Sunday, 30 April 2017

Philip Green and the BHS Pension Scandal: A Cause of Change in British Company Law?

Today’s post is a short reactionary post to the statements made today by the Prime Minister, Theresa May, regarding the potential future of Company Law in the U.K. With regards to the protection of pension funds within large businesses, Mrs May stated that ‘today I am setting out our [the Conservative Party] plans, if elected, to ensure the pensions of ordinary people are protected against the actions of unscrupulous company bosses’. In light of this, this post will look at the propelling rationale for this election campaign agenda, and also look at the reality of the situation by asking whether the Government would really punish the bosses of the largest and most influential companies in the country.

The reason why the issue of company pension funds is being debated by the leaders of the main political parties in the U.K. is, predominantly, because of the scandal that emanated from the collapse of large British retailer British Home Stores last year. In Financial Regulation Matters, we have already discussed this scandal from two perspectives: the first post was concerned with the conduct of Sir Philip Green with regards to his selling the retail icon to a less than stellar businessman, and his subsequent pledge to ‘sort’ the crisis that emerged with regards to the £500 million deficit in the company’s pension pot for its employees; the second post analysed the proposal by Frank Field to incorporate corporate governance standards aimed at public companies within the realm of private companies in the U.K., which took the form of proposing that private companies should abide by the Financial Reporting Council’s corporate governance code. So, rather than go over those stories in any great detail again, we shall instead focus upon the aims of the Prime Minister.

Theresa May started by stating that ‘safeguarding pensions to ensure dignity in retirement is about security for families’ which, whilst clearly a worthwhile endeavour, should be considered against the backdrop that she recently hinted at removing the ‘triple lock’ on pensions in the U.K. – a system which guarantees that the basic state pension will rise by a minimum of either 2.5%, the rate of inflation, or average earnings growth, whichever is larger – but one digresses. In terms of the proposals hinted at in the PM’s speech today, she stated that the Pensions Regulator would be able to impose large fines of bosses who ‘wilfully left a scheme under-resourced’ and that some company directors could be struck off in more serious cases. Labour leader Jeremy Corbyn, in offering his party’s proposed plan on the issue, stated that one element of his so-called ’20-point plan to end the “rigged economy”’ would be to amend company takeover rules to protect employees’ pensions. At this point it is important to note that these issues were only raised today and will, hopefully, be elaborated upon in much more detail by the candidates, as it is rightly being regarded as a pressing social problem. However, the call to further empower the pensions regulator is, in theory, a welcome call and could go some way to addressing this extremely important issue. However, the question is ‘will this proposed change in company law have a demonstrable effect upon the status quo?’


It is here that, in the style that underpins every post here in Financial Regulation Matters, it is important to look at things as they actually are, not how we would like them to be. Whilst the BHS scandal highlighted the incredibly transgressive nature of businessmen like Sir Green, the approach taken by the state – whether that be via Parliamentary Committees, or regulators – was particularly woeful. We saw, live, the utter disregard that people like Green have for the state and the people who they harm on the way to their successes. We saw how the Parliamentary Committees tasked with bringing Green to account were bullied and scolded by the billionaire. We saw how the establishment, with the support of the media, heralded the potential removal of Green’s knighthood as the best deterrent against his conduct. We saw all this, and for this reason we should consider the potential that these alterations to the companies laws in the U.K. will make little difference when it comes to the most influential figures within the arena of big business. If we add to this the understanding that the trajectory of Brexit negotiations is likely to see the U.K. pandering to big business in order to repair the damage that leaving the Union will create, then it creates further uncertainty as to how, in any genuinely effectual manner, the Government will rebuke those who they need to navigate what will be, almost undoubtedly, particularly choppy waters in 2019. It is hoped that the Companies Act 2006 is amended to further protect the pension pots of employees in companies in the U.K., but whether those alterations will result in the next Philip Green being struck off from being a company director is, arguably, highly unlikely. So yes, Mrs May, it is very important, for the dignity of employees, that their retirement funds are protected now – the question for the British electorate is ‘is she true to her word?’

Thursday, 27 April 2017

Donald Trump’s Plans to Cut Corporate Tax Rates by 20%: The First Domino To Fall in the Story of a Race to the Bottom?

Today’s post reacts to the news that President Trump is seeking to ‘cut corporate tax to 15%’ from the current rate of 35%. The proposal, which was announced this week, represents what White House officials are labelling as the ‘largest tax reform in US history’ and which has its basis in the (supposed) aim of repatriating taxes on money that major US companies like Apple, Google, and Microsoft generate abroad. For this post the focus will be on the larger picture; specifically, the focus will be on the connection between this story and the fears that Brexit will promote the idea that Britain will set itself up as a tax-haven if it is shut out of the single market. The two developments, potentially, point to a much larger issue that has been mentioned time and time again here in Financial Regulation Matters – the escalation in divisiveness within modern politics is playing right into the hands of big business.

The plans to cut the US Corporate Tax rate by a massive 20% have not yet come to fruition. Speaking yesterday, new US Treasury Secretary Steven Mnuchin, who has been the focus of Financial Regulation Matters previously, stated that the Administration is moving ‘as quickly as we can’ to pass the reforms, which Chief Economic Advisor Gary Cohn suggested was a ‘once-in-a-generation opportunity to do something big’. The plan, which would be the first major corporate tax reform in the US since 1986, aims to redirect the taxes that major US companies are paying to tax-havens all around the world – a recent study by Oxfam suggested that the 50 biggest US companies ‘stashed another $200 billion of profits in offshore tax havens in 2015 alone, taking the total to approximately $1.6 trillion’. The plans will slash taxes for companies large and small – including, as many media outlets have noted, Trump’s own businesses – but will see the largest firms experience a $328 billion tax break. Critics have responded in the expected manner by pointing out that the proposed cuts are ‘basically a huge tax cut for the rich’, whereas other critics have chosen to focus on the practicality of the cuts by asking how the national debt will be lowered by reducing tax revenue; Governmental aides have suggested that this issue would be ‘offset by the new revenue created by the rapid growth [the tax cuts] would trigger’. This is obviously an important issue as the US Government is flirting with yet another ‘government shutdown’ because of the ever-increasing national debt – it has been suggested the tax cuts could add up to $2.4 trillion to the national debt, which at the time of writing stands at just under $20 trillion. Leaving aside the issues surrounding Trump and his own personal tax returns, which seem to be a consistent form of scandal, and also the fact that the proposed reforms have a very long way to go – Democratic Senator Joe Crowley insists that the White House needs to ‘get their act together’ – the in-your-face aspects of this story mask a much deeper issue.

