Monday, 11 December 2017

Is Labour’s Prospective Economic Policy Short-sighted? The Rumoured Relocation of the Bank of England Suggests So

In this third and final post of the day, we will take a brief look at a proposal being advanced today by the Labour Party, which attempts to convey their commitment to redistributing wealth across the U.K. rather than its current concentration in the South-East of the Country. This review will only be brief because, given the political landscape, it is all that it can be at the time of writing; however, whilst the suggested aim to redistribute the economic dynamic across the Country is hardly surprising given the stated aims and objectives of Jeremy Corbyn’s Labour Party, in reality the question this suggestion raises is two-fold: is the Party operating on any solid basis of reality, and then do they recognise the reality of the problems i.e. their root causes, or are they focusing on and subsequently adding to the façade that serves to preserve the current power structure? Surely, as recent and historical evidence suggests, anything other than a ‘root and branch’ redevelopment will have very few lasting positive consequences.

The Shadow Chancellor, John McDonnell, has commissioned consultants to review potential options available to the Party if it wins the next General Election, and one option that is being promoted today is that the Bank of England, located in the City of London since 1694, should be relocated in whole or in part to Birmingham, because the current base is ‘unsatisfactory and leads to the regions being underweighted in policy decisions’. The prospective move would accentuate the development of the ‘National Investment Bank’ and the Strategic Investment Board’ in the city and would represent the development of a new ‘economic policy hub’. Whilst the suggestion so far is that the move would provide for a visible representation of the Party’s determination to ‘promote growth and a rebalancing of the economy’, the real question is ‘is that enough’ to uproot a British Institution for a ‘representation’?

Of course, the answer is ‘no’, because whilst HSBC and potentially Channel 4 may be moving to the city, it is a different prospect entirely moving the Bank of England. The simple reason is that uprooting the Bank of England, so soon after the Country leaves the E.U. and faces the prospect of battling for international trade deals which will be underpinned by the perceived authority of the City of London as a financial centre, means McDonnell’s suggestion will remain on the drawing board irrespective of whether the Party comes to power or not; naturally, it is one thing suggesting policies from the side-lines as opposed to actually governing. Yet, whilst this counteracting point is the obvious one to make, the more obscure point is what effect would moving the bank actually have on ‘rebalancing’ the economy? The divergence between basic economic indicators like wages and employment levels in both the North and the South of the country are clear for all to see, the political battle that is being fought on the basis of the development of the ‘Northern Powerhouse’ suggests that devolving power and authority may fulfil the aim of reducing the divide, but in many instances it may not. Theresa May was earlier this year forced to respond to critics that accused her of paying lip-service to the ideal, and whilst Labour supporters may not like hearing that their Party has similarities to the Conservative Party, McDonnell’s suggestion implies that this is the case; of all the things to be done, is relocating the Bank of England a worthy option? Is it even worth us discussing based upon the fact that diluting the influence of the City of London in the wake of Brexit is a non-starter? Whilst this author does not support either Party, it is worth stating that to rise to power the Labour Party should really seek to be rooted in realism to provide a realistic alternative to the Conservative Party who operate in a rather different way. Ultimately, the more noises we hear from the Labour Party about how they will govern whilst they are on the side-lines, particularly with respect like these calls today, will only serve to undermine their chances – only root-and-branch and consistent change, over a long period, will reduce the divide between the North and the South.

Keywords – Bank of England, Labour Party, Politics, Birmingham, City of London, @finregmatters

A New Anti-Corruption Strategy Epitomises the Conservative Government’s Underhanded Approach

In the second post today, the focus will be on the Serious Fraud Office (SFO) and its navigation of particularly choppy political waters. We have looked at the SFO on a number of occasions and in May this year we looked at how the Prime Minister was seemingly zeroing in on the SFO in the accumulation of what is an almost-relentless campaign to dismantle the agency. However, in news today, it appears that the new anti-corruption strategy developed by the Home Secretary – Amber Rudd – seeks to incorporate the SFO with the National Crime Agency (NCA) and not replace it, as had been suggested previously. However, what can the SFO make of this latest development?

We have discussed the SFO on a number of occasions, with most references being to victories that the agency has scored, particularly in reference to the large Deferred Prosecution Agreement arranged with Rolls-Royce. The SFO has a number of other ‘victories’ to its name (e shall not revisit the discussion of whether DPAs are victories or not here) but that had not stopped the Prime Minister renewing an old vendetta against the SFO which has seen her attempt to dissolve the SFO in favour of the NCA since her time in office as Home Secretary. Yet, the current Home Secretary provided some potential relief for the recently successful but still beleaguered agency, although that sense of success was rocked recently with a scalding assessment of the agency’s competency regarding its usage of inappropriate witnesses during a high-profile case. Today, Rudd announced plans for a new ‘National Economic Crime Centre’, which will see the Centre based within the NCA and give it the power to task the SFO with conducting investigations regarding ‘the worst cases of fraud, money laundering and corruption’. Not only is the Home Secretary concerned with tackling financial crime, but she is also concerned with rooting out corruption in key social areas like within policing, prisons, and the Border Force, apparently. Furthermore, Rudd stated that the new initiative was not just designed to counter large-scale financial crime, but also small-scale everyday financial crime like phishing scams etc. However, whilst the media report this in the form of either a. the SFO has been spared or b. the Government is now getting serious over corruption, a closer inspection into the wording used by Rudd suggest something much more sinister.

The Prime Minister has plenty on her plate at the moment, and wading into a public battle with an agency that has scored some impressive ‘wins’ recently is not only bad politics, but could potentially see the barometer swing away from her party in upcoming elections. Yet, whilst this author has many opinions of Theresa May, it is clear that her doggedness could never be underestimated, so with that in mind it is worth taking Rudd’s proclamation today with great care. Rudd stated that the NCA will have the power to task the SFO with investigating serious fraud, but in reality it already does this – it is part-and-parcel of its purpose. Whilst onlookers have been quick to declare that ‘it is reassuring that the Government appears to have abandoned its earlier plans to abolish the SFO’, in reality the Government have taken the first step to incorporating the SFO into the NCA, just as May had promised she would. However, by repackaging the move in the way that Rudd did today, in line with her unwavering allegiance to the Prime Minister, Theresa May has set the plan in motion and received the support of those that were so adamantly against her when she pledged to do this very same thing before the election. Depending on what media outlet one reads, if at all, one could be forgiven for falling into the trap of believing that she and her Government are incompetent and confused, when in fact they are anything but.

Keywords – Serious Fraud Office, National Crime Agency, Corruption, Politics, Theresa May, @finregmatters

HSBC is Spared, Despite Concerns

In the first of three brief posts today, in order to stay abreast of a busy day in the financial arena, we will begin by looking at news that is coming out of the Department of Justice in the U.S. The news, that the DoJ is changing course on its agreement put in place to deter further transgressions by the multinational bank, is excellent news for the bank but, perhaps, sends a message about the pro-business sentiments that are emerging all the time under the Trump Administration.

