e. the element that is not subjected to the travails of the risk-taking investment banking arm, will now be the vehicle to work with SMEs who have an annual turnover of less than £6.5m. The move has been heralded by onlookers (and the bank itself), with the bank stating that the separation represents a ‘seismic’ but positive change, and external analysts suggesting that the divestment would allow for ‘greater balance sheet certainty’. However, a wider look at the fortunes of the massive British-based bank suggest that challenging times lay ahead.

There are a number of potentially negative elements currently affecting the bank, with each contributing to a negative outlook. Firstly, the search is underway to replace outgoing Chairman John McFarlane, which whilst significant in itself is perhaps magnified with the increased stake taken by the activist investor Edward Bramson; Bramson is renowned for involving himself in the businesses within which he invests, which provides for uncertainty in relation to the current issues faced by Barclays. With regards to its leadership, Barclays CEO Jes Staley is still under investigation for his alleged attempts to uncover the identity of a whistle-blower, which although there has been some support for Staley in the media with regards to his position on the matter, continues to be a dark cloud hanging over the bank – if found guilty, it is possible that Staley will be made to be an example (potentially). Additionally, Staley has been praised for his handling of the charges emanating from the US, with the Bank’s settlement with the DoJ for $2 billion being regarded as a positive result for the bank. Yet, others have not been so positive, and it has been argued that the bank’s restructuring plans (strongly attributed to Staley) have not been successful so far; one onlooker suggests that Bramson’s appearance on the scene at Barclays is evidence of this restructuring attempt failing. Furthermore, Barclays’ own audit committee is continuing to raise fears over the culture of compliance within the firm, which point towards a much larger issue. Yet, those issues were all compounded recently by movement from the credit rating agencies, whom we know so well here in Financial Regulation Matters.

Earlier this week, the Credit Rating giant Moody’s downgraded Barclays to just one level above its so-called ‘junk status’. The agency cited the ring-fencing manoeuvre as its biggest concern, suggesting that whilst it believed the ring-fencing is positive, it has made the bank riskier overall; there was a specific focus on the impact upon the investment banking arm of the bank, which the agency believes could cause the company serious harm if it suffers from the ring-fencing system. The business media has been quick to note that a. the downgrade was expected and b. it is having very little effect upon the perceptions of investors towards the bank. However, there are wider implications in that the pressure summarily increases on Staley at a time where he needs anything but. Yet, it is fair to say that the bank is at somewhat of a crossroads, and its development from this point could have a major impact upon its long-term future.

There are a number of elements that will be concerning the bank, but a few stand out. The credit rating downgrade makes for bad ‘optics’, but the damage to the bank will likely be minimal before it is inevitably raised to a ‘normal’ level. However, the two most concerning elements for the bank are the emergence of Bramson, and the continuing investigation into Staley. With Bramson increasing his stake, the possibility of this notorious investor inserting himself into the business of the bank to satisfy his objectives continue to increase, and that is not a positive for the bank; the bank really needs to develop a longer-term focus to its operations, and many have suggested that Bramson will look to do the exact opposite. For Staley, the argument put forward in his defence (that the whistle-blower was not an employee of the bank) may stand up under legal scrutiny, but is a poor defence when one considers the effect of his actions upon the concept of whistle-blowing more generally; not to re-hash an old post, but with the prospect of ‘amnesia’ setting in within the financial arena as we oscillate further away from the Crisis being a real possibility, there is an acute need to champion the role of a whistle-blower – the question is will allowing Staley to avoid sanction for his actions encourage such a thing? The answer is no, and the effect of that will be massive. Yet, for Barclays, their future is plagued by uncertainty at the moment, and it is important that the bank’s development is kept in focus as it plots a way out of its current malaise.


Keywords – Barclays, Banking, Business, UK, ring-fencing, @finregmatters

Tuesday, 27 March 2018

The Personal Debt Spiral Continues

The issue of debt, and more specifically personal debt, has been a consistent focus here in Financial Regulation Matters, with the most recent post reporting on the fears that the personal debt crisis was set to deepen. Whilst we know that this crisis, and the ‘age of austerity’ go hand in hand, there are, of course, a number of competing elements that are fuelling the current debt crisis. In today’s post, the focus will be on the latest fears regarding the crisis, but also on calls by an influential Labour MP who is calling now for the credit card companies to come under increased scrutiny after successfully campaigning against payday lenders like Wonga.

