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.

“Round Two” – Sir Philip Green and Frank Field set to Renew Hostilities

Here in Financial Regulation Matters we have focused upon Sir Philip Green and his vast business empire on a number of occasions, with most posts assessing the downfall of the British retailer ‘BHS’ and the subsequent fallout that spanned from that. Frank Field MP, who chairs the Parliamentary ‘Work and Pensions Select Committee’ has, by way of the Committee’s mandate, come into direct opposition with Green over the collapse of BHS and the effect on its pension holders, and news today suggests that they are yet again set to resume hostilities over Green’s business plans; so, in this post, we will detail what is at issue this time and look at some of the possible effects that may ensure from this continuation of investigation.

The collapse of BHS, and Green’s involvement in the reduction of its pension schemes beforehand, made for a spectacle that was remarkable, but in reality not surprising. We covered the account of Sir Philip Green taking a daring approach to being questioned by Field’s Committee, with the result being that Green contributed significantly, but not in full, to the pension schemes to bring about some sort of parity after it was systematically reduced by the company’s leaders over a period of years. Whilst questions were raised here regarding the effect of that encounter, particularly in relation to the sentiments that resulted - i.e. Green’s bluster was both demonstrative of a. his belief in his lack of wrongdoing and b. his disregard for the threat posed to him, but also in relation to the sentiments offered for Field, that taking on such a commercial giant can reap the correct rewards – the outcome was to both secure a significant portion of the lost pension funds for the pension holders, but also to bring Green to the stage on account of his business dealings. It has been noted recently that Green’s Arcadia company, that controls many high street chains and has nearly 3,000 stores and 26,000 employees worldwide, is under increasing pressure from online retailers that have forced their way into the marketplace but, of course, with much less operating cost; as a result, news today suggests that Green is considering selling his company to a Chinese firm called Shandong Ruyi. However, for Field, this raises concerns on the back of Green’s performance with BHS, and it is for that reason that he has declared that his Committee will ‘look at the state of Sir Philip Green’s pensions schemes and whether he can sell to whomever he wants…’. Other reports suggest the reason for this concern, with one source stating that it is widely rumoured that Arcadia’s current pension deficit stands at almost £1 billion, which would add weight to Field’s declaration that it is important to ‘find out what the position is’ in relation to the current deficit held by Arcadia before any sale can go through. However, leaving aside the merits of the Chinese company, who have been making a concerted entrance into the European market of late, a question posed by Journalists to Field is of more interest at the moment; Field was asked whether this new investigation might be perceived by Green to be the confirmation of a vendetta against him, with Field responding ‘I hope it doesn’t’. That question from the journalist raises some very questions indeed.

On the one hand, it could look like a politician focusing upon a business leader too much, particularly as the BHS scandal and its fallout was so recent, but this is a particularly poor vision to follow. Another way to examine developments would be a politician, tasked with safeguarding vulnerable pension holders, fulfilling his mandate that he was elected to carry out, and consistently protecting pension holders against what has been demonstrated to be particularly venal behaviour. It is quite illustrative of the problems within modern society that investigating a business leader who has just had to settle to the tune of £350 million to replenish funds that he and his company drained, and who sit on an apparently gigantic pension deficit at the moment, is even potentially considered to be a ‘vendetta’; it is not, and this shaping of the debate lends poorly to the integrity of those who advance such degenerative arguments. In reality, Green should have to declare, at a very early stage, his intentions with regards to the sale and then a formal and thorough investigation should be commenced; it is very unlikely that someone who operates in such a manner will leave the company in great shape for its purchaser, and more importantly its employees. It will be an interesting scene if Green is put in front of the Committee again, because his appalling performance last time will surely not be repeated; this is, however, a logical conclusion to make. The case is that, in reality, if Green is put in front of the Committee again, he will likely be even worse, and this come from his understanding that there is no real deterrent for someone in his position; would Green ever face imprisonment for his actions? We know the answer to that, and at best he faces a slight reduction in his substantial wealth which, for a man in his mid-60s, is no real threat at all. Yet, whilst that is a negative, the positive can be found in Field’s determination to protect those who cannot protect themselves, and his actions in this continuing case need to be the model moving forward. Perhaps the word ‘vendetta’ is correct, but rather it needs to be a vendetta against those who continue to plunder the system in the belief that they will not be pursued.