On two specific occasions here in Financial Regulation Matters, we have looked at HSBC in particular with reference to their almost infamous track record when it comes to financial crime, particularly money laundering. It is no secret that the large multinational bank has been involved in some particularly damaging news stories, including having to pay a £1.9 billion fine to U.S. authorities in 2012 for ‘exposing the U.S. financial system to money laundering, drug (and) terrorist financing risks’ and also the bank’s connection to the so-called ‘Global Laundromat’, which has seemingly been lost to the news cycles. However, today, the focus is on the first of these two instances, with the suggestion emerging today that the DoJ will be filing a motion in New York that will see the ‘sword of Damocles’ – the charges attached to the Deferred Prosecution Agreement (DPA) that forced through the fine in 2012 – removed from over the head of HSBC. Many news outlets are carrying this story, and the Financial Times makes quite a point of indicating just how happy Stuart Gulliver (outgoing CEO), John Flint (incoming CEO), and Mark Tucker (non-Executive Chairman) will be with this result, with Gulliver proudly declaring that ‘HSBC is able to combat financial crime much more effectively today as the result of the significant reforms we have implemented over the last five years’. So, it would appear that Gulliver’s jubilance is deserved, given that it is surely the case that he is right because, quite frankly, the removal of the DPA must surely indicate the accuracy of the statement; regular readers of Financial Regulation Matters will know that we cannot be so fast to accept what we see, and the same principle unfortunately applies here.

It was only at the beginning of this year when the FCA were investigating HSBC over its Anti-Money Laundering (AML) procedures over concerns relating to the bank’s thoroughness in this all-important sector, and it was only in 2016 that the lawyer appointed to HSBC to monitor its compliance with regulations as part of the DPA expressed ‘significant concerns’ over its ability, and willingness, to comply with a range of regulations like AML regulations. Yet, this is seemingly not enough evidence to remain vigilant, and if the DoJ does indeed decide to lift the sword of Damocles, then it is essentially releasing HSBC from the continued restraint that the DPA brings – if it was showing concerning levels of compliance with a DPA-associated Lawyer on board, what will it do without the continued presence of a 3rd party overseer? The optimist will agree with Gulliver, that improvements have been made, but the pessimist will argue that there is little evidence of that; the continued transgressions make the optimist’s argument almost null and void. However, this ignorance of evidence is a common theme in the post-2016 political environment, and the willingness of the DoJ to intervene will be a clear signal that the U.S. is open for business and does not seek to operate conservatively based upon recent damage. It is, unfortunately, a signal that the marketplace will respond to, and not in a socially-positive manner.

Keywords – HSBC, Banking, Politics, Money Laundering, Financial Crime, @finregmatters

Tuesday, 5 December 2017

News from the Regulators: Blink and You Will Miss It

Today’s post acts as a small review of two specific news pieces that broke today concerning two financial regulators in the U.K. Whilst one would have had to have been quick to spot these stories, with both falling down the list of financial news stories rather quickly, each has particularly strong knock-on effects, but for differing reasons. So, in this post, a little more detail will be added as both of those stories represent the latest iterations of themes that have formed the basis of a number of posts here in Financial Regulation Matters.

The first story is concerned with the infamous report conducted by the FCA regarding the actions of RBS and its ‘Global Restructuring Group’ (GRG). We have covered this issue on a number of occasions, and heard most recently that whilst the FCA has been busy investigating and punishing a number of firms of their failures, firms like BrightHouse and Equifax, their hesitancy to take any serious action against RBS has garnered plenty of justified criticism – although it is worth noting that, in general, the rate of fines being imposed by the FCA is steadily reducing (it is not suggested here, of course, that this is because of increased standards in the marketplace [!]). Even in response to Governmental pressure via the Treasury Select Committee and its new Chair Nicky Morgan, the FCA refused to bow to the pressure and released just a summary of their report on the investigation; yet, today, we were given a reason as to why this was. The official story being developed is that the FCA could not reveal the report in full because of fears over counter-litigation from those involved – a process known as ‘Maxwellisation’ which is the process whereby those accused in an official report have to be notified and consulted first. Internal Board minutes reveal that the ‘external counsel’s advice led [the FCA] to the conclusion that publication of the final report would expose the FCA to an unacceptable risk of successful legal action by current/former RBS managers’. So, what does this mean? Well, it essentially means that the process will be incredibly long-winded and, likely, will be downplayed as much as humanly possible to reduce the exposure of RBS, a majoritively state-owned business, from major investigation. However, it denotes something much more important – if Maxwellisation prevents these reports from being publically aired, which as a process is justifiable in theory (i.e. what if those accused were themselves not guilty?), then maybe we should be asking a different question – maybe, rather than looking to air an investigation, the FCA seeks to criminally prosecute those responsible for breaching a multitude of duties that they owe to connected parties; then, the issue of Maxwellisation goes away, because those accused would have to answer for their alleged wrongdoing in a court of law. Obviously, that is a fanciful suggestion in this arena, but the principle still stands; we are being faced with the prospect that those in the financial arena are, almost, immune to punishment. So, as we move on to the second story, a question that links the two may be ‘how may we protect against Executive excesses and misdeeds? One answer may be to have employee representatives on Boards of companies to provide for more balance, representation, and diversity in the decision-making organ of a company.

That idea is not based upon a speech from Jeremy Corbyn, or anyone else fundamentally associated with ‘the left’, but from the leader of the Conservative Party and Prime Minister, Theresa May. Speaking in May of 2016, the then Home Secretary was developing her pitch to take over the Conservative Party on a number of political platforms; one of which was her pitch to make the Country ‘work for all’, and in turn to increase social mobility – whilst it is obvious to anyone who cares to notice the widespread usage of foodbanks under her premiership, the abdication of the Government’s ‘Social Mobility Tsar’ and his entire team on the basis of his perception of ‘indecision, dysfunctionality and lack of leadership’ in number 10 should come as absolutely no surprise. Another of her key platforms was to ‘completely, absolutely, unequivocally’ put the Conservatives ‘at the service of working people’ and one way in which she planned to achieve that was to instil workers on company boards and mandate that shareholder votes on executive pay were to become binding, rather than advisory. Unless one has been living under a rock, or is an ardent Conservative, it should come as no surprise once more to hear that ‘Theresa May has backed away from plans set out in her Tory leadership campaign to put workers on company boards’. However, this is to be expected because, quite simply, why would she keep her promise? There is no consequence, politically, to breaking promises (think of the Big Red Bus). Yet, today, the Financial Reporting Council (FRC) waded into the minefield by seemingly confirming Theresa May’s U-turn by declaring that the revised UK Corporate Governance Code will have three options for companies to heed the advice of employee representatives, with all being based upon the comply-or-explain principle (the consultation phase continues up until February 2018). Those three options include assigning a specified non-Executive Director to represent employees, creating an employee advisory council, or to nominate a Director from the pool of employees; these sound good in theory, but the backing-down away from May’s pledge is the real headline here. Whilst the FRC discusses how it may go about encouraging this behaviour, and increasing the intake and representativeness of under-represented peoples within companies, the sheer ineffectiveness of the FRC is likely to garner any serious results in this regard.

Ultimately, these regulatory developments signal the position of the regulator – they are fundamentally constrained; to say that these regulators are hamstrung is to downplay their position. On many occasions this author has called for regulators to be braver, more direct, and more honest about their efforts to make a serious impact upon these dynamics that cause so much harm, but in reality it is worth asking what is it they can actually do? Do they have the systemic support to put RBS Executives in the dock? No. Do they have the support to enforce that workers are sat on every board in the country? No. Do they have the support to provide for anything more than token penalties in the forms of fines that companies write off in a matter of hours/days/weeks? No. So, whilst it is right that regulators are critically examined for their role with respect to these corporate failings, it is worthwhile remembering that with a systemic support network based upon justified, proportionate, and righteous punishment, these regulators will never be much more than official wrist-slappers, regrettably.