There is a fear, which was represented in the recent Oxfam report, that the cuts to US Corporate tax rates will trigger a ‘race to the bottom that will harm consumers in America as well as the world’s poor’. However, if we proceed on this globalised viewpoint, there is the potential situation that post-2016 politics – Trump’s election win; Brexit; the upcoming U.K. General Election; and the French Presidential Election (not to mention Germany’s at the end of the year) – and the sheer divisiveness that is resulting from it is playing right into the hands of corporate elites. In January of this year, the Chancellor of the Exchequer Philip Hammond, who was the subject of a recent post in Financial Regulation Matters, brazenly threatened that the U.K. is willing to ‘whatever we have to’ to bounce back after Brexit, including, amongst a number of other things, engaging in a tax-rate race to the bottom to make the U.K. into a tax haven to ‘regain competitiveness’ in the event of a so-called ‘hard-Brexit’. There are a number of issues with this threatening posture. The first is the realisation that the U.K. already has one of the lowest corporate tax rates in the G20, and plans to reduce the rate to 17% from 20% in 2020 would see the U.K. boast the lowest rate of any member, which has led some to fear for the consequential effects upon environmental and safety standards, as well as upon social cohesion. Others have argued that the move towards becoming a tax haven should be viewed against the common features of tax havens, which they argue include anti-democratic sentiments, high house prices, disproportionate employment economies, and a high cost for everything for those who actually reside in tax havens. Whether or not the British Government carry out this threat is another matter entirely, but the sentiment that the threat contains is telling – we are entering into a phase where the aim of the game is to court the business of corporate elites.


The loss in revenue to places like Ireland and Luxembourg if Trump’s proposals come to fruition will see those countries aggressively attempt to undercut the US. The U.K., if it decides to proceed down the path of reducing corporate tax to the lowest of any G20 country, will then be forced to follow suit, and so on and so on. Whilst there is a lot up in the air in this area at the moment, one thing is certain – playing this game of bending over backwards to corporate elites that only have their interests at heart will result in catastrophe. Whilst business cannot be regulated in every single thing that they do within this current society, it is remarkable that, just a decade on from one of the largest financial crashes in history, amnesia has recommenced and the corporate elites who threatened the very fabric of society are now being courted to save it. Yet, it is not remarkable. It is, if we take a step back for a moment, actually very ordinary. The cyclical elements to these stories are clear, yet the smallest details are being hashed out by officials and the media – the larger picture shows, unfortunately, that the bubble that these deregulatory and tax-reducing moves will create will pop with an almighty bang; the question is, and it is a question that should concern us all, ‘will the reverberations of that explosion be too close to the last one?’

Tuesday, 25 April 2017

Andrew Tyrie Stands Down as MP and from the Treasury Select Committee: Where Will He Land and Who Will Replace Him?

Today’s post looks at the news that Conservative MP and Chairman of the Treasury Select Committee, Andrew Tyrie, is to step down at the forthcoming election. Rather than cast aspersions on Tyrie’s political allegiances, the focus for this post will be, primarily, upon his role as Chairman of the Committee. In this role, Tyrie has developed a reputation for being meticulous and thorough when scrutinising the actions of political and business elites, and it is this that is important for our understanding. Therefore, after looking at Tyrie’s performance over the years in the role, the post will look at where Tyrie should go now that he is leaving Parliament, and also the importance of finding a suitable replacement.

The caveat to this piece is that it should be a given that politicians could always do more in their roles. Scrutiny is great but, just for one example, the fact that hardly anybody was punished for the Financial Crisis and the endemic fraud that underpinned it is the more telling understanding. However, we have spoken before in Financial Regulation Matters about the limitations of advancing the notion that white-collar criminals should be punished just as severely as anybody else, so with that in mind let us continue within the parameters that scrutinising is a particularly positive endeavour. In that sense, Andrew Tyrie represents the forefront of political and business-related scrutineering in this country, akin, arguably, to recently retired US Senator Carl Levin who, apart from his many endeavours over his years as Senator, led the inquisition into the Financial Crisis from an American perspective. Tyrie has been in and around Parliament for over 20 years, and took the reins of the Treasury Select Committee in 2010. In that role, which he campaigned to have strengthened by making the case for Select Committee Chairman to be elected by MPs, Tyrie has faced off against a number of powerful and influential individuals. In 2016, the Select Committee called Sir John Chilcot to bear, with Tyrie putting Chilcot under particularly revealing pressure with his thoughts on Tony Blair’s culpability in taking the country to war. He has grilled Governors of the Bank of England, including a systematic examination of Sir Mervyn King’s powers, and more recently rebuking Mark Carney for threatening the perceived independence of the Bank by engaging in a ‘deliberate attempt to frighten the voting public with a political motive’ regarding Brexit. His economics background gives him an insight into a world which often, and purposefully, shrouded in an air of complexity – this was demonstrated particularly well in his public dressing-down of former HBOS Chairman Lord Stevenson, who Tyrie labelled ‘delusional’, living in ‘cloud cuckoo land’, and as being ‘evasive, repetitive, and unrealistic’. The most recent example of Tyrie’s quest for fairness amongst the financial elite was reviewed in Financial Regulation Matters when the story broke that Charlotte Hogg had transgressed in her role in the Bank of England; again, it was the Committee behind that development. However, Tyrie would also make a name for himself for challenging the elites within his own party, which has seen him being described, since he announced his resignation, as a ‘true parliamentarian’.

Tyrie’s most famous political clashes have been with the leaders of his own party, including none other than the then Prime Minster David Cameron, and the then Chancellor of the Exchequer George Osborne, who has graced the pages of Financial Regulation Matters before. With regards to the David Cameron, the two had a heated exchange during a hearing whereby the Prime Minister was being questioned on his approach to assisting inquiries into the relevancy and appropriateness of force being used in Syria, which saw Cameron angrily respond to Tyrie ‘you do not know what you are talking about’ after being asked why information was not forthcoming to Intelligence and Security Committees tasked with overseeing the actions of Government. With regards to Osborne, the then Chancellor was taken to task regarding a bank surcharge that the Government had dreamed up because, essentially, the fear was that the surcharge would inhibit competition to the detriment of consumers and small businesses. These are just some of the many actions taken by Tyrie in his role as Chairman of the Select Committee, but as of the General Election in June, the Committee will need a new leader.