Keywords: Sir Philip Green; Arcadia, Topshop, Retail, Business, Pensions, Politics, @finregmatters.

Thursday, 15 February 2018

Article Preview – ‘Sustainable Finance Ratings as the latest Symptom of “Rating Addiction” – The Journal of Sustainable Finance & Investment

In today’s post, we will be previewing an article produced by this author that was very recently published in the Journal of Sustainable Finance & Investment (available here). The article is concerned with recent developments within the ‘Principles of Responsible Investment’ (PRI) initiative that is being undertaken by the U.N., with the focus being on the proposed incorporation of the leading credit rating agencies (for the most part) and their products. The emphasis of the article is on explaining the view that, based on the historical development of the credit rating industry, inducting them into the potentially systemic-altering movement carries with it great risk, and it is that risk that is analysed within the article.

The article begins by not explaining the developments within the PRI, but by examining a concept known as ‘rating addiction’. Using the literature to provide context for the concept, an assessment is undertaken to examine how the leading rating agencies have been correctly identified as being central to the Financial Crisis (and many other issues) but have not only survived through these socially-challenging periods, but actually prospered – the article advances the claim that the reason for this phenomenon is ‘rating addiction’ which, as one would likely surmise, relates to the notion that the financial system is addicted to the products and therefore the agencies, which has the effect of protecting the agencies against any meaningful punishment for their actions. The article examines the literature that discusses the concept of ‘ratings reliance’, which is similar concept to ‘rating addiction’ in many ways but focuses more on the regulators’ incorporation of the ratings into their procedures for a number of elements, like bank capital requirements, for example; the effect of this reliance has been, according to the literature, a systemic-level of ‘outsourcing’ of regulatory responsibility to third-parties, so much so that the regulators have come to ‘rely’ on the ratings. However, it is arguable, and the article makes this distinction, that ‘reliance’ and ‘addiction’ are two separate phenomena, because ‘addiction’ carries the connotation of the strong inability to remove oneself from the process – much like a drug (or any other commonly witnessed addictions).

Upon declaring that rating addiction does indeed exist, and is fact prevalent, the article goes on to discuss the technical issue of whether ‘reliance’ and ‘addiction’ are indeed separate, describe the same thing, or are different positions within the same linear causal pattern. It is proposed in the article that rating addiction supersedes everything else because, essentially, it predates the regulatory usage of the products of the agencies. Using business history literature, particularly that developed by Professor Marc Flandreau and his doctoral colleagues, the article presents a picture whereby, due to the economic landscape in antebellum America i.e. before the American Civil War, it was the economy that became addicted to the ratings of the agencies, and not a case whereby, as others have suggested, regulators pushed the ratings onto the marketplace – with the ratings being used to deal with the issues being raised by the expansion of the United States, market participants began to realise that ratings were the most cost-effective way of ensuring (to the greatest extent possible) that credit extended to a person or a company would be repaid. Flandreau discusses this at length across a number of fascinating articles, but the conclusion to be drawn from his research is that, quite simply, the regulators in 1933, and in 1975 (to note two key dates in the regulatory induction of ratings; 1933 saw the Office of the Comptroller of the Currency induct the ratings, and 1973 [later promulgated in 1975] saw the SEC formally induce and protect the rating agencies into the modern marketplace) were responding to the marketplace, not influencing the marketplace; understanding this dynamic is absolutely vital to understanding the reason why agencies managed to prosper despite being widely identified as being key actors in the Financial Crisis.

The above hints at the viewpoint that is it actually investors and bond-offering organisations that lay at the cause of rating addiction, which is to some extent true, and on that basis the article then looks at why this may be. One of the key aspects that the article examines is the concept of ‘agency’ and the related theories, which provide a useful tool with which to examine the relationship between an investor, their institutional investor, and the rating agencies. For example, whilst in the 1840s when the first commercialised  rating agency came into being the system involved lenders providing credit to other marketplace actors in a very commercialised manner, the modern system relies on the constant flow of resources; the clearest example to use is an institutional investor, like a pension fund, whereby the ‘lender’ is made of a large number of dispersed investors with relatively small funds, and partake in a system that has investment managers who take the lead on who to lend to, why, and where. The obvious problem with this scenario is that dispersed fund contributors would find it difficult, and more importantly inefficient, to monitor the actions of their ‘agents’ on a daily basis; the solution, within the modern marketplace at least, has been to define parameters within which the ‘agents’ can act, with easily digestible and identifiable ‘ratings’ being a common choice. On the other hand, to protect the system, regulatory (and legislative) bodies have enforced rules that do the same thing but for different reasons, which is why many institutional investors have their investing ability capped by certain rating levels i.e. AAA, or the top ratings prescribed by the relevant rating agency. Yet, as that is the case, the question is then what does that mean when the investing system itself is changed, or at least being proposed to change?