Keywords – Financial Regulators, RBS, FCA, FRC, Board diversity, employees, representation, SMEs, Fraud, @finregmatters

Monday, 4 December 2017

How to Change the Impact of the Financial System: Focus on the Investors

In today’s post we will turn our attention to the role of the Investor in the global financial dynamic, as although we spend plenty of time here in Financial Regulation Matters looking at the iniquities of the marketplace via the actions of banks, rating agencies, governmental agencies and financial regulators, the role of the investor is just as important, if not more so. Whilst an assessment like this is always valid, this post is reacting specifically to a report last week that investors are returning to the products that brought the world to its knees in 2007/8, all for increased returns. So, in this post, this issue will be assessed because, on a number of occasions here we have spoken about the potential rise of the ‘responsible investor’ since the Crisis; perhaps we should be more careful with such discussions in the future.

The role of the investor in relation to the causation of the Financial Crisis is no secret, with a number of analyses choosing to focus upon it specifically. In one Handbook, an analysis that was undertaken to describe the processes of investors in relation to the cycles surrounding the Crisis suggested that the pre-Crisis phase is dominated by the sentiment that a crisis cannot happen, and then the realisation that it can usually encourages a systemic shock that prevents further abuse moving forward (for a certain time anyway). However, whilst this ‘financial amnesia’ may seem obvious, the analysis suggests that the difference with this Crisis was that the extensive Quantitative-Easing (QE) programme has essentially removed that period of shock and consequence, which ties in neatly to the theme of this post. Another analysis suggests that what lies at the core of this hazardous dynamic between the investors and the financial system is that once investors, i.e. ‘retail’ investors, are differentiated from ‘sophisticated investors’ (SIs), the protections put in place are stripped away on the basis of an entrenched belief that SIs can police their own markets. It is likely for this reason that, in the aftermath of the Crisis, the Chartered Financial Analyst Society in the U.K. argued that fund managers and financial advisors should be forced to study financial history to reduce the likelihood of financial crises. Whilst this is obviously a good idea in theory, it is clearly a non-starter in reality; yet, this claim brings forward two issues: firstly, enforcing SIs to study is symptomatic of a system that cannot enforce strict regulations; secondly, allowing SIs to police themselves ignores one vital component – what drives an SI?

We have looked on a few occasions in Financial Regulation Matters at what drives the SIs, and we have looked specifically at what some are suggesting the future will be in relation to this question; one such post looked at the chances of an increased sensibility to social responsibility. Yet, whilst discussions like those are usually related to the aim of trying provide some positive or hopeful analyses, the cold hard truth is that SIs are only interested, principally, in one thing – the highest returns possible. The report from last week assesses this, and its opening gambit is revelatory: ‘investors are driving a revival of structured credit products that were a hallmark of the boom years before the financial crisis’. However, this report in the Financial Times on the 27th November is certainly not the first warning about the direction that most SIs are heading in, with reports from much earlier in the year confirming exactly the same worrying trend. The story, essentially, is an entirely familiar and predictable one, with SIs being seduced into re-termed structured finance products – the new ‘hot’ product is the ‘bespoke tranche’, which is simply a collection of credit default swaps (CDS) tied to the risk of corporate defaults – so nothing new here to report. So, the products are the same, and also the reasoning for why SIs are being seduced into these shaky fields are the same too; understanding the environment surrounding an SI is crucial to predicting their actions. Today, the situation is that so-called ‘junk bonds’ are providing particularly low-yields, and that corporate bonds are not providing the high yields that large investors apparently ‘need’, although this is another issue entirely. Whether it is investing in ‘bespoke tranches’, plain old Collateralised Debt Obligations, or now ‘Collateralised Loan Obligations’ – the collection of leveraged loans – the story remains the same; ‘with junk bonds at such low yields where else can you go? It pushes investors into the securitised world’.

Worryingly, the environment surrounding SIs seems to be deteriorating, not improving. One report discusses how a wave of fixed-income debt procured in the immediate aftermath of the Crisis is now maturing, with an estimated $1 trillion about to mature which leaves investors with the need to re-invest and find similar levels of yield on their investments. If that scenario comes to pass, which the research suggests it will, then investors will be sitting on an incredible amount of money, which is essentially blood in the water for the usual protagonists. It has been noted that, with respect to ‘bespoke tranches’, the large SIs have been unable to partake up unto this point because, quite simply, the leading credit rating agencies have not yet rated them – the dynamic is, irrespective of the efforts of post-Crisis regulation with respect to rating agencies, that SIs are still reliant upon the ratings of the agencies (internally, if not implicitly externally). So, as we can see… the scene is yet again set.

Ultimately, there is a justified fear emerging that a perfect storm is brewing. SIs will have an incredible amount of money that they need to invest (hoarding that money will garner no returns), safer and more regulated products are producing extremely low yields, and all that is needed is for the rating agencies to sign-off on the creditworthiness of these incredibly complex products and that mound of money can be injected into this specific system. What can we deduce from all of this? Well, the first thing is that the suggestion that finance professionals be forced to read financial history is probably the most appropriate, albeit unrealistic proposal on record. Secondly, the regulations of this institution or that institution, of this process or that process, of this product or that product, is essentially closing the door once the horse has bolted; the real focus needs to be on the dynamics that are inherent within the investment process. There are reasons why the blinkered pursuit of high yields exists, but in essence the true reason is a systemic one – the modern capitalist structure determines that everyone should be involved in the process to make money as fluid as possible for high finance; the pension schemes that exist in workplaces up and down the country are a way to mobilise the public’s money, with the motive of the public then being to maximise their retirement pot – how many employees would, in reality, be happy with their pension being slightly limited in the pursuit of sustainable and responsible investing practices? It is not the fault of these savers, really, because their savings from their employment have a tangible and real property attached to them, whilst for SIs they are just numbers on a screen. Yet, it may be the savers’ fault, because if they all withdrew their pensions at once, SIs and Governments would have to take notice and respond. The conclusion is, however, that it is simply safe to continue as is, lurching from crisis to crisis, acknowledging but never truly learning from the past – what is needed is a radical action to be taken for someone influential, as a group, to fully commit to the ideal of sustainable and responsible investing; whether that happens anytime soon, in an era where individualism and uncertainty reign supreme, is doubtful.

Keywords – investors, institutional investors, structured finance, financial regulation, financial crisis, @finregmatters

Tuesday, 28 November 2017

Donald Trump and the Dodd-Frank Act: “The Very Worst Kind of Government Entity” Finds Its Head on the Block

Regular readers of Financial Regulation Matters (and, in truth, any financially-concerned writing) will be more than aware that President Trump has his sights set firmly on the Dodd-Frank Act’s destruction; in fact, he is unequivocal in his aims to remove regulations that ‘enshrine too big to fail and encourage risky behaviour’. Yet, his planned dismantling, like almost every other ‘huge’ plan that he declared on his way to the White House, has not come to fruition and the new strategy is, seemingly, based upon a piecemeal approach and taking victories whenever one presents itself; recently, with certain actions taken at a Government agency created by the Dodd-Frank Act, Trump sensed a victory and acted. Yet, things have not gone smoothly and in this post we will assess the development of this story and some of the implications.