This then raises two questions. The first is where will Tyrie go now? It was stated in the Financial Times today that Tyrie’s decision came as a surprise initially, because ‘only last week he was lobbying to stay chair of the committee’, although it appears that he was aware that the tenure may have only lasted one more year. At 60, Tyrie still has a while to remain influential, and one columnist in The Guardian has suggested that Tyrie would be a natural replacement for Hogg, or at least should be given a prominent role in the Bank of England – this is not the worst idea in the world. Failing that, a role within a financial regulator like the Financial Conduct Authority would seem fitting for a man who challenged political elites at the cost of his parliamentary career; hopefully, this story does not end in the same way most political careers do with the politician monetising their position by walking through the ‘revolving door’. In terms of the second question – who will replace Tyrie? – there are currently no stand-out characters. What is for sure, however, is that what we need – in terms of a country going through a particularly difficult and divisive transition – is someone who will forego political ambitions (in terms of wanting to become a cabinet minister) in order to hold the political and financial elite to account. There is a constant fear, demonstrated by the posts in Financial Regulation Matters, but across the news media generally, that the changing tides in the British political landscape can be fertile ground for abuse – a select committee chairman who will be willing to ask difficult questions may be the best chance, within the current parameters, of reducing the likelihood of that abuse. Therefore, the appointment to the Chairmanship should be observed with interest. 

Monday, 24 April 2017

U.K. Firms Ready Themselves to Reveal Gender Pay Gaps: A Private Or Public Solution?

Today’s post focuses upon the upcoming raft of company disclosures in the U.K. that will detail the differences between what Men and Women are paid. The first companies to reveal their internal statistics include Virgin Money, Schroders, and Utilities company SSE, with the headline figure being that one of the companies, Virgin Money, has pay gaps of an extraordinary 36%, which is roughly twice the national average. In this post, then, we will look at the disclosures that are forthcoming and assess whether the actual task of forcing companies to reveal the gender pay-gaps is even something we should be insisting upon, or whether there is more to be done on a much bigger scale – there is clearly much that needs to be done, but the question remains of how it should be done to eradicate the pay-gap once and for all.

The new regulations, which will be monitored by the Equality and Human Rights Commission, are aimed at all companies in England (and also public bodies) that employ more than 250 people. The aim of the regulations is to enforce the disclosure of how companies pay men and women, with it being expected that 9,000 companies employing more than 15 million people will disclose this information, representing half of the workforce in the U.K. Even though it has been technically illegal to pay men and women different amounts for the same position for over 45 years with the enactment of the Equal Pay Act 1970, which was more recently amended and superseded by the relevant parts (s. 64-71) of the Equality Act 2010, the gender pay-gap still stands at 18%. The companies who have declared so far have revealed somewhat alarming figures, with Virgin Money being the headline company in this regard. The bank revealed that men who work at the company earn, on average, more than 36% than women do, and at the asset management firm Schroders, the difference is 31%. PricewaterhouseCoopers found a 15% difference, whilst SSE reported a 23.4% gap in their pay rates. Onlookers have been keen to point to the mitigating factors however, like the issue that statistics (as if often the case) may not represent the true picture. For example, the national pay gap of 18% does not, according to The Independent, take into account the fact that men hold a larger proportion of senior and high paying roles, whereas women hold a majority of the lowest-paying jobs, with these statistics that were sourced from the Confederation of British Industry (CBI) supplementing the view that ‘the way men and women are segregated into different job functions is the biggest driver of the gender wage gap’ – when these factors are taken into account, it has been stated that the actual national pay-gap is around 5.5%. The results, and the push to declare such data moreover, has elicited a varied response.

Virgin Money’s ‘People Director’ Matt Elliot is quoted as saying that as the firm had too few women in senior roles, with men making up 67% of the highest paid positions as opposed to just 26% of the lowest-paid, there is a need ‘to make consumer-service roles more attractive to men’. SSE found that 34% of men in its company received a bonus, compared to just 12% of women, and when paid the bonuses were, on average, 32% larger for men. As for the issues of bonus rates, it is hard to justify such a chasm – the fact that the firm chose to blame a gender gap in science and technology education is telling. With regards to Elliot’s comment, it seems almost remarkable to suggest that the way the company should deal with a lack of female representation is to encourage men to take lower paying jobs, rather than anything to do with the firm’s recruitment procedures. On this point, the CBI raises a point in which it states, via a report by a partner at law firm CMS, ‘if employers are not responsible for all the problems, they cannot be held accountable for all the solutions’, adding that more affordable child care and better education for women would bring women’s pay in line with men. Whilst it does remove the burden from business, it does raise an interesting point regarding the systematic assistance in this area, which a columnist in The Telegraph agrees with then they state that ‘childcare in London can easily cost £25,000 per year. For all but the super-rich, this is simply unworkable’, which is capsulated by the headline ‘the gender pay gap is about motherhood. Everything else is just noise’. The role of the government, therefore, can be seen as crucial in this area.

In terms of pure statistics, the data between this country and others shows the need for action by the state. In the U.K., it has been found that many parents are spending more on childcare than they do on their mortgage, with average fees for one child in part-time nursery and another in an after-school club costing £7,549 a year. Statistics from around Europe paint a rosier picture, but there are caveats to each statistic, with the examples of Finland being cited as needing to be understood in terms of the high tax rate, and Sweden as needing to be understood in the societal effects of the lack of ‘stay at home mums’, to quote an ‘expert’. Nicky Morgan, the Education (and Equalities) Secretary, noted the actions of the government, while maintaining that this issue is a problem for business to resolve: ‘the job won’t be complete until we see the talents of women and men recognised equally and fairly in every workplace. That why I am announcing a raft of measures to support women in their careers, from the classroom to the boardroom… at the same time, I’m calling on women across Britain to use their position as employees and consumers to demand more from business’. This has been supported by a partner at Allen & Overy, who suggests that ‘the gender pay provisions are likely to do more for pay parity in five years than equal pay legislation has done in 45 years’, with the abiding hope that firms that reveal and act upon the data in a positive manner ‘will have an advantage both with investors and in recruiting’. However, is this pro-market sentiment appropriate for this sector, and does the sentiment being offered by the market and the Government do enough?


Ultimately, the answer has to be ‘no’ on both accounts. Firstly, the sentiment does not go even nearly far enough because it focuses on the difference between men and women; what about the divergence between women, if we focus on women just for one moment, from different backgrounds? Does that not matter? Research recently found that the difference between Pakistani and Bangladeshi women and white women was 26%, whilst black African women earned only 80% as much as their white male counterparts, with the divergence between a disabled woman and non-disabled woman being 22%. These factors, and the official ignorance, or perhaps denial, of them means that the pro-market sentiment is particularly inappropriate. Yes, businesses need to do an awful lot more, but urging women to act with their custom is hardly an effective method of changing this socially-ingrained problem. The fact that 82% of firms, based upon a survey of 145 employers, were not even reviewing their pay practices in light of the new regulation, speaks volumes. The pro-market stance of the current government is clear to see, and it is continuing to affect our societal values. Businesses are at once being put under pressure to perform ‘for the good of the economy’, but also being tasked with altering deep-rooted social norms. The government, who are elected to take such action, are claiming that business should do it. The result? The result is simple – the buck is being passed. Women are not being supported by the state to compete at the upper echelons of the workplace, and are not being supported by the institutions that they work for; obviously something needs to change but the question is who will initiate that change and carry the torch for this societal need? According to the above, it is women who will have to do it by being conscientious with where they spend their money; that statement is indicative of a dire state of affairs in this supposedly ‘modern’ society.

