Saturday, 29 July 2017

The USS Pension Deficit grows to Extreme Levels: A Case for Invasive Regulation?

Today’s post reacts to the news that the Universities Superannuation Scheme (USS) has the largest pensions deficit of any British pension fund, now measured at £17.5 billion. We have looked briefly at pension deficits before here in Financial Regulation Matters when we looked at the behaviour of Sir Philip Green throughout the BHS scandal, but in this post we will review some of the concerns connected to this large increase in the deficit of the largest pension fund in the U.K., whilst we will also look at some of the issues that branch out from this development. Ultimately, it is worth considering whether, as Peter Drucker once opined, pension funds are the saviour of capitalism, whether the function of pension fund investment powerhouses is beneficial but needs alteration, whether the current situation is a product of the financial crisis and something that does not need much attention, or whether the situation is representative of inherent systemic issues which are bound to cause massive failures.

The news that the USS has recorded liabilities of £77.5 billion, in relation to its assets of £60 billion, is bound to cause concern. With the £17.5 billion deficit representing almost double the second largest deficit in the U.K. (BTs deficit stands at £9 billion), there are fears that drastic action may be required to reduce the definition, based upon the belief that the straightforward options available to the USS are ‘unpalatable’: potential measures include pension holders i.e. Academics and University staff, contributing more to their retirement, pension holders having their future pension benefits diluted, or increased contributions from Universities, seemingly at the cost of teaching resources. An independent pension consultant, speaking to the Financial Times, argued that ‘the danger that USS poses to the future financial health of UK universities is hugely underestimated’, whilst the Chief Executive of USS argued differently, stating that the fund’s decision to move its asset management team in-house had saved money and that the fund’s performance should be judged after years, adding that ‘our performance has been pretty good’ – yet, the massive increase in the deficit, the revelation that the investment team had underperformed its performance benchmark by 2% over the year, and that USS executive committee – which contains no women - was paid, on average, £488,000 each, makes for particularly uncomfortable reading.

The contrasting viewpoints with regards to the USS are stark. On the one hand, it has been suggested that the root cause of this massive deficit is that ‘the USS trustees [have been] going down to the casino and betting the money that they had been given by universities, betting it on [the stock market]’, whilst on the other hand the cause has been pinned on an unexpected rise in liabilities, with a USS spokesperson stating that ‘USS pensions are secure, backed by solid investment portfolio and the strength of sponsoring employers’, of which the spokesperson was relating to the ‘backing’ of Universities that have assets of more than £50 billion. The financial data has been used, however, to paint a rosier picture of the USS, with its assets under management increasing by 20.1% over the past year, and the financial environment surrounding institutional investors being cited as reasons for calm when viewing the stated deficit; studies discuss how affected pension funds can be to external factors. On both sides of the Atlantic, there are concerns that employees will be the ones who pay for the irresponsibility of fund managers’ earnings predictions, with it even being suggested that not only is it deemed appropriate that workers increase their contributions to fund the gaps, but that even workers who are not involved in pension schemes are having their pay increases restricted to pump resources into this incredible marketplace. Earlier this year, it was reported that the Pensions regulator was to take a tougher stance on companies that prioritise shareholder dividends over reducing pension deficits, but the regulator is not as bold when it comes to pressuring the large pension funds, with the penalty seemingly constrained to financial penalty notices in the event of a failure to comply with pension regulations.

The USS, unfortunately, has form. In 2011 academics went on strike over changes to their pension, with the changes being an increase in retirement age from 60 to 65, and an end to final salary pensions for new members. In 2014, academics again went on strike, in the form of refusing to mark students’ work, after the USS continued its strategy from 2011 anyway. Sally Hunt, the General Secretary of the University and College Union (UCU) wrote recently that ‘twice have members seen the value of their pensions reduced and been asked to pay more for the privilege’, something which she suggests is demonstrated by the system of having one pension scheme for academics rather than two – with the example being that, now, (after the reductions to USS benefits) an academic at a pre-1992 institution may be as worse of as £150,000 over the course of their retirement than an academic at a post-1992 institution. The obvious fear in relation to this is that recruitment and retention could be affected massively in the HE sector.