It has been suggested on numerous occasions that the roadblocks that have been erected in Trump’s remarkable path will force his Administration to think differently about how to achieve their goals whilst in office. Talking about how the Administration would navigate around hurdles in relation to banking rules, it was suggested earlier this year that the Administration would seek to do all it could without reverting to altering/enacted legislation i.e. it would act through the regulators and their specific regulations. Whilst not surprising given that the Administration has few options available to them in their conquest, that analysis was indeed prophetic, as recent events show. A few days ago, the Head of the Consumer Financial Protection Bureau (an agency formed in the wake of the Crisis), Richard Cordray, stepped down from his post and, as according to the rules in the Dodd-Frank Act, his Deputy, Leandra English, was promoted to interim Head of the Bureau. Yet, sensing a victory, Trump and his Administration announced that Mick Mulvaney, the White House’s Budget Director, would be stepping under the powers afforded to the President under the Federal Vacancies Act.

The obvious result was one of confusion (which is normal since 2016), and the remarkable situation whereby a powerful Government agency has two people claiming to be its Head. Fast-forward a few hours, and English had filed a lawsuit against the decision; news breaking at the time of writing is that the Judge hearing the case has declined to ‘remove Trump pick Mulvaney’ from the CFPB, with Mulvaney sending emails to CFPB staff immediately advising staff to disregard English’s instructions as she is ‘purporting to be acting director’. Whilst the legal battle is not over – it is projected to go the Federal Appeals Court – the dismal reduction in standards is a remarkable (d)evolution in the esteem of the political process. Furthermore, and rather unsurprisingly, the move has caused even further rifts between the political ‘sides’ in the US, with Barney Frank (of Dodd-Frank) stating, quite rightly, that ‘we gave a lot of attention to how to structure the CFPB and how to protect its independence, because its job is to go after some very powerful forces in the economy’, which leads us smoothly into discussing the elephant in the room: why is Trump taking such an action?

Donald Trump, during his campaign trail, said many things. Many claims were outlandish, and many, if not all, were ‘mistruths’ – a political word for a lie. Yet, one that seem to stick and gain him favour was the oft-repeated and catchy slogan ‘drain the swamp’. This mantra was repeated on stage after stage, and was applied to a number of different elements: politics and big business mostly, although in reality nobody was safe. Yet, even before he took Office after his inauguration, Trump has been systematically spending the U.S. taxpayer’s money, with the cost of his visits to Mar-a-Lago allegedly costing the taxpayers $20 million in the first 100 days. Yet, all the ludicrous figures on the usage of Air Force One, golfing breaks with Tiger Woods, and whatever else, should be no distraction to what Donald Trump is doing; he is not just advocating for big business, he is actively dismantling regulations designed to constrain the iniquities of big business.

It is important that this is articulated and repeatedly so. In 2007/8, a decade ago, the American citizens, as just one example, were systematically abused by big business. They were actively fed into processes that people coherently understood would see them harmed. They were considered to be acceptable collateral in a game in which they can never win. These are not conspiracy theories, they are supported observations and need to be remembered every time the President decides to lower the standards of such a powerful and dominant Country. The effect of this period upon the progression of the United States will be, arguably, what defines the coming global dynamic for decades, and Trump’s continuous dedication to operating upon the lowest common denominator, to inciting confusion, fear and disrespect, must have a consequence – it will not just bounce back to normal when he leaves Office. This news may look like a battle for a regulator, but is much more than that.

Keywords – Donald Trump, Consumer Financial Protection Bureau, Financial regulation, Politics, United States, Republicans, Democrats, Financial Crisis, Society, @finregmatters

Wednesday, 22 November 2017

A New Regulatory Approach for the Accounting Industry, But Same Old Results

The second post today is a short follow up from a post earlier in the year that looked at the leniency of the deterrent selected for the accounting industry. In that post we looked at how the SEC and the Financial Reporting Council (FRC) were handing out ‘record fines’ of £5m here or $6 million there, something which onlookers noted was ‘less than half a day’s work’ for these top-four Auditors. Therefore, you can imagine this author’s delight when reading the headline in the Financial Times yesterday that a ‘review recommends larger fines for accountancy firms’; yet, regular readers of Financial Regulation Matters know that there was no such delight, because the rest of the article could have been written without one having read it.

Obviously, the article goes on to confirm that, as suspected, the increase in fines was not really worthy of a headline, if the increase even goes ahead at all. In the report commissioned by the FRC and led by for Court of Appeal Judge Christopher Clarke, it was mentioned that as a starting point the firms should not be able to profit from wrongdoing (although they stated that identifying that profit may be difficult owing to the nature of the business of auditing) and that ultimately the ability to fine firms should be significantly increased. The article in the FT makes the obvious comparison between largest penalties attributed by the FRC and the FCA, with the FRC’s being £5.1 million and the FCA’s being £284 million – in reality, the FCA’s level of fines also needs to be addressed. The most startling sentence in the article – ‘the most controversial measure proposed by the review would enable the regulator to fine large accounting firms by more than £10m’ – is perhaps indicative of where the regulatory framework is up to. Whilst Clarke rightly notes that the smaller fines like we have now are probably just recognised as ‘the cost of doing business’, it is unlikely that fines of £10 million will fare much differently, something with Professor Ramanna calls the ‘800-pound gorilla’ in the room.

Unfortunately, if we were to look at actions rather than words, then this report is particularly poor. Not to judge Clarke’s intent, but looking at the actions paints a picture whereby the capability of a regulator to control an industry which is inexplicably linked to corporate wrongdoing is called into question, and the result of extensive investigation is that they should raise their fines by a total of £5 million at a time, against companies that post revenues in the billions and profits in the hundreds of millions. Right now is the time for regulators to work via actions rather than statements, but unfortunately this report does exactly the opposite, and the auditing industry will have taken notice – what message would then have received? Business as usual….

Keywords – Accounting, Auditing, Financial Regulation, Financial Reporting Council, Fines, Crime, White Collar Crime, @finregmatters

“Economic Murder” and the Reality of Economic Cycles

One does not have to search for long in the archives of Financial Regulation Matters to find criticism of the Conservative Government. Whether the focus is on the increase in food banks, tax avoidance, elitism, siding with business over the public, or a level of privatisation that is forcing the U.K. into a corner it will struggle to get out from, there has been no shortage of criticism. However, the first thing to note is that today’s post is not, nor the blog moreover, pro-Labour (or, in fact, any political party); Labour are simply just as culpable as their Conservative brethren. To demonstrate this point, today’s post, the first of two, will look at the recent ‘landmark study’ that suggested the Conservative Party’s austerity measures have caused upwards of 120,000 deaths, unnecessarily, since embarking upon this attempt to recoup the losses caused by the financial sector; yet, the analysis will do so from within the parameters of the need to understand economic cycles.