Saturday, 22 April 2017

The Privatisation of the Green Investment Bank: Yet Another Example of the Imbalance Between Short-Term Gains and Long-Term Losses?

Today’s post was intended to move away from the world of politics after a number of posts in Financial Regulation Matters focused upon the actions of the political leaders in the U.K. However, politics and financial regulation, and business matters moreover, are intrinsically intertwined. Therefore, today’s post will remain in this juncture between the relevant fields and look at the recent news that the British Government is about to sell the Green Investment Bank (GIB) to a consortium led by the Australian-based Macquarie Group. So, in this post, we will take a look at the GIB in more detail and see whether the claims from the government that the deal represents good value for the taxpayer really hold true under scrutiny.

The Green Investment Bank, which proudly proclaims on its website to be ‘first bank of its type in the world’, was created in 2012 after consultations stemming from the 2010 General Election. In 2012 the bank received the authorisation from the European Commission to receive state aid and subsequently became a fully-fledged financial institution. The bank, which currently has only one shareholder – the U.K. Government – has a capitalisation of nearly £4 billion that was designed to allow it to invest in ‘green’ endeavours up and down the country, ranging from wind farms to bio-waste processing plants. In 2015, the Government decided that it would sell a majority stake in the bank, stating that the move would give the bank ‘more freedom to borrow, remove state aid restrictions, and allow it to attract more capital’ and this week a bid was accepted, preliminarily, to that end. The bid of £2.3 billion, which comes from a consortium led by the Australian-based Macquarie group but, also interestingly for British academics, contains the Universities Superannuation Scheme (USS), sees what would be, potentially, Britain’s fastest-ever privatisation create a £160 million profit for the public purse which one onlookers suggests ‘we can’t grumble about’. However, there have been a number of questions raised about the proposed sale.

The first point of call in terms of opposition was the last-ditched attempt for a judicial review by a rival bidder, Sustainable Development Capital, which was based upon the need for the Government to operate in a way which create the best value for the taxpayer, although it was subsequently dismissed by the courts. The potentially fastest ever privatisation – the process has yet to be officially completed – raises a number of issues further than the issue of ‘value for money’ because of the reputation of the leader of the consortium, with the phrase ‘asset-stripper’ being highlighted by a number of media outlets. At the turn of the year, when the deal was first mooted, the fears were that the bank was preparing to sell many of the constituent parts of the GIB’s portfolio once it secured the deal, with wind farms being the prime contender. This led to Scotland’s Economy Secretary, Keith Brown, writing officially to the Climate Minister in Westminster, Nick Hurd, to warn that the sale could result in the new owner embarking upon an ‘asset stripping’ exercise, although the company insisted that it has a ‘substantial and longstanding commitment to the renewable energy and clean technology sectors’. As for the USS, its role will be to help the new consortium by way of funding future investments to the tune of about £2 billion, which equates to it investing in two of the three new investment vehicles being created by the new consortium. However, although it is expected that USS as an institutional investor will invest in these sorts of endeavours, it is the make-up of the entities in which it is investing which is of concern. USS recently joined forces with Credit Suisse, who as we know here in Financial Regulation Matters has been enduring a torrid spell, to invest in private debt that contains ‘AAA-rated or AA-rated listed securitised debt notes’ – we do not need a great memory to know that this means very little. Also, the integrity of the Macquarie group has been called into question, with one commentator noting that Nick Hurd is ‘betting that the interests of a bank known as Australia’s answer to Goldman Sachs will coincided with the ambitions of UK policy on green infrastructure. Let’s see how, five years from now, that gamble has worked in practice’. Encouraging Australia’s answer to Goldman into the arena does not particularly sound like a great idea for the future of Britain’s investment in anything ‘green’.


The Government, ultimately, are spinning this move as a clear indicator of the potential of Theresa May’s Conservative Government in light of the forthcoming General Election, but it is worth noting that the Conservative Government were eager to offload the bank as soon as possible anyway, in order to relieve the books as the bank stood as a liability for the Government. The purpose of these posts is not to lambaste only the Conservative Government because, in essence, all political parties have an awful lot to answer for. However, the Conservatives are currently in power and, as such, will receive the majority of criticism (I’m sure they do not lose sleep over it). With that in mind, the headline that the Green Investment Bank has created a £160 million surplus is rightly being kept off the business pages, with the actual headlines being that the Government are privatising an entity, faster than they ever have before, which is helping to fund green projects in this country. Not only that, but the entity they are selling to are renowned corporate players and, as such, are raising huge concerns as to the appropriateness of them taking over. The attachment of the USS was probably supposed to bring authority to the move, but the recent actions of the USS raise further concerns. Ultimately, the £160 million will be worthless if the group strip the assets of the GIB, and even more so will look like a rip-off if, as expected, the firm reduce the amount of investment once the news cycle moves along. The speed of this privatisation is arguably the most remarkable element to this story however, with only 5 years from start to finish representing a clear move by the Government to signal its intentions – the country’s assets are available to the highest and most preferable bidder. 

Wednesday, 19 April 2017

Philip Hammond and RBS: Time to live in the “Real World”

Today’s short and reactionary post is concerned with a recent statement made by the Chancellor of the Exchequer, Philip Hammond, in which he told the British taxpayer, and essentially every citizen, that ‘we have to live in the real world’ with regards to the news that the U.K. Government may be ‘forced’ to sell its stake in RBS at a loss. The troubled bank, which the Government pumped £45 billion of taxpayer money into in the wake of the Financial Crisis, has reported nine consecutive annual losses since it was bailed-out and only recently posted a massive £6 billion loss, as was discussed in Financial Regulation Matters, in addition to the looming threat of a massive fine from the U.S. Department of Justice, which some suggest may be as high as $12 billion. So, in this post, we will follow Hammond’s advice and ‘live in the real world’ – by assessing his performance and stance, as well as the situation in this ever-changing and increasingly fractious post-2016 world. For once, Philip Hammond is right – it is time to live in the real world.

Currently, RBS is trading at about 224p a share, which is substantially lower than the 502p average that the shares were selling for when the bank was bailed out. In August 2015, the then-Chancellor of the Exchequer, George Osborne, faced criticism for selling 5% of the Government’s stake in RBS at a £1 billion loss. This incredible and consistent deterioration of this huge banking institution is what has led Philip Hammond to make this recent statement, in which he continued by confirming that ‘our policy remains to return the bank to private hands as soon as we can to achieve fair value for the shares, recognising that fair value could well be below what the previous government paid for them’. However, if we take a step back for just one moment, and dissect the statement that came as the British citizen was commanded to attend the polling stations for the third time in three years, after repeatedly being told it would not have to do so, then Mr Hammond’s suggestion that we should live in the real world is a timely reminder to do so. In that vein, let us look at some important aspects.