Ultimately, there is an underlying issue which is not really being discussed. Whilst there is merit to the viewpoint that external factors have contributed to this massive deficit and that, eventually, the deficit will naturally decrease once certain environmental factors correct themselves, the £17.5 billion deficit, in such a time of uncertainty, is just not acceptable for any pension fund. Whilst it is not entirely determinative of the USS’ ability, its partnering with institutions like Credit Suisse, who were recently fined billions of dollars for their involvement in the Financial Crisis, and the Macquarie Group, who have been fined recently for cartel-like behaviour will not ease tensions. Earlier it was mentioned that the options available to the USS to reduce the deficit will be unpalatable, and that is entirely correct. It is not right that members would have to contribute more to fund the gap, nor is it right that employers should divert funds away from their core focus of teaching students to fund this gap. What is required is for the Pensions Regulator to become much more involved in the running of these societally-centralised funds, because the gambling ethos must be reduced. Peter Drucker was right that pension funds are the saviour of capitalism in that they help transfer the money of employees into the system, but that proclamation has been attached to the notion that ‘what is good for capitalism is good for society’, which is not the case. It is more likely that those that hold pensions with USS will be on the picket line once more, and very soon – there is only one way that the system knows how to reduce deficits in this scenario, as many pension holders are all too aware.

Thursday, 27 July 2017

Positivity Surrounding Lloyds’ Return to Private Ownership Evaporates

In today’s post, the focus will be on Lloyds Bank which, if we look back into the archives of Financial Regulation Matters, is proving to be a consistent source of newsworthy stories. Back in February 2017, when the largest U.K. banks were declaring their financial results for the previous year, we discussed how Lloyds’ results were somewhat of a ‘silver lining’ in amongst a whole host of poor results from their competitors. Then, on the basis of this positive rhetoric that was beginning to surround Lloyds, we looked at how the Bank’s return to private ownership caused neoliberals to rejoice at the process of the state providing support but the supported entity eventually returning to private ownership. Yet, staying in the archives, we can see that all is not what it seems. We discussed how Lloyds’ exposure to Payment Protection Insurance (PPI) claims was not over, and also how the bank has been handling the HBOS compensation situation particularly poorly. In this post, the focus is on how these two negative elements have been developing recently, with both inferring that the success story of Lloyds’ return to private hands was a very short success story indeed.

The first component of the post – PPI claims – comes on the back of some positive news for the bank. It was reported today that the bank has reported its largest half-year profit in over 8 years, with its rate of profit rising by 4% to £2.5 billion, although this was below City expectations. However, this news was accompanies by the news that the bank has set aside a further £700 million to compensate people who had been mis-sold insurance policies, on top of an extra £283 million to compensate those who were ‘mistreated’ whilst in mortgage arrears. This extra billion pounds, which takes the bank’s total outlay so far to an incredible £18 billion, has been designated to cover ‘reactive claims’ which the bank expects to number around 9,000 per week in the run-up to the August 2019 deadline for complaints. Yet, the Telegraph reports that the bank, in addition to this £1 billion, have put aside a further £540 million for ‘misconduct charges’ which, according to the newspaper, contains £100 million to compensate the victims of the HBOS fraud. The last we time the fraud was discussed here in Financial Regulation Matters, we discussed how Lloyds had been criticised for failing to meet its self-determined deadline to compensate the victims, with only one victim being compensated so far. However, that particular component had a new development recently, one which will likely see the saga extended.