With the Conservative Party taking power in 2010 as part of a Coalition Government it effectively controlled, austerity measures have been ruthlessly implemented across a wide range of British society. Whilst it is expected that the Party would go after the poorest first, traditionally speaking, this era was, and still is, defined by the broadening of that net to the middle-classes. It is on that basis that Johnathan Watkins et al produced the research paper Effects of health and social care spending constraints on mortality in England: a time trend analysis, which was made publically available via the British Medical Journal. The paper is based upon statistical analyses regarding spending levels in two specific categories: public expenditure on health (PEH) and public expenditure on social care (PES), with PES suffering greatly in the hands of the Tories. Yet, whilst the paper ultimately calls for an increase in PES, which seems obvious but is supported by statistical evidence, the media have found delight in picking up on certain elements of the report. The Independent takes the lead with the extracted phrase of ‘economic murder’, whilst continuing by affirming that whilst mortality rates declined between 2001 and 2010, they rose sharply in the following years; the study suggests that, based on the trends identified, there would be 152,000 austerity-related deaths between 2015 and 2020 – 100 a day – mostly because the majority of these people will be reliant on social care rather than health care. Yet, the authors of the paper were keen to temper their findings, expectedly, and stated ultimately that the paper cannot prove ‘cause and effect’, only ‘association’, which was highlighted by critics of the paper like Local Councils who suggested the statistical background of the research could not be relied upon. This all makes sense, but in reality it should be no surprise that savage cuts, across the board, have led to an increase in the mortality rate.

For the Tories, figures like these are par for the course. This is demonstrated in the callousness of some of their most senior figures, and in the recent ‘gaffe’ made by Chancellor of the Exchequer Philip Hammond with his ‘there are no unemployed people’ remark on a morning political TV show. Whilst the comment was, in reality, taken out of context – Hammond was discussing the effect of technological innovations on sectors in different eras, although the claims made by some that actually Britain does not have an unemployment problem can be easily dismissed – the comment was ‘bad for the optics’ in a world where, apparently, that is all that matters. Just two days out from today’s Budget, the timing could not have been worse for Hammond in theory, but in reality it matters very little. This is because the focusing upon who said what and when is nothing more than a distraction from the reality of the situation – the systemic reality. Let us take a step back from Tory-bashing for one moment, and let us look at the Labour Party’s role in this situation where disabled people are being forced to climb stairs to prove their disability, and young families with young children are being forced into food banks after having their benefits effectively suspended for six weeks. Since the 1980s up until the Financial Crisis, of which Labour Governments played an active part (from 1997 to 2010), financial entities within the City of London were actively deregulated, with the Labour Party overseeing the final ten years of the project to extract more wealth from society then has been witnessed before – the Crisis cost the U.S. more than $22 trillion, and the U.K. £7.4 trillion which, if it were not for the heart-breaking human cost would be almost laughable figures. Labour played its part in this system, and they are as much to blame as anybody else; this is not to put the blame on any one particular group, because the political elite is now paying for their subservience to the financial elite by way of record numbers of politically disengaged and disenfranchised citizens.

Ultimately, it is important to have some perspectives when phrases like ‘economic murder’ are being put forward. Yes, the Conservative Party is at the forefront of the attack upon society, but we must focus on what they represent more than what they actually do. Doing this will allow people to predict the effects of economic cycles, rather than find themselves caught up in the crossfire. When the next boom comes around, and credit is flowing free again, society needs to reject the allure of an easy and commercialised life in the knowledge of the damage that is inevitably lurking around the corner; whether this happens is anybody’s guess, but history tells us that, at some point, we will see this all again.

Keywords – Austerity, Conservative Party, Labour Party, Politics, Business, Poverty, Economics, @finregmatters

Friday, 17 November 2017

Carillion in Crisis

Today’s second post looks at the ever-developing story that the British-based multinational construction firm Carillion has today issued its third profit-warning since July, in addition to its suggestion that it is about to breach conditions attached to loans that it is accountable for. With the increasing utilisation of so-called ‘Public Private Partnerships’ and ‘Public Finance Initiatives’, as discussed in a recent post here in Financial Regulation Matters, it is worth discussing the potential effect that this financial bombshell will have; will it cause the socially-integrated company to begin to spiral and ultimately fail, or will it be the latest demonstration of a company that is ‘too big to fail’, as one onlooker has suggested today.

Carillion is proving to be synonymous with this particular period of Britain’s economic history, with the firm winning a number of lucrative and highly-visible contracts, including skyscrapers in Manchester, and of course the infamous HS2 high speed rail project as part of an overall £6.6 billion contract (to all of those involved, not just Carillion); the company is also responsible for the Royal Opera House in Oman, the Yas Viceroy hotel in Abu Dhabi, the redevelopment of the Tate Modern building, GCHQ, Brampton Civic Hospital in Canada and the Library of Birmingham, amongst other projects. However, despite these contractual successes, all is not rosy at Carillion’s headquarters, with many stating that a number of high-risk projects have resulted in the recent malaise for the company. In the Summer, the time of its last profit warning, it was identified that four projects in particular, in conjunction with the need to divest from Canada and the Middle-East, were causing the company serious problems; the company is feeling the effects of loss-making contracts, late-paying contracts, and a building sector that is being squeezed by the economic environment. Three projects in the U.K. – The Royal Liverpool Hospital, the Midland Metropolitan Hospital, and a road project in Aberdeen – are understood to have heavily contributed to the recent £375 million write-down that is at the heart of the spiralling financial health of the company.

For a company that survives upon large-scale grandiose plans, usually by states demonstrating their financial health, the inherent uncertainty that defines the post-2016 (and realistically the post-Crisis) world can be a deathblow if the company is not diversified enough to protect itself – it is for this reason that the company has been divesting from its Canadian and Middle-Eastern projects, whilst also moving the bulk of its business into the facilities management business which, according to the Financial Times now represents almost two-thirds of its entire revenue stream. Yet, the drop in share price, particularly when viewed in relation to its share price when it buoyantly attempted to takeover one of its main rivals Belfour Beatty, means that the company has witnessed its share price fall from 340p in 2014 to 117p today. Ironically, the predicament the company finds itself in has led to speculation, which is being fuelled by a merciless short-selling campaign, that the company itself is now particularly vulnerable to a takeover. However, whilst these facts, figures, and opinions all point to a company in freefall, the reality may be much different.

A piece in today’s Independent discusses how, four year ago, the National Audit Office declared Carillion ‘too big to fail’ because, in effect, it had been allowed to attach itself to the very infrastructure that underpins British society – hospitals, transport, schools, and the military were all reliant upon Carillion to offer their services, for a price. Furthermore, the company is being woven into society even further despite its poor performance, with the contract for its involvement in the HS2 project being awarded just days after one of its most troublesome profit warnings earlier this year. The article in question asks whether knowledge of this arrangement affects the decision making in the firm, and in reality that is a question that need not be answered – knowledge that you are too big to fail has to have an impact upon decision making, whether knowingly or otherwise. Yet, the problem is representative of a much larger social issue, and that is political short-termism.

HS2 was George Osborne’s signature contribution to society, but he left shortly after championing it. Theresa May, now at the helm, is being bombarded with a number of crucial problems like the ever-stuttering Brexit negotiations; has she the capacity to tackle this growing systemic problem of PPP-providers being on the brink of failure? Quite frankly, the obvious answer is ‘no’, with the consequence of that being that to kick this problem further up the road when she will have left Office quickly becomes the best possible option. Companies like Carillion, that are interwoven within society, rely upon this political short-termism to survive and prosper, because for Carillion to fail now would be a problem the country simply cannot afford. So, yes, knowing that one is ‘too big to fail’ has an effect, and it has an effect of everyone.