Philip Hammond, the man who recently made the garish statement for us to live in the real world, is the son of a civil engineer and a University of Oxford graduate, attending the University at the same time as Prime Minister Theresa May did. He has had a number of high profile endeavours in the business world, although one in particular left creditors severely out of pocket. After graduating from the University of Oxford, and making his multi-million pound fortune in Construction, Hammond was elected as MP in 1997 for Runnymede and Weybridge, and steadily made his way up through the ranks of the Conservative Party – although he maintained his interest in his construction firm via an offshore trust that the Cabinet Office has ruled does not represent a conflict of interest. In relation to this, Hammond gave a wife a stake in the business in order to reduce his tax expenditure, a fact which one onlooker finds ironic that the ‘man who has spent years working out how to most efficiently use the tax rules is now in charge of crafting them. “He’s a poacher turned gamekeeper”’. Recently, in his role as Chancellor, Hammond has been making waves for reasons which have a distinct societal importance. Firstly, Hammond was exposed to an incredible amount of criticism over his decision increase tax rates on the self-employed, which saw him almost immediately back down. Then, only a few days ago, it was stated in The Independent that Hammond is facing calls from his own party to backtrack on a four-year freeze that his party placed upon working-age benefits, as the cap is now set to hit almost 50% more claimants than he had originally envisaged. So, taking Hammond’s advice and living in the real world, it seems only right to conclude that he is not just a Chancellor of the Exchequer, but a multi-millionaire from a privileged background who has conducted such an attack on the poor of this country that even Conservative Party members are urging him to relent – yes, the real world indeed.

In terms of RBS, the situation could not be clearer. The bank, which sought to defraud investors with despicable practices – investors, like pension funds and their members, that make up many of the electorate that will go the polls in June – will likely be returned to the marketplace after causing the taxpayer to suffer an incredible loss. Removing ourselves from economic thought processes for just one moment, the taxpayer bailed out a private company that had transgressed against them to the tune of £45 billion, and now will not see the entirety of that money back and the bank will be free to transgress again, safe in the knowledge that it will be rescued. The loss, which has already topped £1 billion and will no doubt run into the many billions, comes at a time when we are told that the NHS services in nearly two-thirds of the country are being cut back, which a report in the Journal of the Royal Society of Medicine recently blamed for causing 30,000 deaths in 2015 alone. According to a report conducted on behalf of the Office of National Statistics, the U.K. has nearly 4 million people living in persistent poverty16% of the United Kingdom is classified in this manner. In addition to these relative and incredibly distressing statistics, the Government, in responding to the rapid increase in mental health issues affecting British citizens, has cut up to £598 million from the relative budgets each year and this year added insult to injury by affording just £15 million for ‘crisis cafes’. These are just some, of the many instances of what the ‘real world’ looks like so, yes, it is time to live in it.


Ultimately, Mr Hammond’s call should be exactly what is needed. The country goes to the polls in June after, presumably, being subjected to a campaign trail that will focus on Brexit, not hospital cuts. It will focus on ‘needing unity’, and not how the most vulnerable in society have not only been dismissed, but are actually seeing their positions attacked and the funding that is supposed to help them extracted to cover the multi-billion pound support that successive governments have afforded to big business and the elite in society. This author urges anyone to actually listen to Prime Minister’s Question Time (as the Prime Minister will not be making any other public appearances on Television) and ask whether anyone has answers to these pressing problems. In reality, Hammond alluded to a ‘real world’ in which we must live, but, in truth, many of the country’s citizens do live in the real world and it looks nothing like the life that Mr Hammond returns to every evening.

Tuesday, 18 April 2017

Theresa May Calls a Snap General Election: Instability Continues When Seen Through a Long Lens

Today’s post could only have been concerned with one news story and that is the news that Theresa May, the British Prime Minister, has called for a General Election to be held on June 8th. For this post, as always, the focus will be looking at the longer vision. We have already looked at the options and the future facing Theresa May in light of the British electorate’s decision last year, particularly with reference to the business arena that may result, and today’s announcement contributes to this future, but in a way that may not be so obvious at first glance. In a slight departure to usual practice, today’s post will start by looking at the politics of the decision, but will then assess the trajectory of recent events in relation to what it means for the relationship between society and big business.

To begin with, it is being taken as read that the Conservative Government will have its wish of initiating a general election granted, because first the House of Commons must agree to the wavering of the restrictions imposed by the Fixed Term Parliaments Act 2011, which sought to enforce a 5-year term for any Parliament; Labour Leader Jeremy Corbyn and Liberal Democrat Leader Tim Farron’s almost immediate announcements that they will be embracing the challenge seems to provide the early indication that the Government will waive the restrictions imposed by the Act in the morning. Once the election path begins, officially, there is likely to be an awful lot of accusations, claims, and counter-claims that the British public will have to be subjected to in what is a third major election in three years – following the General Election two years ago, and the E.U. membership referendum last summer. As for the election itself, the outcome is likely to be relatively straightforward – ignoring the general failings of polling companies in the past few years – as the Conservatives hold an incredibly large lead over the Labour party at the time of writing, something which Scottish National Party leader and First Minister of Scotland Nicola Sturgeon suggested was indicative of the ‘selfish, narrow, party political interests’ that she believes embody the May Premiership. Whilst the debate will no doubt run and run over the next seven weeks – mostly about Brexit but hopefully about the state of the NHS, Job Security, and Public Spending, to name but a few extremely important issues that were rarely mentioned today – Theresa May’s speech on the steps of Number 10 Downing Street presented a much more important and menacing political issue.

Theresa May opted to take a particularly odd tone in her speech. The tone was set when she began by triumphantly announcing that ‘despite predictions of immediate financial and economic danger since the referendum we have seen consumer confidence remain high, record numbers of jobs and economic growth that has exceeded all expectations’, a viewpoint that is particularly worrying when the real fear is that the decision to leave the E.U. will have lasting effects, and arguably surviving the first year since the referendum should be no cause for celebration. In reality, GDP increased by 0.1%, the Office for National Statistics cut its growth forecast by 0.2% to 1.8%, business investment rates reduced, the Pound has dropped significantly in value, and the interest rates have been forcibly reduced to a record-low of 0.25%; the situation is not as dire as some had predicted, but the economic situation is not to be celebrated. Yet, the really significant section of May’s speech came when she discussed the state of Westminster. The Prime Minister was unrepentant in her criticism of U.K. politics, stating that her approach ‘is in the national interest’ (something which she forcibly repeated), but that ‘other political parties oppose it’ and that ‘at this moment of enormous national significance there should be unity here in Westminster, but instead there is division. The country is coming together, but Westminster is not’. However, opposition has to be the cornerstone of any democracy and the section speech reminds one of the claims put forward by soon-to-be Turkish President Recep Erdoĝan in the run up to the recent constitutional referendum in Turkey, a move which many British MPs who will support Theresa May tomorrow were quick to denounce as undemocratic. The incredible development of this rhetoric is, however, symptomatic of a larger issue.