With reference to the HBOS fraud and the compensating of the victims, we have discussed how the British TV personality, Noel Edmonds, is leading the public charge against Lloyds for the compensation process, after his company had fallen foul of Scourfield’s fraud. Yet, Edmonds’ claim for more than £70 million seemed at odds with Lloyds’ estimates of a total compensatory fund of £100 million. On Tuesday, Edmonds raised the stakes by increasing his claim to £300 million, stating that ‘I am advised that given the trajectory of the businesses in the period before the criminals destroyed Unique Group and my other commercial interests, £300 million is actually a conservative figure’. Whilst this development seemingly extends the collision course that the two parties are on, further revelations from Edmonds suggest that Lloyds’ wish of ‘moving on’ from their recent troubles may have to wait a little longer. Edmonds added that his legal team ‘now have documentary evidence to support the view of Thames Valley Police, the Judiciary, and the CPS, that the HBOS criminality extended far beyond the “Reading 6”’, with Edmonds continuing that ‘this explains why Lloyds created the secretive review process in an attempt to limit their liability to a very small number of victims’. If Edmonds’ claims are true, particularly in relation to obtaining documentary evidence, then it is likely that Lloyds’ internal review will not count for much – there will need to be state-level investigations; Edmonds’ proclamation that the process is like ‘trying to plug an active volcano with a cork’ will hold true if this supposed evidence comes to light. Furthermore, if this evidence has been obtained, it is important that Edmonds pursues the case in the courts instead of settling because, with Lloyds promoting itself as the bank for SMEs and Edmonds insisting that the problems that cumulated in Reading are actually systemic, it is important that the true nature of the bank is revealed before other SMEs are potentially damaged.


The bank was lauded for being the first to return to private ownership after being in receipt of tax-payer funds, but this demonstrates the sentiment developed by neoliberals within society. The real issue is that this bank is being proven, on a weekly basis now it seems, to be inherently transgressive, with billions upon billions of pounds having already been spent to compensate those whom they have harmed, and with many more billions still to be spent. If we remove ourselves from the short-term narrative that seems to keep everything and everyone in their place, then surely the cultural processes that facilitated such widespread transgressions still remain – how could they not? What, in reality has changed since the Crisis? In reality, all that has changed is that the environment surrounding the bank is not as facilitative as it was in the lead up to 2007; that culture still remains, and that culture is demonstrated in the bank’s awful handling of the HBOS compensation. Edmonds would likely accept a settlement that met his demands if the situation arose, but the opportunity to examine the inherent culture of this massive bank would be more beneficial for society; whether that comes to pass is a different story entirely.

Wednesday, 26 July 2017

Guest Post: Remembering the Financial Crisis and its Causes

Today’s post is a guest post by Jan Weir, a Barrister from Canada who specialises in Banking and Fraud and who also teaches Business Law at the University of Toronto. On many occasions here in Financial Regulation Matters, and in fact in society in general, we discuss elements of society that have been directly affected by the Financial Crisis, but only mention the Crisis in passing. Whilst this is not done to reduce the understanding that the Crisis devastated society, the passing time has allowed for the actual causes of the Crisis to become so engrained that they are rarely discussed anymore. So, in this guest post, Jan Weir helpfully provides a reflective account to discuss some of the underlying causes to the Crisis so that we can bring them back to the forefront of our thinking when assessing current events – the underlying sentiments and motivations have not changed.

Trying to Help the Poor Caused the Financial Crisis

As absurd as that sounds when put in a simple sentence, that is what a vast majority of Americans actually believe. It is an example of what must be the most successful propaganda campaign of modern vintage­— accomplished by Wall Street, of course. (Then) New York Mayor Michael Bloomberg quite clearly demonstrated this propaganda when at a business breakfast in Manhattan in 2011 he said: ‘It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp… They [governments] were the ones that pushed the banks to loan to everybody. And now we want to go and vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves’. Yet, if we are to understand how the banks engineered and covered up a blatant mortgage application fraud, then we must go back to 1938 and look at the founding of Fannie Mae (Federal National Mortgage Association) and its siblings, although we will cover these later on. During that period, the Government wanted to help the working class buy their homes. To do this, the Government developed a plan whereby Fannie Mae would lend based upon standards that we are all familiar with from the banking sector – job history, a salary four times the amount of the monthly mortgage instalment, a 20% down payment, and so on – but with one crucial difference; its mortgagors could have a 5% down payment instead. Other than this, Fannie Mae was to have the same lending standards as their banking colleagues; because of this, Fannie Mae mortgages became known as ‘conforming mortgages’ because they conformed to its standards.