Keywords – Construction, Carillion, Brexit, Business, Politics, Finance, @finregmatters.

Saudi Arabia Exposes itself to ‘Rating Addiction’

This very short commentary, the first of two posts today, reacts to the news that Standard & Poor’s (S&P), the world’s leading credit rating agency, is to open a branch in Riyadh, the capital of Saudi Arabia. Only very recently did we discuss the recent developments within Saudi Arabia here in Financial Regulation Matters and, as part of that push to reorganise under the ‘Vision 2030’ banner which is being developed by the Crown Prince, the oil-rich state is attempting to move into the financialised marketplace more; the effect of this will be remarkable for the growth of the country, but will also open it up to the iniquities of the marketplace that plague their Western colleagues; the parasitic emergence of S&P just before Saudi Aramco is floated and the country begins its move away from petro-dollars is no coincidence. The question, then, is what exactly is the country letting itself in for?

S&P received approval to locate to Riyadh this time last year, and plans are underway to bring the rating giant to the epicentre of Middle-Eastern prosperity. S&P Global Ratings President John Berisford was clear in his understanding of this when he stated that the Saudi regulator’s (the Capital Markets Authority - CMA) ‘ambitious enabling program presents significant opportunities for the country and investors alike’. The managing director also confirmed that as Saudi Arabia’s capital markets evolve with the changing strategy, there is ‘prime potential for greater debt issuance’ which creates a ‘significant opportunity for S&P’. However, the IMF’s suggestion that there is ‘hardly any liquidity [in Saudi Arabia] as most investors are of the buy and hold nature’ confirms that this move is not for the benefit of Saudi investors, but for international investors to flood the Saudi marketplace with investment. The obvious response to all of this is ‘so what?’ – it is to be expected that the private company seeks to take as much advantage of a new opportunity as possible; this is absolutely true. The real issue lays with the approach of the Saudi leadership.

Saudi Arabia’s push to move away from oil-dependency makes complete sense in light of the fact that the resource is a finite resource. Yet, what they are exposing themselves to in doing so is something which they have likely not encountered before. The mercenary nature of the large rating agencies means that the Saudis are introducing the perfect cocktail for financial ruin to their border, and further, by way of a clear thirst to encourage investment, and a regulatory framework that has no experience of dealing with these venal companies. The pressure the CMA will be under to allow the rating agency as much flexibility as it can with its methodologies, it approach and its compliance, will be considerable owing to the need for the turnaround to work. Then, further, as this author discusses in a forthcoming article and monograph, the country will be catapulted into a vicious cycle of what is known as ‘rating addiction’ whereby the agencies become systemically intertwined and, effectively, remove themselves from deterrent and punishment.

So, what may be the answer for the Saudis? The push to change direction is valid, but it must be done with great care, and in this particular field that does not appear to be the reality of the situation. The regulators are beckoning, even seducing these companies into the country whilst what they should be doing is developing the strongest framework possible, based upon foreign experience and assistance, so that their fragile social revolution is protected from the iniquities of the marketplace. There is a great risk for the Saudi leadership in constructing and executing this social revolution, and they would be minded to take great care when inviting the fox to the hen house.

Keywords – Saudi Arabia, Credit Rating Agencies, Business, Politics, Middle-East, Finance, @finregmatters

Thursday, 16 November 2017

Goldman Sachs’ Chief Raises the Issue of Referenda

In this post, the focus is on the issue of referenda, again, in the context of the British Electorate’s decision to secede from the European Union in 2016. We have looked at the issue of ‘Brexit’ on a number of occasions here in Financial Regulation Matters, for obvious reasons, but only really once from a systemic/theoretical viewpoint. Yet, in light of comments today from one of the most influential business leaders in the world, it is perhaps timely to revisit the issue once more and look more systematically at the issue of referenda and their effects.

In this modern world where direction is presented via a Tweet, Lloyd Blankfein, the CEO of Goldman Sachs, delivered a telling tweet earlier today that will surely have an effect upon development in the U.K. In his Tweet he stated that there was ‘lots of hand-wringing’ from CEOs regarding Brexit, and that with the Brexit decision being so ‘monumental and irreversible’, ‘why not make sure consensus [is] still there’? Effectively, Blankfein is asking why, with such an incredibly effectual decision, one capturing of consensus was and still is considered to be enough – and it is a good question to ask. As business seeks clarity whilst reorganising themselves in case that clarity never arrives, this raising of the ‘multiple referenda’ argument is worth focusing on, and we shall do that in continuation of the previous post in Financial Regulation Matters cited above. To begin with, the concept of multiple referenda is discussed in the Centennial to the Parliament Act 1911: The Manner and Form Fallacy article written by Professor Rivka Weill in 2012, and represents a good starting point. In the article Weill, citing Bruce Ackerman, states that one particular model for conducting referendums is to establish a multiple referenda model, whereby the referendums are ‘spaced years apart with constructed deliberation, on the same topic before recognising that the People have spoken’. Interestingly, Weill pairs this point with the fact that, as a rule (and certainly in the case of Brexit), referendums are not binding for a reason i.e. they are meant to be consultative. Ultimately, Weill discusses how, when writing in 2012, Britain is slowly developing into a nation that promotes the use of referendum to decide constitutional changes, and with 2016 having passed we can say safely that this is certainly the case; as Weill says, the referenda has become a favoured ‘tool of a popular sovereignty model’.

Yet, referenda do have a number of competing positive and negative elements to them. Setala mentions how whilst referenda can be seen as a direct threat to even the largest of majorities within a given nation, it is also the case that referenda can be viewed as an excellent vehicle for increasing the participation of citizens in key areas of constitutional politics, ultimately constituting a ‘step towards [the] further democratisation of societies’. It is also true, however, that the method with which the referendum is delivered is particularly influential, with overwhelmingly intense referendum campaigns leading, usually, to an ‘issue-based’ voting pattern; the EU referendum could certainly be described as intense. The inclusion of large and influential figures into the campaign, ranging from private donors like the infamous Arron Banks, to the whole spectrum of elite politicians, is representative of a long-standing mistrust in the efficiency, effectiveness, and legitimacy of referenda as a tool for democracy; Tierney discusses how, for many, referenda are merely a ‘democratic chimera, symbolising popular power when in reality direct democracy acts as a cover for elite manipulation’ (Tierney’s discussion of the usage of referenda by Napoleon Bonaparte to take control of the French State is illuminating).

With regards to Blankfein’s statement regarding a second referendum with respect to Brexit, there are perhaps three questions (amongst many others) which stand out. Firstly, should there be another referendum? There are perhaps two issues that relate to that, with the first being that for those who voted Leave and continue to support that decision, a changing of the parameters of the game (for want of a better word), could be incredibly impactful upon faith in the democratic system. The second issue is that the decision to leave was taken over a year ago, and the U.K. has triggered Article 50 – there have been a lot of decisions taken on the back of that announcement, and to undo that process could also be particularly impactful (particularly upon such a fragile society). Another issue would be the potential effect upon those who campaigned for Leave upon facts and figures that have been proven to be purposefully misleading (think the big red bus); would there be any repercussions? Yet, another perhaps larger question is why have another referendum anyway? If the concern is regarding the manipulation of democratic processes, then having another referendum means that there is just another opportunity to have the process manipulated. It goes without saying that lobbying forms would jump into action if even the weakest of second-referendum rumours began to develop. This point leads to the obvious point, and that is that the Leave/Remain referendum was simply not binding. The question then is why such a slender majority was considered enough to take such a monumental decision. Surely, and rationally, a simple majority was an inappropriate measure for action; to use the regulations governing companies for example, for the most influential of decisions that a company can take, a special resolution is often required i.e. more than ¾ must approve the decision for it to take effect – apparently, the direction of private companies is more sacrosanct than the direction of a country. Blankfein’s message is an interesting one, but unfortunately a safe one that only adds to the problems – he knows full well that his ‘idea’ is particularly late and will not be acted upon. The real question we need to ask is why the decision to act on such a slender majority was taken in the first place; regrettably, that is a question that has too many answers.