This talk of division and uncertainty is supposed to garner unity to serve the ‘national interest’, but in actual fact it will do the exact opposite. One of the first posts in Financial Regulation Matters discussed the delicate situation facing Theresa May post-referendum, and rather than navigate the choppy waters with delicacy she has, as one onlooker stated, thrown a ‘huge cluster grenade of political risk, uncertainty, and potential volatility’ into a situation that required the very opposite. Her consistent declarations that she would not call for snap election, as it would cause ‘instability’ have now been proven to be untrue. So, what does this mean for society in its seemingly constant battle against big business? One thing that it certainly does is give the upper hand, even more than usual, to big business that is, almost on a daily basis, threatening to leave the U.K. post-Brexit if it is not given preferential treatment as we have already discussed in a previous post. This morning’s development contributed to that uncertainty and division in a way which was actually damaging to the ‘national interest’ because, if we look through a longer lens, we will see that the U.K. is in real danger of having to bow to big business, which very rarely ends well.


It is important not to get lost in focusing upon one’s political outlook and short-term issues, because even though this post has chosen to criticise the Conservatives, it is also the case that the main opposition, the Labour Party, are a shambles and offer no real opposition at all – hence May gambling on securing her mandate in the face of such weak opposition. The question is not how will the U.K. government navigate Brexit, but should actually be what state will the country be in 10 or 20 years’ time. It has been mentioned in this blog on a number of occasions that what is required is a conscious and consistent effort to restrain big business so that society is not regarded as some sort of piñata that can endlessly be beaten – today there was not even an inkling that this was on the minds of the leaders of the political parties in the U.K. Instead, we saw continuous back-biting, infighting, and political slurs that all sought to draw attention away from the fact that the poor and vulnerable in this country have had their positions attacked, continuously, whilst the futures of big business is being prioritised by the political leaders. The focus on Brexit and political divisions in interviews today, and not on financial exclusion, an increase in societal deprivation including mental health, physical illness, and suicide rates, increasing inequality, and a sharp reduction in spending on fundamental values in this country like the National Health Service was disheartening – yes, it was paid lip service, but it is not enough. What we need now is unity, but not in terms of all following one party’s vision, but in uniting against real issues that are a blight on our society; it is worth asking ourselves if we believe that today’s events, and the future it created, aided or hampered that aim.

Monday, 17 April 2017

The Issue of Bank Branch Closures: Should the Continuation of Bank Branches Be Enforced?

Today’s post is concerned with the issue of banks closing their physical branches up and down the U.K., which has recently led the Shadow Chancellor John McDonnell and other politicians to call for an end to what is being described as an ‘epidemic’ of bank branch closures – McDonnell has pledged that Labour will tackle the issue by only permitting branches to be closed only after extensive consultation and the gaining of permission from the Financial Conduct Authority, should they win the next General Election. However, this post will examine the issue from the obvious point of the need to keep branches open, but also from the point of view of whether it is right, or indeed appropriate to force private companies to operate in a manner which benefits the public but not their own profit margins.

Firstly, it is important to note the current state of bank branch closures in the U.K., because the rate is rapidly increasing. According to a House of Commons briefing paper, there were 20,583 bank branches in 1988 in the U.K., but only 8,837 in 2012. The Financial Times reported how more than 1,000 bank branches have been closed between 2014 and 2016, whilst the Guardian reports that there are 486 more closures scheduled for 2017 alone. This has led McDonnell to state that bank branch closures have ‘blighted our town centres, hurting particularly elderly and more vulnerable customers, and local small businesses whilst making profit for themselves’, whilst politicians in Scotland have stated that pressure needs to be put on the banks so that they ‘understand the needs of local communities’. The House of Commons paper explains how ‘the traditional role of banks within the community, and the effects of branch closures on customers, banking staff and the community itself, mean that closures, especially in rural areas, are often controversial’, but the question is why is it controversial?

The obvious issue is in relation to the availability of banking services, and crucially of financial advice, to people who are deemed to be ‘vulnerable’ i.e. the elderly or the financially uninformed. This takes us back to an important post in Financial Regulation Matters were we discussed how the Government are apparently embarking upon a push to increase the amount of financial education within society, as demonstrated by the establishment of the ‘Financial Exclusion Committee’. In line with the ethos of the Financial Exclusion Committee, the ‘Campaign for Community Banking Services’ has noted that the issues of access to financial services, sustainability of communities, and environmental damage (through increased travel to branches further afield) are all knock-on effects of the increased rate of branch closures. In essence, we have a governmental push to increase financial literacy and support at the same time that the most visible source of that support is being withdrawn, which is the main source of criticism from onlookers. However, what of the arguments of the banks in radically changing the culture of the country and its communities?

A report cited in the House of Commons report states that ‘there is a clear and consistent demand for branches declared by the British public, but also that this preference is also [borne] out by people’s actual behaviour too’, and that the closures are not a response to demand conditions but as a result of a ‘business calculation’. However, the banks argue differently, with RBS declaring that ‘simple’ branch transactions across its chain of branches (in conjunction with its NatWest branches) have fallen by 43% since 2010, whilst online and mobile-based transactions have increased by an extraordinary 400%; HSBC similarly declared that the footfall in its branches had reduced by over 40% in the last five years. Statistically, the banks have a point, but as is usually the case, the statistics paint a different picture. Whilst it is right that there has been a reduction in footfall, and that only 11% of the population use branches, that 11% consists of the elderly and poorer customers. Therefore, there is a burning question that needs to be raised when such figures are cited – what do we expect from the banks? Do we expect them to behave like the companies they are i.e. prioritise their own growth and protection above all else? Or do we expect them to play some societal role and take into account the needs of society? The answer to that question has been debated for a very long time.