However, we need to keep this term ‘conforming mortgages’ in mind because if we read any analysis of the Financial Crisis and ‘conforming mortgages’ are not mentioned, then it is likely that the author, however well intentioned, has been influenced by the bankers’ propaganda. In terms of reality, these strict lending criteria at Fannie Mae were never, never lessened! However, on the back of this development came a brilliant idea which was that Fannie Mae would buy mortgages from private lenders that met her standards, with the private mortgage companies and commercial banks being at the forefront of this new system. In essence, Fannie Mae would buy the mortgages, package and sell them to wealthy investors with an implied guarantee that she would pay if the mortgagors did not. Then, in an example of how titles and symbolism come into play, those mortgages became known as ‘conforming mortgages’ because they conformed to Fannie Mae’s standards, even though they had originated elsewhere. Why was this a brilliant idea? It was brilliant because it removed the risk from the Banks’ books and this in turn allowed them to create more and more mortgage loans so more and more low-income people could buy homes – and the private lenders got their profit up front. The investors targeted were not after massive profits from their investment – they could afford not to. What they did want, however, is to have their investment protected, which is why investing in government-backed subprime mortgages was as safe as investing in Treasury Bills but with a few more percentage points – great! But, if this was the case, there should not have been a Crisis at all – it is at this juncture that we are introduced to the NINJA loan; the No income-no job-no assets loan that, even just by looking at the title, clearly did not meet Fannie Mae’s standards. In order to understand this more, we need more background.

Packaging these mortgage loans together is one type of a derivative. A derivative means that the investment derives its value from another investment – in this case, underlying mortgages. That package, or derivative, would then be sold under another name (Abacus 2007 AC1, for example). These derivatives were a massive hit with investors, mostly because there were almost no defaults. Fannie Maw was successful in providing the working class with homes they could not have otherwise have afforded, and the whole system was highly profitable for the Government, and the private parties. However, whilst the process looks extremely positive, we know from hindsight that this was a fa├žade that would cause great destruction, so it is worth looking at this packaging process in more detail, and to do that we need to go back to the 1980s.

In the 1980s, an investment banker at Salomon Brothers – Lewie Ranieri – decided that he would package prime mortgages, certify that they were indeed prime mortgages, and sell these packages, or derivatives, to wealthy investors. Both the private derivatives and the government-sponsored derivatives proved to be wonderful investment opportunities, and this confidence then allowed for a confidence in the mortgage-backed security as an ideal – the market for them exploded! The investors hungered for the derivatives, and so Fannie Mae and the investment banks gladly supplied. But, at some point, the investment banks started to mix the prime mortgages with mortgages which were certified to be the Fannie Mae-level conforming mortgages – at the beginning, they probably were – but soon these mixed bag mortgage derivatives also gained the same confidence from the marketplace, which in turn drew in the real heavy-hitters; the institutional investors. Predictably, the demand increased to a point where the commercial and investment banks ran out of supply – there simply was not enough people meeting Fannie Mae’s standards. It is at this point that mortgage broking standards deteriorated rapidly, with any warm body capable of signing their own name signed up to the process (in some cases, like the 23 in Ohio, the mortgagor didn’t even have to be alive!). If we return to the NINJA loans from earlier, an important point to raise is that the lenders were charged with checking the applicant’s background and certifying that they met Fannie Mae’s lending standards, but at both commercial and investment banks, employees forged, or knowingly approved forged applications so they would appear as if they met the lending standards – the NINJA loans subsequently became, to all intents and purposes, ‘conforming mortgages’. To supplement this, the lending banks had lowered their standards so that they now represented predatory lenders, with the process being to lure applicants into signing for mortgages on the basis of a 3% rate that would jump to 6% in two years.

Perhaps the best dramatisation of this so far has been Michael Lewis’ The Big Short, which portrays the environment before the Crash in which his antiheroes saw the dates that the higher rates would kick in as an indicator of a systemic crash, and who subsequently ‘shorted’ the market to reap the rewards. Lewis showed one of his main characters, Mark Baum (played by Steve Carell), knocking on doors discovering the mortgagors’ NINJA qualities. The only factor Lewis missed was the role of lending standards; these NINJA loans did not meet lending standards! So how did they get approved? Shorting the housing market is pure gambling. It means betting that the housing market will fall. Many of the investment banks took that bet to the tune of billions of dollars. When the higher rates kicked in and the market collapsed, the investment banks were bust and had to appeal to the Government for bailouts to pay the wealthy hedge fund investors. This was probably the biggest, fastest, most direct transfer of wealth from the pockets of the middle- and working-classes into the bank accounts of the wealthy in history. Were there whistleblowers? Were there employees along the way who raised the alarm? Yes, but that will be the focus of future posts.