This issue of changing the investing ‘system’ slightly exaggerates the proposals being put forward by the PRI, but the sentiment is close enough. The initiative, which sees a number of large investment practices come together to promote the increased incorporation of sustainable investment practices, whereby key Environmental, Social, and Governance (ESG) concerns are incorporated into investment practices, is essentially the movement being developed by the PRI. In the article the proposals set forth by the PRI are discussed in detail, but the result of that examination is to assess the proposals currently being considered which set out a plan of action for the rating agencies to a. be inducted into the PRI’s movement, and b. have that induction predicated upon the agencies’ incorporation of ESG concerns into their rating processes. Whilst some have championed this idea, there is a problem that is outstanding which forms the crux of the article; whilst the agencies profess to already incorporate ESG into their rating processes, the facts of this are disputable, and for a number of reasons. Firstly, as discussed in the article, the rating agencies are no exactly clear on the levels of ESG incorporation into their analyses, although all say that it forms a part; the majority of responses revolved around the declaration that, for their part, they see financial data as the key driver of their rating analyses, with ESG components playing not much more than a bit part on their deliberations. Whilst the PRI are, as a result of this understanding, aiming to encourage rating agencies to increase their usage of ESG considerations, the responses of the agencies suggest that operationally, and moreover culturally¸ they are not seriously inclined to do so. Yet, the biggest issue of all is that the agencies are notoriously guarded when it comes to disseminating information related to their methodological processes, and this is for a number of reasons – many of the reasons relate to protecting their position, and others relate to protecting themselves when things go wrong or they act in a transgressive manner. Nevertheless, it is on this basis that the article argues that inducting the agencies, in their current form and with their current culture in mind, into the PRI, is a great risk. Whilst that claim may be sensationalised, to an extent (although this author is clear on the view that agencies need to be treated with great care when it comes to incorporation), there is a technical element which describes that risk more accurately. Using the research of Professor Kern Alexander, there is an argument to be had that if the sustainable investment movement continues and regulators place a value on operating in such a manner, then the linking of, say, sustainable finance credit ratings to something like bank capital requirements, could pose a huge risk in relation to the historical conduct of the rating agencies. In doing so, the sustainable finance movement would, in essence, become the latest credit rating-related vehicle with which the systemic safety of the economy could be placed in jeopardy; then, as always here in Financial Regulation Matters, the obvious question is whether the economy, and society moreover, is healthy enough to withstand another shock so soon after the Financial Crisis. Ultimately then, the aim of the article is to present an account of the recent movements of the agencies, and present an account that is determined to highlight the potential risks of incorporating the rating oligopoly into such a progressive and much needed movement; understanding the historical trajectory of the rating agencies provides the rationale for doing so.


Keywords: credit rating agencies, business, finance, investment, law, regulation, @finregmatters.

Tuesday, 13 February 2018

Article Preview: ‘Scope Ratings: The Viability of a Response’ in European Company Law

Today’s post will preview a recent article by this author that was published by European Company Law, entitled ‘Scope Ratings: The Viability of a Response’ (details here). The short preview will discuss the rationale for the article, some of its aims and achievements, and then the wider picture with respect to the continuing Viability Of articles, with this article representing the fourth in the series.

This article, as mentioned above, represents the fourth edition of the Viability Of series produced by this author, which is a series which aims to examine and assess the growing number of alternatives to the Big Three rating agencies (S&P, Moody’s, and Fitch) that dominate the credit rating marketplace. Details of the first three are available here, here and here (although the titles are different in these last two articles, they are still in the same series) and this current article operates on exactly the same lines. The rationale for these articles is straightforward; the proposed challengers to the hegemony of the Big Three need to be assessed, discussed, and judged within a practical light because, given the nature of this industry, even those with good intentions will likely meet an obstacle they could not have foreseen, or at the least anticipated – the Big Three are well known, but their practices are inherent, as in any oligopoly, and the effect of that is felt within every challenger to their position.