The issue of what is expected of the banks can be neatly categorised by the economic and regulatory studies of so-called ‘public goods’. ‘Public Goods’, in the economic sense, are ‘things’ that are provided for the public, and contain certain characteristics. Essentially, a ‘pure’ public good has both ‘nonrival’ and ‘nonexludable’ properties, meaning that the good can be consumed by one person without reducing the availability of potential consumption by another (nonrival) and that the good is free to all (nonexcludable). The study of this phenomenon can be found in the field usually termed as ‘Public Choice’, but for our purposes an interesting discussion can be found in this interesting blog post by June Sekera. However, the term is often (and in this author’s opinion misguidedly) used interchangeably, alluding to a provision of a service as contributing positively to society (a better term could be used for this). Banking, on both sides of the Atlantic, is often perceived to be a ‘public good’, and this can be demonstrated by the consistent references to providing for a community. Yet, what we expect of a private, or indeed public company, is often alluded to, and herein lies the issue. Banks, particularly under Right-wing governments, are considered to be purely private institutions whose affairs the state cannot interfere, unless some illegal transgression has been committed. McDonnell, in representing the Left-wing, confirms that the Labour Government would actively interfere in the organisational procedures of private institutions, which is not particularly surprising knowing what we know about the main political parties. However, there has been little discussion as to why the state should interfere, or not, it has just been assumed that one’s political outlook will decide one’s views. There is, however, another way of assessing the situation.


In the early 2000s, the leading banks took conscious efforts to defraud investors, engage in a systemic degeneration of ethics and standards, and ultimately put society at great risk, all because of one widely-held understanding – they were too-big-to-fail. Companies such as RBS in the U.K., and Bank of America in the U.S., understood that whatever happened, the state could not let them all fail. We know now that this was understood, and ‘too-big-to-fail’ has made it into common parlance as a result. Therefore, rather than the societally-dangerous reasons underpinning the Right-wing viewpoint of leaving business alone, absolutely, and the Left-wing approach of interfering in private business, it is better to understand it in these simple terms: relying on the public as a parachute intrinsically makes that company liable to consider the public more than companies that do not. The work of the Financial Exclusion Committee has confirmed that there is a desperate need to increase financial education and face-to-face support, and as such the leading banks, particularly those that have directly benefited from the public fisc, must take an active role in meeting this required demand. Whether that means reducing the rate of branch closures can be debated, but there must be an effort to meet that demand – it is not enough, like RBS have done (a major beneficiary of public bail outs) to simply claim statistics as the reason for increased closures. Banks do not fulfil the requirements of the ‘public good’ designation on a number of accounts, but like the Financial Crisis seemingly changed the parameters in favour of the banks, it can now be brought back around to favour the most vulnerable in society. It is important that political bias does not interfere with this alteration, but that we simply adhere to the notion that everything has a price that must be paid – interest payments on bailouts are not enough for irrevocably changing the parameters of society.

Sunday, 16 April 2017

Bunzl, BT, Credit Suisse, Drax, United Airlines, G4S, and BlackRock: Executive Pay Still the Order of the Day

Today’s post looks at a subject that has been the focus for many of the posts in Financial Regulation Matters and that is Executive Pay. In recognition of the ever-increasing issue of executive pay despite poor performance, the blog has analysed a number of issues in this field, ranging from BP recently cutting the pay packet of its CEO to Credit Suisse vowing to increase the bonuses it pays to its leading managers. However, as discussed in a post dating back to the 9th of February, there is an undercurrent of unrest amongst shareholders that is slowly but surely beginning to shape the atmosphere amongst big business. In this post, the focus will be on reviewing the latest tranche of stories coming from the world of big business in relation to executive pay and, ultimately, the post will discuss how the trajectory of this movement to affect the pay packages of some of the leading business figures may continue.

The first firm that will be worth discussing is Bunzl, the multinational non-food product distributor that is headquartered in London. The company made headlines last year because it decided to pay its former CEO, Michael Roney, a full year’s bonus package despite the fact that he had only worked a proportion of the year before leaving. In receiving a total package of £3.64 million, having only worked up until April of 2016, Roney drew the anger of shareholders as over 26% of the shareholder body voted against the pay package award. In reaction to the revolt, the company instituted a pro-rata system of pay packages, which have ultimately been welcomed by shareholders, although recent news that new CEO Frank van Zanten is to have the maximum bonus he can receive boosted to 180% of his £800,000 annual salary has prompted another wave of activism. Shareholder groups ISS and Pirc have stated recently that the remuneration policy, with regards to van Zanten, is ‘not without concern’ and is to be considered as ‘excessive’. The coming days should reveal the reaction to the latest round of activism within Bunzl, but the company is currently sticking to the oft repeated line of ‘the remuneration policy is intended to drive and reward performance’. ISS, an influential proxy advisor, have been busy recently. In addition to criticising Bunzl, the shareholder advisory service recently criticised the energy giant Drax regarding its decision to increase the pay of its CEO, Dorothy Thompson, to £1.6 million, despite the company recently announcing that shareholder dividends would be facing an overhaul. The energy company, which is currently experiencing a difficult period owing to the challenging conditions facing all energy companies, reacted by stating that it had consulted with the majority of shareholders before initiating the rise, but in actual fact nearly 23% of shareholders have voted against the hike, which should see the company backtrack or make the necessary changes to quell the uprising within its ranks.

In a similar story related to the reaction to activism from shareholders (and in this case politicians), Credit Suisse who, as we know, were adamant that their top bosses would receive an increased pay package, have recently relented. However, rather than an official response to the activism, it is actually the bosses themselves have acted to see their packages reduced in the face of criticism. Tidjane Thiam, along with other top managers at the bank, have recently agreed to a 40% cut in their packages after an extraordinarily fierce response to their proposed $77 million increase, as was discussed previously in Financial Regulation Matters. Thiam, in writing to the shareholders of the bank, announced that the board had volunteered for the cut after shareholders has expressed ‘reservations’ about the increase, ultimately conceding that the recent and massive settlement between the bank and the US Department of Justice was ‘not appropriately reflected in the compensation of the current management’ which, in layman’s terms, means the board had been of the opinion that no one would question why they were being rewarding for being at the helm during one of the worst periods in the bank’s history. This development is yet another demonstration of both the power of shareholder activism, and also the incredible levels of detachment from their actions that some CEOs demonstrate.

Another story, but one that is ongoing at the time of writing, is the move by customers of the embattled airline company United Airlines to limit the pay package of its CEO, Oscar Munoz, by way of a procedure initiated by United Airlines that sees its CEO’s pay package linked to consumer satisfaction. In reaction to the video that recently went viral of a Doctor being forcibly and aggressively removed from one of their airplanes, customers are reportedly ready to react negatively in consumer surveys which would see Munoz’s pay package reduced by $500,000, although this is unlikely to make a dent in Munoz’s reported $14.3 million pay package. However, the negative press is likely to continue for some time, so there is a likelihood that his pay package may be reduced even further, particularly if the share prices of the airline continue to fall in the wake of the PR disaster.

In terms of companies responding to pressure over executive pay, it is worth ending this section with news that BT, the massive telecoms company, is reportedly about to claw back some of the £5.4 million earned by its CEO Gavin Patterson last year because of the scandal that emanated from the ‘inappropriate management behaviour’ in its Italian division which ultimately wiped over £8 billion from its market value – essentially, the division had been overstating its performance for years. As a result, BT’s bosses were being rewarded for meeting performance measures which were based upon fabrications, and as such it is now likely that its top bosses will have to pay back some of their bonuses linked to these performance measures. It is, however, likely that this will not be the end of the story for the bosses at BT, as the scandal looks set to further unravel, as is the way with accounting scandals (think of Enron, although that was on a much bigger scale, of course).