Rather than general debt figures being the focus this week in the media, the focus instead focuses upon credit card debt specifically. This is on the back of official figures that note that, over the last few months, the rate of credit card debt has risen to a 12-year high. The reported rise was over 8% for the last year, with it also being recognised that in February alone there were 220 million credit card transactions conducted which represents a rise of 3.3%. Of course these figures need to be contextualised, with it being important to state that many utilise credit card facilities as a way of effectively budgeting. However, whilst personal debt from sources such as personal loans i.e. payday and short-term loan facilities, have actually decreased (as a result of recent campaigns one can confidently suggest), fears are continuing to mount in relation to credit card debt; the FCA is concerned on the basis that there are expected interest rate hikes in the offing, which has played a role (to a small extent) in the FCA proposing now regulations for credit lenders. By September, credit card companies must have implemented a specific suite of internal rules to comply with the FCA’s demands, namely that the companies must seek to intervene in cases where people represent being in 18 months’ worth of ‘persistent debt’ (defined as having paid more in interest than principal over an 18-month period); to alleviate these issues, the rules require the companies to provide prompts at certain intervals, more in-depth guidance after three years, and even waive certain components of the debt in the longer-term. Furthermore, the companies will allow customers to opt-out of unsolicited credit limit extensions (with those in debt for more than 12 months being excluded from receiving credit limit extensions), whilst they will be forced to cancel the continuing credit facility of customers who have not paid enough back in continuance of the 18-month period.

However, it was reported today that Stella Creasy MP, the person promoted as being responsible for the enforced capping of fees and interest rates by payday lenders, is ‘calling for a cap on fees and interest charges’ with respect to ‘high-cost credit cards’. The campaign, which is receiving support from a number of sectors, is aiming to block lenders from charging customers ‘more than the same amount they have borrowed in interest and fees’. Yet, whilst Creasy’s target is companies like Vanquis, who target customers who struggle to receive credit elsewhere, The Guardian noted that ‘the FCA has already ruled out taking such steps after a review of the market last year’. The FCA’s reasoning is based on the notion that customers need the ‘flexibility’ that comes with an open market, in conjunction with the supposed safety net that the FCAs new rules in September will bring. However, the issue of credit card debt continues against all the talk of impending regulation.

It is difficult to say what approach is correct, but it is easier to state that this is an issue that is unlikely to get better anytime soon. With similar problems in the U.S., it is difficult not to make the assumption that this crisis is, simply, a natural partner of the ‘age of austerity’ within which we currently reside. It is tempting to suggest that people have a certain lifestyle in mind and have been forced into credit cycles to maintain that standard of living, but that is arguably not the case. Whilst it is positive that payday lending has been reduced since caps were put in place and the lenders came directly into regulatory focus, it is likely that people have simply moved into a different form of credit; companies such as Vanquis allow for consumers to access credit when, in reality, they would struggle to do so from high-street lenders (in theory, at least). Ultimately it is difficult to pinpoint why the crisis is worsening, not through a lack of understanding but because there are so many factors at play. The FCA’s proposed rules are positive, in a sense, but the ‘catch-point’ being at 18 months or longer means that significant debt could still be accrued by those unable to pay it – there is still plenty of scope for this crisis to worsen.


Keywords – personal debt, debt crisis, business, financial regulation, law, consumers, society, @finregmatters

Thursday, 22 March 2018

Elon Musk Brings Executive Pay Further Into the Limelight

Naturally, the issue of Executive Pay has been a consistent focus for Financial Regulation Matters, with a number of posts discussing the elements that make up such a complex issue. News recently from the automotive/technology industries concerning Elon Musk has brought the issue to the fore once more, and in this post the focus will be on the record-setting pay-deal that was recently announced by Tesla, and then what may be the effects of this for the wider issue of executive pay across the financial sectors.

Yesterday, the headlines where Musk was concerned were almost writing themselves, with The Guardian’s ‘Elon Musk wins approval for “staggering” pay deal with potential $55bn bonus’ headline perhaps being representative of the response to the news from Tesla. However, the deal is a complex one with a number of conditions attached, which result in the reality of the situation being somewhat different. Essentially, Tesla has decided to grant its Billionaire founder a $2.6 billion ‘stock option grant’, which will be paid in 12 tranches (slices) over the next years, providing the company hits certain metric markers, like massive increases in revenue and market capitalisation etc. Tied to these milestones are bonuses which, if Musk is absolutely successful, will total more than $50 billion, but the markers are somewhat remarkable; in terms of revenue, Tesla’s revenues must rise to $175 billion, which when compared to the fact that General Motors is recording revenues of $145 billion and Ford, another stalwart of the American (and global) industry is recording $156 billion is remarkably ambitious; at the end of 2017, the firm announced its total revenue to be $11.7 billion. If we factor that the firm has recently been suffering losses, despite increased sales of its products, then the potential of Tesla actually meeting those targets becomes even more remote. CNBC reported that, currently, the company’s market capitalisation stands at $52 billion, with Musk needing it to rise to $650 billion to receive all of his pay award; furthermore, the deal ties Musk to Tesla indefinitely, and he will earn no other compensation for his work with Tesla outside of this pay deal.