This edition of the series focuses upon Scope Ratings, a German rating agency that is taking a different approach to all the other challengers. The agency is aiming to become a ‘European alternative to the “status quo” for institutional investors’, as well as international investors, and to achieve that aim they are embarking upon a concerted and far-reaching Mergers & Acquisitions strategy that has the potential to provide a real foundation to their development, but is also fraught with great risk within the oligopolistic dynamic that exists within the industry. Starting life in 2002, the firm has gone on to acquire a number of financial service providers from within the E.U. in an effort to consolidate expertise that, at least, allows for investors to consider different options other than what the Big Three provide. A big breakthrough occurred for the firm’s strategy when, in 2011, the firm was officially registered by the European Securities and Markets Authority (ESMA) as a functioning and accredited rating agency; the firm has continued its aggressive M&A strategy ever since, and now counts major companies like BMW, Santander, and UBS as its clients. The article goes on to examine the firm’s recent acquisition (2016) of Feri rating services, and discusses how the acquisition has the ability to increase Scope’s fortunes on account of its new found ability to incorporate significant sovereign bond research into its offerings. Yet, the firm sees an important part of its development within the banking sector, and as such has recently moved to open a London branch headed by a former head of department at Moody’s; how these developments will unfold in the wake of the U.K’s decision to leave the European Union is another matter entirely (a point which is raised in another article that has just been published by this author with the assistance of the European Business Law Review – preview available here).

In terms of setting the structure for the article, it proceeds by counteracting the analysis of the ‘challenger’ with that of the ‘champion’ i.e. the Big Three, in order to demonstrate the task facing Scope Ratings. Upon doing so (it is not worth going into detail here; regular readers will know the views on the Big Three held by this author), the article concludes the ‘champion’ section by discussing the E.U.’s plans to ‘increase competition’ in the marketplace by way of inducing the newer firms further into the investing picture (this point was raised in a recent article published by this author with the assistance of European Company Law – preview available here); the overriding statistic that comes from this analysis is that, at the moment, Scope holds just 0.39% of the market, which makes its progress interesting but not threatening to the Big Three at the moment. However, as the article continues by looking at the ‘tale of the tape’, which aims to examine the reasons why Scope may not make an impact, and the reasons why it may. The concluding section suggests that 0.39% is simply not a factor in the current market, meaning that Scope’s ratings offer an addendum at best to the ratings of the Big Three. Also, if it does grow beyond 0.39%, the likelihood is, at least according to historical trends, that the Big Three will devour the agency and simultaneously protect their oligopoly, as any good oligopoly must. Yet, the article does offer reasons for why Scope may gain more success in the field, and that is mainly due to the structural differences being proposed by the E.U. In the American market, any claims of increasing competition within the rating industry is often nothing more than lip service (as Egan-Jones can attest to), but in the E.U. the sentiment is much stronger; this may be because of the effect of the sovereign debt crisis that saw the agencies at the heart of the unfolding crisis, or just because the U.S.-based agencies have less of an influence in the E.U. to some relative extent. Nevertheless, there is a growing sentiment, whether misplaced or not, to enforce competition on the sector, and that can only go in Scope’s favour. Additionally, Scope is particularly European in its outlook, and that bodes well if the E.U. decides to incorporate protectionist ideals into its regulatory framework moving forward. Also, the specialised nature of Scope’s offerings has drawn in some highly reputable clients, with the hopeful impact being that more will decide to incorporate Scope Ratings’ evaluations in their investment decisions. However, a pragmatic evaluation can only have one outcome: at the moment, Scope is minute compared to the Big Three, and perhaps the only reason why the oligopoly is allowing the small firm to grow is because, at the moment, they need not concern themselves with Scope’s development (one can safely assume they are monitoring their progress, however).