However, not all companies are reacting to activism regarding the pay packages of their leaders. BlackRock, who as we have discussed in another post in Financial Regulation Matters are now the home of George Osborne, are currently in the news because it awarded its CEO, Larry Fink, $25.5 million after a number of job cuts last year and also after it had campaigned against excessive executive pay. The rise, when understood against the fact that BlackRock’s revenues and net incomes fell slightly, is in sharp contrast the claims that, as an institutional investor, it would ‘not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation’, which is a sentiment that its own shareholders are obviously not inclined to follow. In another story of executive pay despite poor performance, the CEO of G4S, the private security firm, received a record pay package of £4.8 million despite the firm suffering from a wave of scandals, including people being sent to prison because of faulty electronic tags, and a Young Offenders Institute being returned to the Government after a string of child abuse allegations against G4S staff. Although the company remains in profit, the incredible string of scandals associated with the firm, under Ashley Almanza’s tenure, makes the massive award seem almost ludicrous in the current climate.


Ultimately, the stories that continue to garner headlines represent a developing sentiment. Yes shareholders are becoming more active in disputing the pay packages of their managers, but the coverage of this activism is, unfortunately, not absolute. The stories of BlackRock, G4S, and the recent decision by ISS to reverse its criticism of a pay procedure for bosses at Goldman Sachs mean that shareholders, as a general body, have much more to do to restrain the actions of their managers. Yet, this is the problem. Ultimately, shareholders of companies are exactly that, shareholders in that particular company. They do not, for obvious reasons, represent a unified body with concerns outside of their own advancement. The sentiment being developed by the headlines that shareholders represent a positive check on mismanagement is correct, but potentially misleading. It is misleading because it advances a mentality that shareholders should be the protectors against mismanagement when, in reality, it is the state’s responsibility. Shareholders cannot, and arguably should not, be placed as vanguards for protecting the public because, simply, that is not their role. The current political climate, which is dominated by the political ‘Right’, has cultivated this sentiment and we are now seeing the theoretical support for that movement. This is not to champion the political ‘Left’ – far from it – but there must be a responsibility taken by the state to act in the interest of the public. In this regard, we must understand these shareholder-champion headlines from within that framework.

Saturday, 15 April 2017

The Analytical Credit Rating Agency: A New Entrant That Will Further Enhance Russia’s Isolation

This short post is based upon a forthcoming article by this author that examines the viability of the latest entrant into the credit rating arena, the Analytical Credit Rating Agency (ACRA). The article, which is due to be published in the European Company Law Journal (and is available here in a pre-published version), looks at the chances of the ACRA succeeding when viewed within the parameters of perception, an aspect that underpins the credit rating sector. For this post, the focus will be upon introducing the ACRA, and then on examining the effect it may have upon the wider political issues affecting the Russian Federation.

The Analytical Credit Rating Agency was established in November 2015 and comprises of 27 major Russian companies and financial institutions that serve as its shareholders. The agency, which became the first rating agency to receive accreditation from the Russian Central Bank under the new N 222-FZ Law which was designed to protect investors, has a relatively small operating capital of 3 billion roubles, or around £42 million. Nevertheless, the agency has a defined code of conduct, and aims to embody its key principles of independence, prevention of conflicts of interests, timely disclosures, and increased compliance procedures. Whilst these aspects are to be expected of any new entrant to the credit rating market place, the ACRA aims to make clear that its dedication to these principles separate it from its competitors. However, whilst the official line seems perfectly normal, there are other issues that some suspect may hamper any gains the agency may make.

Under the new laws drafted by the Russian Central Bank, rating agencies operating in Russia are to be subjected to an increasing amount of intervention and regulation. For example, the new law gives the central bank the ability to supervise any agency acting in its jurisdiction on a daily basis, and also allows it to actively intervene in the composition of its board and management structure. As such, and in a much anticipated move, the leading rating agencies have reacted negatively to these developments and have ultimately withdrawn from the Russian market, with Moody’s and Fitch both closing their Moscow operations and withdrawing their ratings for Russian debt (Standard & Poor’s is in discussion with the Central Bank about how it may maintain its presence but not be subjected to the new law). With the ACRA being the first agency to be successfully granted accreditation under the new regulations, it may seem obvious to state that the situation looks rosy for the new agency. However, the knock on effects could be disastrous. The situation started with Russia’s annexation of Crimea, which ultimately led to sanctions from the U.S. against the Country and many of its leading business figures. As such, the leading rating agencies, all American of course, subsequently could not provide ratings for the businesses of these connected figures and, as Deputy Finance Minister Alexey Moiseev recently stated ‘we didn’t have any idea of those banks’ credit quality’. With the ACRA, there is now an organisation that will supply ratings for these connected institutions, but the interconnectedness between Vladimir Putin and business in Russia has led many to proclaim that the ACRA is simply ‘Putin’s rating agency’, a claim which has been vociferously denied by ACRA’s CEO Ekaterina Trofimova. Whilst there is no evidence of Putin’s connection to the new firm, the perceived connection is arguably more than enough to keep the suggestion going.


Ultimately, the ACRA is a response to global-political issues that see Russia needing to fend for itself. The recent downgrading of Russian debt to ‘junk’ status, and also the ‘indefinite’ sanctions levied against the country in the wake of the annexation of Crimea, mean that Russia is, potentially, being cast adrift in terms of its position within the global marketplace. The recent escalation in tension between the U.S. and Russia seems to be indicative of sentiment that is based upon fragmentation and division, and the ACRA arguably represents the realisation of this sentiment within the corridors of the Kremlin. Whilst the move to create a nationally-focused rating agency makes sense for Putin in the current eco-political climate, it will perhaps hasten the seemingly inevitable situation whereby Russian debt becomes too risky for the global capital markets to hold. This process has already begun with the appropriation of the ‘junk’ status by the largest rating agencies, but Putin’s insistence on not bowing to their evaluations means that the chances of Russia returning to the global table, in terms of debt issuances, are more remote than ever before. Whilst this author has written a number of pieces suggesting that we, as a global society, need to move away from the Big Three’s ratings, there is an argument that would say now is not the time for Russia to be withdrawing ever further away from the global capital marketplace. The global economy would be much better served with an outward-looking Russia, but the recent establishment and cementation of the ACRA suggests that an inward-looking Russia is the one that we shall bear witness to in the near future, and perhaps even further into the future – the effects of this may be extreme in a number of possible circumstances.