There has been, rather predictably, criticism levelled at this pay deal, and from a number of angles. Glass Lewis, a corporate governance group, remarked that ‘the cost of the grant is staggering relative to executive compensation levels among public companies worldwide’, whilst the Institutional Shareholder Services stated that the deal ‘locks in unprecedented high-pay opportunities for the next decade’. Additionally, it came to light today that Norway’s $1 trillion Sovereign wealth fund actually voted against the pay deal, which signals the concerns at the highest levels of finance over the nature of the deal. A piece in Bloomberg today argued that underneath all of the bluster that accompanies the company, its manufacturing processes are ‘taking automotive manufacturing back to the dark ages’, which relates to a number of reports of problems with the company’s ‘Model 3’, upon which it many of its hopes hinge; the sentiment is that with outdated manufacturing processes, the company cannot reach its projected targets. In addition, analysts have raised the question as to why Musk has to be so heavily incentivised to remain with Tesla, on the basis that he is already well invested. Yet, there are views that support the deal, and they potentially make a lot of sense.

It is clear that this deal is an absolute win-win for the parties involved; if Musk reaches the targets set, the shareholders will certainly not begrudge paying $55 billion, and if he does not, then they do not have to pay. Furthermore, opinion offered today suggests that the deal represents the realisation that Musk is, essentially, a brand that Tesla is buying into which, when we consider the rapid elevation of Musk is hard to counter. Also, Musk is having successes with his SpaceX company, with successful launches and landings, and the company acquiring more and more contracts ahead of its competition (relatively speaking); the argument being put forward is that this pay deal incentives Musk to provide more attention to Tesla, rather than SpaceX. There are, indeed, a number of benefits to this deal, but there is one potential issue that may result from this deal, and that is contagion.

It is fully acknowledged here that the chances of Musk ever achieving these milestones is extraordinarily small; the deal almost presupposes that the market will move fundamentally towards electric vehicles (which it inherently will), but that Tesla will be at the forefront; we know here in Financial Regulation Matters that far more established car manufacturers are, themselves, making concerted moves into the electric car market, and recent news from China suggests that the entire Chinese market is rapidly moving towards that particular marketplace. However, whilst the chances of Musk achieving the particular milestones are low, the sentiment that the deal produces are potentially worrying. It is no way a certainty, but there is a very slight potential that other large firms will figure that they should also incentivise their Executives in such a manner; Tesla’s shareholders have produced a deal where they fundamentally cannot lose, and it is not beyond the realm of possibility that other shareholder groups will come to the same conclusion. Whilst the situation at Tesla is rather unique, as is Elon Musk, it is very important that this news does not become somewhat of a benchmark; it is unlikely, but what happens if it does? Whilst such remarkable pay deals are unlikely to have a massive societal effect at Tesla, could the same be said for Goldman Sachs and the other massive banking companies? The push to meet targets in that particular sector has proven to be a recipe for disaster, and something that regulation is seeking to curb – today’s news goes against that sentiment. Yes it is a far-fetched possibility that Musk will reach the goals and that other companies will follow suit, but the point still stands that making today’s deal a bench-mark will be a particularly regressive step.


Keywords – Elon Musk, Tesla, SpaceX, Executive Pay, Investment, Shareholders, Business, @finregmatters

Monday, 19 March 2018

Has the FCA “Gone Soft”, or are its Hands Tied?

The Financial Conduct Authority (FCA), one of Britain’s primary financial regulators, has featured heavily within Financial Regulation Matters, for obvious reasons. However, a lot of the recent posts focusing on the regulator have been concerned with its approach to the unfolding scandal at RBS, with its role in the publication of a damning report drawing attention most recently. However, recently there have been suggestions that the regulator has ‘gone soft’ in its approach to the regulated, with the RBS debacle being cited as the most compelling evidence for the regulator’s approach. In this post, these accusations will be assessed against the evidence, with a larger question being asked with regards to both the role of the regulator in the larger picture, and its willingness to take action.