Jan Weir is a Barrister who specialises in Banking and Fraud and who also teaches Business Law at the University of Toronto. Jan’s practice can be found here. Please do also follow Jan’s posts from his Twitter account @JanWeirLaw and his Medium account here.

Tuesday, 25 July 2017

The Bank of England Issues Yet Another Warning on the Credit Bubble

Today’s post reacts to the latest warning from the Bank of England regarding the ever-growing credit bubble, something which we have reviewed on a number of occasions here in Financial Regulation Matters. In addition to the previous warnings regarding the expansion of markets like the ‘Personal Contract Purchasing’ (PCP) market for cars, the Bank of England is now threatening even more regulatory supervision for credit lenders, which has been met with clear opposition from the marketplace. So, this post will look at these developments and continue to assess the likely causes and outcomes of this pressing issue.

On this occasion it was the turn of the Bank’s Director for Financial Stability, Alex Brazier, to address the issue of the growing credit bubble. In a speech to the University of Liverpool’s Institute for Risk and Uncertainty, Brazier commented that household debt is a truly systemic threat and that ‘the spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing’. Also, in what is a common cause of financial downturns, Brazier noted that lenders ‘may be placing undue weight on the recent performance of credit cards and loans in benign conditions’, something which has been noted before in terms of placing too much emphasis upon the wrong indicators. For the Bank of England, one of the key indicators of this bubble is that in the six months after the E.U. referendum the British economy actually grew in opposition to expectations, which subsequently was revealed to be due to an increase in borrowing; we have looked at this before with regards to the diminishing savings ratio, the increased rate of people using their savings to spend, and the willingness, or arguably need, to borrow at increased rates. In response to these threats, Brazier stated that the Bank would consider imposing new and increased rates of financial reserves on Banks to ensure their safety with regards to their exposure to the explosion of the bubble.

Yet, one lender has made clear that they consider the Bank of England to be, for want of a better term, scare mongering. Provident Financial, a sub-prime lending firm, has stated that it has never changed its vigilance with regards to lending and has ‘not observed changes in customer behaviour in relation to either demand for credit or credit performance’. However, this rebuttal stands as a clear outlier because other statistics demonstrate a different reality. In the U.K. the outstanding balance on personal loans for cars, personal loans, and credit cards rose by 10% in the last year, and with regards to car loans there has been increasing concern with respects to increasing rates of delinquencies on both sides of the Atlantic. The issue then is what may be the cause of the bubble?

There are two lines of reasoning, primarily, to explain the growing credit bubble. The first is that countries like the U.K. and the U.S. have become accustomed to certain lifestyles that people are attempting to maintain without the necessary capital with which to do so. The official statistics point towards a continuation of spending in the areas of ‘restaurants and hotels, food and non-alcoholic beverages, recreation and culture, and miscellaneous goods’, with the latter being comprised of a number of elements including personal care, financial services, and insurance amongst other things including prostitution, oddly enough. However, whilst the rates of people buying new cars, via a multitude of financing options supports the sentiment that consumers are ‘binging’ on cheap credit, the other end of the scale is just as compelling. The fact of the matter is that not everyone who makes up the borrowing statistics are borrowing to purchase the latest Mercedes, BMW or Jaguar; rather, they are borrowing to live. Whilst we must place the dire situation in the U.S. to one side for just one moment, the situation in Britain is no better. A study by the University of Bristol found that the rate of ‘problem debt’ i.e. households unable to meet contractual payments, is rising and fundamentally affects those on the lower incomes in society. The report continues by confirming the links between home-ownership, inconsistent employment, age (households under 30), households with children, mental health and problem debt – which, as we know, is not a new connection to make. Once again, the issues of mental health, ill-health, and a lack of financial education/awareness are proven to be key factors in over-indebtedness and despite the efforts of regulators, predatory lending to these vulnerable groups has persisted, although now the offerings have been reduced and repackaged as ‘instalment loans’ (a movement led by Provident Financial, coincidentally).