Keywords – Brexit, Politics, Referendum, Banking, Goldman Sachs, Constitution, democracy, @finregmatters.

Lessons from the “Paradise Papers” Leak

It has been nearly two weeks since the news broke that yet another offshore law firm’s accounts had been hacked and subsequently leaked. After the ‘Panama Papers’ scandal that broke in 2016, this latest leak – the so-called ‘Paradise Papers’ – has the capacity to engulf a large number of particularly influential and recognisable people. Yet, it is worth questioning a. what this leak actually portrays, b. what the effect of the leak may be, and c. what the leak tells us about the larger picture? To answer those questions, the following seeks to introduce the leak, and provide some context for the claims that are consistently emanating from it.

The so-called ‘Paradise Papers’ leak, which is the catchy title being given to the leak of documents from a Caribbean-based Law firm called Appleby (its ‘fiduciary’ arm is called ‘Estera’ after a recent management buyout), is the second-largest document data leak, with the so-called ‘Panama Papers’, derived from the Law firm Mossack Fonseca, holding that unfortunate honour of being the largest data leak on record (2.6 TB of files were released then, as opposed to 1.4TB from Appleby). However, some perspective is required within a world were sensationalism is currently the order of the day. So, firstly, what is the reality of offshore investing, and does that relate to these stories of, seemingly, widespread tax avoidance? Secondly, what can we take from these leaks with regards to the ‘bigger picture’?

Offshore investing, in very general terms and in order to provide a realism check, is legal. The ability to invest one’s funds offshore, traditionally in a small jurisdiction that does not have the most sophisticated regulatory structure, is noted as being a viable and useful investment strategy for a number of reasons. Whether it is to diversify one’s exposure to risk, to protect one’s assets from political variabilities (like war or political instability, for example), or to protect against market volatility, there are a number of benefits to investing offshore. However, ‘investing offshore’ masks a number of variances which really should be revealed: offshore investing may relate to an investment fund being ‘domiciled’ abroad, which is legal, but offshore investing is sometimes cited when people attempt to remove their income from tax authorities, which is not legal. Whilst some who are caught in the crosshairs of this latest scandals have not, necessarily, been accused of operating illegally, it is really the close connection between the business and political elite and these tax-avoiding schemes which is causing the scandal to have such an impact. Whilst allegations of illegality will likely be forthcoming, at the moment the focus is on both a. proximity between the scheme and the elite, and also b. the issue of declaration, as witnessed by the story enveloping Lord Ashcroft at the moment. Yet, the proximity-issue points to a much larger issue, and one which, rather regrettably, is difficult to paint in a positive manner.

The former British Prime Minister, David Cameron, once opined that tax avoidance – in relation to the comedian Jimmy Carr being outed as using an aggressive tax-avoidance scheme – is ‘morally wrong’, with his successor, Theresa May, vowing to combat tax-avoidance almost immediately after taking office. However, the first point to note is that it will be incredibly interesting to hear Theresa May’s responses to this latest leak, one which puts some of her Party’s most revered figures in the centre of the scandal (one doubts she will be as forthcoming this time – more on this below). The second point is more abstract; the absolutely incredible amount of people and corporations caught up in this scandal can only tell us one thing: tax avoidance, or at least doing everything possible to reduce one’s tax burden, is inherent within society (particularly, rather obviously, for those with large reserves of funds). This should not really be revelatory, but the response to the Paradise Papers suggests that maybe it is. This latest instance of proof that influential people systematically ‘game the system’ should be the spark that initiates deep-rooted reform of the market-centred society we live in, but one should be able to realise how fanciful that thought is when looking at the impact of the Panama Papers.

Yet, the development of a story that is just over 10 days old continues unabated, with more and more of the elite being linked to the scandal. Billionaires like Robert Kraft, sports stars turned celebrities like Gary Lineker, Lewis Hamilton, and performers like Shakira, Nicole Kidman and Madonna have all been caught up in the scandal to varying degrees. Furthermore, it was stated above that it would be interesting to hear of Theresa May’s views on the scandal, speaking from a British perspective, and that interest was only heightened today by the news that ‘Theresa May’s Husband has “serious questions to answer” on tax avoidance’; Business Insider leads with a story this evening that ‘investment advisors Capital Group, where Mr May is a relationship manager, used offshore law firm Appleby to arrange investments in tax havens’. Quite what Mr May does in his role as ‘relationship manager’ of a private equity firm, at the same time as being the Husband of the Prime Minister of the United Kingdom, is not quite revealed by the publication, but certainly adds another dimension to the unfolding scandal. Furthermore, it is probably more proof, if proof were needed, that tax evasion, tax avoidance, high finance and high politics are essentially all one and the same. Yet, a massive story published today regarding a ‘landmark study’ that links Conservative-driven austerity to over 120,000 deaths since 2010 that could have been avoided if wealth was not being systemically extracted from society – quite a time to break a story after the scandal that confirmed the widespread removal of private funds from national tax authorities. The report regarding the links between austerity and increased mortality rates will be covered in a future post, but for now it is enough to say that this Paradise Papers scandal should be garnering far more action, far more anger, and ultimately far more effectual change than it is doing; as to why that is, one must look to the system for answers.

Keywords – tax, Paradise Papers, Business, Politics, Celebrities, Finance, Law, Capitalism, @finregmatters

Tuesday, 14 November 2017

French Regulators Hit HSBC for €300 million for Tax Evasion, With More to Follow

Today’s short post serves to review the recent movements of French regulators aiming to crack down on large-scale tax evasion taking place in and through its jurisdiction. Le Parquet National Financier (PNF) are France’s largest financial regulator in terms of financial-based crime, so equivalent really to the Serious Fraud Office in the U.K., and we looked at their work recently here in Financial Regulation Matters with regards to their investigation of Airbus and its potential involvement in widespread bribery. Today, however, we will review their recent work with regards to tax evasion, which is particularly pertinent given the recent ‘Paradise Papers’ scandal which will be the focus of tomorrow’s post.