The effect of this article is to present yet another account of the incredible dynamics that exists within this, and a number of other financial service sectors (the same could be said of the auditing field, for example). The presence of the oligopoly outweighs any smaller undertakings, and regulatory intervention, and any political movement against its position, which is why the study of oligopolies and their dynamics is of the utmost importance (see here for a good resource on the matter). By continuing the study of the rating agencies and basing it upon the actualities of the rating agencies themselves, which is something this author calls for in every piece, rather than what one may desire them to be, or what they should be doing theoretically, there stands a chance at affectual change; other than that, we can expect the continuation of a process that sees these private firms entrenched within society without any impactful recourse.


Keywords: Credit Rating Agencies, Scope Ratings, Big Three, E.U., Business, Politics, Law, @finregmatters.

Monday, 12 February 2018

Barclays Charged for Crisis Dealings: A Crisis That is Going Nowhere

In the second post today, we will take a brief look at the latest development from a regulator (loosely termed) that we have looked at many occasions – the Serious Fraud Office (SFO). In responding to actions taken in the midst of the Crisis, news today confirms that the Office has charged Barclays for loans the bank made to Qatar at the same time investors from the Country provided the necessary lifeline which allowed the bank to survive the Crisis without governmental support. The impact of the prospective action could be far-reaching, so in this post the details of the allegations will be examined, as will the potential fallout.

During the Crisis, the British-based bank tapped investors for nearly £21 billion, with almost £4.5 billion coming from Qatar Holding – part of the State’s Sovereign Wealth Fund – and Challenger Universal, the investment vehicle of the former Qatari Prime Minister. Furthermore, the bank acquired more than £7 billion more from the two vehicles, along with leading figures from Abu Dhabi, but the details of the deals prompted scrutiny and ultimately a massive five-year-plus investigation by the SFO; today, the SFO made the latest in a string of moves on the back of that investigation. Last year the bank’s parent company, and four of its leading executives were charged by the SFO, but today the SFO charged the bank, via its operating company this time, for a second time on counts of fraud. The difference in focus means that whilst the executives face criminal charges that carry up to ten years in prison, the focus on the operational company means that ‘the bank could face regulatory penalties, including withdrawals of its banking licences in the UK and other countries’. The fraudulent act in question is a £2.3 billion loan made to Qatar Holdings at the same time it received the injection of capital, with the charge being that the loan was used, ‘either directly, or indirectly, to buy shares in Barclays, which the SFO says is “unlawful financial assistance”’. The job of the SFO now is to prove that the directors knew what the loan was to be used for, but market commentators, and Barclays itself, seem un-phased by the developments with people focusing on the fact that many banks have been charged and penalised for similar offences committed in the Crisis era and have continued operating successfully; however, is that really the extent of the impact of these prospective problems?

The Guardian reports that operations, specifically from a retail point of view, would likely not be affected as new ring-fencing rules come into force, but that the investment banking, corporate lending, and international operation arms would all be affected. Yet, the same media outlet raises the question of the impact upon Barclays’ branches, with the suggestion being that a widespread revoking of licences would see the bank forced to halt retail operations in spite of the ring-fencing protection, although the article ends with the realistic summation that the SFO, and specifically the FCA in being tasked with implementing punishment, are highly unlikely to go to what the article suggests is the ‘nuclear option’. So, in reality, this issue is analogous the other post today concerning RBS – the environment today is dictating to what level, if at all, punishment is given to these transgressive companies.

Ultimately, the impact of this charge is proving to be minimal within the marketplace because market participants realise that there are so many hurdles before the bank is stripped of its operating licences, which raises the question of the effectiveness of the SFO’s approach. The SFO’s approach is correct in terms of it has found illegality, and is proceeding accordingly. However, the reality of the situation is being played out across the headlines; impactful regulation and punishment is simply not an option at the top level of business. The likely situation is that the bank and the charged executives will allocate remarkable resources to their defence, and the case will drag on for many more years; what it does tell us, however, is that the Crisis era and the actions taken within it continue to haunt us still, with the environment today being directly dictated by the actions, and more importantly the sentiments, that were developed during that era. On that basis, the SFO is between a rock and hard place, and with its action being scrutinised by leading political figures, it is likely the SFO will back down in this instance and settlement of some sort being viewed as a victory under these circumstances; that is quite a revealing chain of events all things considered.


Keywords: Barclays, Banking, Fraud, SFO, Politics, Law, Business, Qatar, Financial Crisis, @finregmatters.