All in all, whilst it is true that certain sections of the consumer base are binging on cheap credit to purchase items like brand-new cars, it is important that we do not let this cloud the reality of the situation. The current situation is a direct consequence of the Financial Crisis, whereby the poorest in society where left without to compensate for those who have. The era of austerity is driving vulnerable people towards modes of finance which not only perpetuate their vulnerability, but actually make them more vulnerable. The Bank of England, as is its remit, is right to look at protecting the largest financial institutions from exposure to the bursting of the bubble, but the real societal issue lurks underneath the headlines. The era of austerity has created a section of the population who have very little to lose but lots to gain from failing to meet their contractual agreements – the necessity of desperation is evident in today’s Britain, and the Bank of England’s warning provides support for the notion that there are companies that are more than willing to make a profit on that desperation; one wonders how many other warnings there will be.

Monday, 24 July 2017

Article Preview: Sustainable Finance: Why the Formal Introduction of Credit Rating Agencies Should Serve as a Warning – Financial Regulation International

Today’s post previews a forthcoming article by this author entitled ‘Sustainable Finance: Why the Formal Introduction of Credit Rating Agencies Should Serve as a Warning’, to be published in Financial Regulation International. A pre-published version can be found here and the purpose of this post is to introduce the article and some of the key concepts flagged within it. With the issue of sustainable finance coming to the fore in the public and investing consciousness, the increase in information asymmetry is sure to follow and, when it does, the door opens for the rating agencies to position themselves within the process. We have already discussed the agencies’ entrance into this arena before here in Financial Regulation Matters, however this need for the agencies has traditionally resulted in exploitation so, in that regard, the article looks at the possibility of this phenomenon repeating itself in this specific arena.

The article begins by discussing how ‘sustainable finance’ as an ideal is growing ever more popular, particularly since the Financial Crisis. Sustainable finance, which is very different from Ethical Investing – which is concerned with investing in line with a certain set of beliefs of wishes – is the process of investing for profit, but with an increased consciousness regarding the impact of the investment. With regards to the capital markets, which is the focus of the article, there is a growing need for issuers of debt to demonstrate to potential investors that their companies operate in a certain manner, particularly with regards to their adoption of the principles that can be understood in terms of ESG, or ‘Environmental, Social, and Governance’ concerns. These ESG concerns have been the focus recently of large institutional investors like the Church Commissioner’s Group who have been putting large companies like Shell under immense pressure to prove that they are incorporating measures to ensure their commitment to ESG principles. Furthermore, there is a push by the UN to incorporate certain Principles with regards to responsible investing, which is why the Principles for Responsible Investing (PRI) has been established and why the article has decided to focus upon one its recent endeavours: to bring credit rating agencies into the fold.

The leading agencies have recently become signatories to the PRI and have pledged to incorporate ESG principles into their methodologies even more than they have done before which, at first glance, looks like progress. The PRI were critical of the agencies beforehand, mostly in relation to the fact that rating methodologies have tended to overlook ESG criteria – particularly the Social and Environmental criteria – for a host of reasons. Whilst there is an argument to be made that investors are primarily concerned with Governance when looking at ESG, especially when they are concerned with the creditworthiness of the issuer, it is also the case that the refusal to appropriate adequate resources to the rating of ESG criteria also constrains the possibility of investors engaging with the other elements of ESG. The agencies have therefore pledged to incorporate ESG into their methodology more but, in keeping with the tradition of the credit rating industry, they are adamant that they will do so on their own terms, with Moody’s clarifying that its understanding of ESG and the PRI’s understanding of ESG will likely differ. Yet, for the article, there is cause for concern.


The concern for the article emanates from the inclusion of an industry that has proven it will sell its wares to the highest bidder. The real need for sustainable investment means that the more attention the sector receives, the more pressure will be on issuers to provide evidence of complying with ESG concerns. This dynamic places the rating agencies at the centre of a process whereby it will be in the interest of issuing companies who do not meet the standard to incentivise the agencies to rubber-stamp their issuances anyway – the exact same process as the Financial Crisis. As we know, the agencies chose money over standards, so we have little reason to believe that just ten years on anything has changed, particularly when we consider that the agencies have continued to transgress. Therefore, whilst it is vital that sustainable finance grows as an ideal and, eventually, becomes a norm, it is unlikely that the credit rating agencies will contribute positively to that aim. Unfortunately, the emphasis is yet again on investors to both demand that issuing companies operate in a sustainable manner and that those who signify this information to the disseminated investing public do so in an absolutely transparent fashion – we must know how an agency has deemed an issuer has considered environmental, social, and governance concerns or else there is likely to be rush of investment into a marketplace that is not what it seems.