For HSBC, one of the world’s largest and most widespread banks, this specific problem today stems from the group’s Swiss Private bank arm, and relates specifically to claims that it helped wealthy clients evade taxes – it was claimed that more than €1.6 billion’s worth of assets were a part of the scheme. The scheme was uncovered and revealed by a ‘leaker’ – Hervé Falciani was convicted in absentia late last year for ‘aggravated industrial espionage’ – in 2009 by way of a seizure of a multitude of documents from his computer. The documents, we now know, were particularly damning, so much so that today HSBC ‘accepted the alleged facts of the case’ outright and has agreed to pay €300 million to settle the issue, which comes on top of an inconsequential £28 million fine from Swiss authorities for ‘organisational failings’ seems as tax evasion technically is not illegal in that country. Of course, the Bank is adamant that accepting the facts does not mean that the Bank is guilty of wrongdoing, which is the standard line, but it is unlikely that the other countries that have also initiated investigations based upon the ‘leak’ will be deterred by the refusal to accept guilt – in fact, it will likely be the opposite, with American, Spanish, Belgian and Argentinian authorities rumoured to be developing similar cases against the Bank. Yet, in reality, today’s news should come as no surprise, as HSBC is, unfortunately for them, beginning to become synonymous with this type of behaviour. In 2015 the British elements of the Bank came under pressure for their failings, and last year were considered fortunate to have escaped criminal prosecution from the HMRC regarding negligence over the monitoring of illegal activities. Also, in a previous post in Financial Regulation Matters in March this year, we looked at how the bank is consistently linked to these schemes, particularly in reference the ‘Global Laundromat’ scandal which has not really received the attention it surely deserves. Yet, whilst HSBC is synonymous with these aspects, the PNF are also focusing on another major player in the field: UBS.

In March, it was reported that the PNF were attempting to settle with UBS for more than €1 billion for the very same crime – assisting wealthy clients evade tax authorities. However, commentary at the time suggested that the figure was so high that UBS really had no choice but refuse to settle, with the consequence then being that the Bank was facing criminal charges which could see it fined up to €4.9 billion. This is an interesting development, because whilst UBS’ local rival Credit Suisse settled with US regulators for $2.5 billion in 2014 and UBS settled for only $780 million and a DPA (deferred prosecution agreement), it appears now that the PNF have UBS in their sights and are attempting to land a serious blow in the fight against tax evasion, which is to be welcomed. There has not been much development in this story of late, but this case and its obvious complexity may see the story drag on for a few more years at least –one thing is for sure, and that is the revelations stemming from this case could be particularly damaging for UBS.

Ultimately, the move by the PNF today signals an intent which is both required and timely. In conjunction with other efforts in Europe, the U.K., and the U.S., this push to use legal powers to bring criminal actors to account is welcomed, although the UBS case is probably of particular importance if it does conclude with a near €5 billion fine for UBS – the reason is that raising the bar will hopefully raise the bar for their regulatory counterparts across the world, so the illegal act of assisting in tax evasion can become a very costly business indeed. Whilst $300 million is small change for a Bank like HSBC, this can be seen as an aperitif for the big case against UBS, and on that basis we can say that today’s settlement represents somewhat of a success, particularly if other authorities begin to take action against HSBC like they are rumoured to be doing – these are interesting times for the regulation of tax evasion.

Keywords – HSBC, UBS, Tax Evasion, PNF, France, Banking, Switzerland, Fraud, Industrial Espionage, @finregmatters.

Sunday, 12 November 2017

AIG Removed from ‘Too-Big-To-Fail’ Status: The Latest Indicator of Cyclicity and Amnesia

Today’s post is a short commentary on the latest development in a story which we have already covered here in Financial Regulation Matters. In early October we looked at the Financial Stability Oversight Council (FSOC) and their decision to remove AIG, the insurance Giant that played a central role in the Financial Crisis, from its designation as a ‘Systemically Important Financial Institution’ (SIFI). In the post we discussed how some of the world’s most influential financial figures, like Carl Icahn, had been devoting considerable time and effort to seeing this designation removed and how, ultimately, the decision could be seen as Donald Trump and his Administration making good on a number of promises to scale regulation back in the coming years. On Friday this deregulation picked up pace, but this time on a global level, and for this post these developments signal a clear marking of a systemic shifting through the economic cycles – however, this has connotations.

The details of the deregulatory push will not be examined in any great detail here, because that was done in the previous post. Yet, there were questions raised as soon as the US chose to remove the SIFI designation regarding how global regulators would react, with onlookers suggesting that looking at the size of a firm is not as accurate nor fair as looking at the particular operations of the said firm. To this end, the Financial Stability Board (FSB), which serves to coordinate financial regulation across the G20, has now (supposedly) declared that they will shift their regulatory focus to activities, rather than size – with the expected result being that firms like AIG will have their Too-Big-To-Fail (TBTF) status removed in line with the US’s designations. However, to read the headlines would have you believe that the FSB has simply chosen the same path as the US because it makes sense, but a closer inspection reveals that the US Treasury has been actively lobbying the FSB to reduce its designation, which seems to add further fuel to the assertion declared in recent posts (here and here) concerning the independence of regulators – should regulators really be lobbying other regulators for private companies to benefit?

There have been many analyses into the validity of the TBTF label, and the validity of applying it to companies which have proven themselves, beyond question, to having been complicit in one of the largest and most systemic financial failures on record. There have also been questions raised by concerned politicians like Senator Elizabeth Warren regarding the decision in the US to remove AIG’s SIFI designation. Yet, whilst all of these analyses and concerns are more than valid, there is a much larger, more systemic, more social issue that needs to be acknowledged: Cyclicity. Whilst political cycles of liberals or conservatives make the headlines and are portrayed as being true indicators of social development, it is actually economic cycles which determine progression; it is widely acknowledged in the literature that these cycles of growth > bubble > collapse > regulation > populism > deregulation > growth are what defines society, with it being suggested that this model is inherent to what we consider a Government-led society to be. Also, the obvious comparisons made between the Great Depression and the Great Recession, and between the political developments of the 1930s and 2008 onwards, suggest that comparison can be made because the problem is systemic, not just confined to the machinations of a given era. Whilst the comparisons may not be directly transferrable between eras, the sentiment is exactly the same – business exploits the system, then the system works to develop the same environment again for business to exploit. This is hard to disagree with, and forms part of the reason why regulation can never truly be ‘successful’ in preventing financial-based scandals, because they system is designed to operate in that way; really, all that one can hope for, is that the public is protected as much as possible. Yet, whilst having hope is necessary, the reality tells us that the money siphoned off by business has to be created somewhere, and that is the public’s role. Then, in order to repair the damage and create a facilitative environment for the next wave, the resources have to come from somewhere, and that is the public’s role. So, in reality, regulators would have a hard time explaining what it is they are meant to do within the public-safety parameter, but arguably they would have no such problem if asked the same question from within the pro-business realm – the recent posts on regulator independence provide more than enough evidence for this.

Ultimately, recent events like the elections of the unashamedly pro-business and anti-public Donald Trump and Theresa May, combined with the concerted and sustained deregulatory campaigns to reduce the oversight of exactly the same entities that brought the system to its knees only less than a decade ago should be confirmation, if confirmation is needed, that we are passing through the phases whereby society has been extorted enough so that preparations can be developed to allow for the next phase, which is business taking advantage of systemically-created opportunities. Some may be of the opinion that this is how it should be, and admittedly there is no alternative proposed here other than greater protection of the vulnerable in society (which is achievable), but the overriding concern is that, last time, there was a buffer of 60+ years for society to prepare itself, this time there is only 10+; it is contested here that this is simply not enough – we need our own “Quiet Period”, and we need it much more than the ‘growth’ that is consistently regurgitated out of the mouths of those associated with the political apparatus’ of Washington, D.C., and London.

Keywords – AIG, Insurance, Politics, Regulation, Financial Stability Board, G20, Trump, Theresa May, Economics, Cycles, Society, @finregmatters.