The decision by the FCA to commission, and then refuse to release a damning report into the operations of RBS and its treatment of small and medium enterprises (SMEs), has caused outrage in the sector, with the regulator being accused of demonstrating a ‘light-touch’ regulatory approach as a result. However, Andrew Bailey – the FCA’s Chief Executive – has sought to respond to the criticism, this week stating that ‘no supervisor can guarantee good conduct at all times’ and that, in relation to the era now after the Financial Crisis, ‘we do now have powers we did not in the past’. Yet, the narrative advanced by Bailey is one that alludes to a helpless regulator doing all they can, which needs to be examined. Much of the criticism has spanned from a divergence witnessed recently because, as opposed to the near-silence and staunch refusal to publish the RBS report (the Treasury Select Committee had to do so instead), the FCA recently banned Paul Flowers from the financial industry, the former Chair of the Cooperative Bank, four years after he pled guilty to the possession of illegal drugs. In addition, the regulator recently took action against the broker Beaufort Securities, declaring it insolvent after a joint operation with American authorities. The obvious question is why take action against these entities, but not RBS when faced with overwhelming evidence of wrongdoing?

In 2017, the FCA’s largest fine was that given to Deutsche Bank for failing to comply certain regulatory codes - £163 million. In 2016, the largest fine was given to Shay Jacobs Reches, for breaching the Financial Services and Markets Act 2000 - £13 million. Before the Financial Services Authority was disbanded, its largest fine was given to UBS on account of rigging the LIBOR rates in 2012, with that fine totalling £160 million. Whilst the business of regulating does not come down to just fines, it is a strong indicator of the power of a regulator, and Bailey’s claims that the FCA now has more power than was available in the Financial Crisis era means that, perhaps, it is their willingness to act which is the question. However, if we continue to focus on their willingness, then another issue arises.

It is important to note here, as many regular readers of Financial Regulation Matters will know all too well, there are rarely any punches pulled when it comes to criticising financial regulators in this blog. The handling of the RBS debacle is nothing short of a national scandal, in addition to the actions of RBS itself, and no one should be excused for their performance in this matter which has costs so many their livelihoods. Yet, what if it is the case that the regulator cannot take action? Whilst the regulator is officially independent, we need to question if this is actually the case; taking a larger view of the arena suggests that, whilst critics are right to call for action, the reality may be that no entity exists to take the action. If we take RBS as the prime example, Bailey was known to have been sitting on the damning report for quite some time, with the only movement being to release an abstract. At the same time, the British Government, via its Treasury Department, was holding high-level talks with the US Department of Justice to accelerate its impending punishment of the bank for Crisis-era transgressions, with that fine expected to run into the billions and billions of dollars. Whilst recent news that the Bank has returned to profit made the headlines, the reality is that this is a bank that has been consistently haemorrhaging money since the Crisis, and its largest shareholder is the British Government. The question is, what effect would the public release of information that detailed systemic abuses against SMEs for profit have upon the fortunes of the bank? Whilst the level of impact was unknown at the time, it was sure to be negative, and the Government simply cannot afford that negativity whilst the Bank is on its books. If we add to this discussion that Bailey is, supposedly, being considered to take over from Mark Carney as the Governor of the Bank of England when his term ends, then the situation becomes murkier still. When Bailey was appointed, it was said, rather widely, that he had been appointed by then Chancellor George Osborne because his temperament was different to that of his predecessor –Martin Wheatley – who was to be ‘too tough’ on the banking sector. Furthermore, Bailey today called for deregulation in the fintech field, to speed up growth in the sector, which whilst not overly news-worthy, does hint at the mentality within the regulator. The picture painted is an interesting one.

The decision to focus on Flowers, and not on RBS, is perhaps a microcosm of the FCA and its actual capability; Flowers was an easy target, as to the Cooperative Bank. They are easy targets because, quite simply, they do not belong to the upper-echelons of modern finance, whereas RBS do. The too-big-to-fail has somewhat fallen out of favour in the common business press, but the sentiment behind the concept not only applies to failure, but also to punishment; if the FCA were to levy record fines against the Bank within which its national Government is the majority shareholder, all whilst the US DoJ is preparing fines that may come in at close to $10 billion, the effect would be extraordinary. It would at once put the upper-banking sector on alert that transgressions will be punished severely, without respect for any other factor. However, as it was, the message sent by the FCA was quite the opposite. That message will then reverberate around the sector, with Lloyds being a prime example as they continue, inexplicably, to delay the compensatory proceedings for those damaged by the HBoS scandal; why should they fear reprisals, if it is proven that none are forthcoming? Yet, whilst we should have an independent financial regulator, and systemic transgressions should be punished with everything the regulator can do, the simple conclusion is that regulator does not exist. The FCA, whether declared as independent or not, exists within a much larger framework and, for that reason, perhaps its hands are truly tied. Does that mean we should accept that? It is contested here that we should not, and independent financial regulation is a ‘public good’ that is, in the current era especially, fundamentally required. However, understanding the reality of situation is also a virtue, and in this instance it is unlikely that independent regulation will be witnessed within the current framework.


Keywords – @finregmatters.
financial regulation, FCA, RBS, Andrew Bailey, DoJ, Law, Business,