Sunday, 23 July 2017

The Prospect of a UK-US Trade Deal: A Dangerous Deal That Would Prioritise Political ‘Wins’ Rather Than Economic Prosperity

Today’s post takes a look at the forthcoming trip of Britain’s International Trade Secretary, Liam Fox, to the United States to begin talks about a possible trade deal between the two countries. In the media on both sides of the Atlantic, but particularly in the U.K., there is a real concern about the effects that such a trade deal could generate, with an imbalance between British and American corporations being top of that agenda. So, in this post, we will assess these claims and examine whether a trade deal is being pursued for the right reasons, or whether the pre-Brexit environment is already becoming illustrative of life outside of the European Union for the British.

Speaking in July, President Trump said he expects a ‘powerful’ trade deal to be conducted with the U.K. ‘very quickly’, and it is on the back of these statements that Liam Fox has travelled to Washington, D.C. The talks themselves, which the head of the TUC – Frances O’Grady - suggests is a ‘PR stunt’ for Fox, are supposedly concerned with rectifying some of the smaller barriers to the trade agreement, although the confident soundbites being uttered by Fox regarding E.U. trade agreement deadlines and even bias at the BBC, perhaps add to O’Grady’s argument. According to Fox himself, the focus of the trade deal will be on removing commercial barriers that could generate up to £40 billion, although it has been suggested that this version of a deal would very hard to deliver in practice. In keeping with the fallout from Brexit, Fox is keen to push the proliferation of the U.K.’s financial service sector, with the suggestion being that ‘the U.K. is already viewing a pact as a way for London-based banks to secure easy access to Wall Street, which might require the U.K. to accept weaker rules on financial services’. This worrying sentiment, coming just a decade after the U.S. financial system contaminated the global financial system, is not the only worrying element of the deal according to onlookers.

The Director General of the British Chamber of Commerce, Adam Marshall, has warned that a headlong rush into a ‘politically attractive’ deal with the U.S. could be troublesome, with the result being that the deal could lead to the ‘predatory purchasing of U.K. firms by bigger, cash-rich U.S. competitors’. This viewpoint, based on the argument that U.K. firms would face increased regulatory costs against the backdrop of a lack of trade negotiating knowhow from the British Government (with the suggestion being that the U.K. has ceded responsibility in this regard to the E.U. and has thus not developed the negotiating skills required to protect British firms), is almost guaranteed when we consider developments that have already been discussed here in Financial Regulation Matters. Even before any trade deal had been mentioned, the instability caused by the referendum result in Britain was more than enough to inspire predatory firms like 3G and Buffett’s Berkshire Hathaway to hunt British firms like Unilever; it is not a stretch to suggest that the trade-deal would open the gates to the same approaches. Yet, in essence, there are two competing narratives to consider. The first is that these deals, based upon the threat of Brexit, are unanimously playing into the hands of big business, whereas the opposing argument is that these bilateral trades are what the British Government must prioritise in the post-Brexit phase. One of these sentiments came from Len McCluskey, the Unite Union boss, and the other from a Governmental spokesperson, so there is no surprise there. Yet, if we take a more abstract view, the dynamics behind this deal are extremely worrying.


Although the right-leaning press in the U.K. have been keen to demonstrate that this potential trade deal is worrying the E.U. and negatively affects their negotiating position, which it does not, the political positions of the two leaders in the deal is perhaps the clearest indicator of the concerns being put forward. In the U.K., Theresa May is under severe pressure from within her own party, in addition to external pressure. Reports suggests that she has lost the support of the grassroots Tory base, as well as the support of senior Tories, because of a number of failings ranging from her robotic reaction to the Grenfell Tower disaster to her massive miscalculation in calling for an early election; the situation is so bad that there are now reports that David Davis is the preferred choice amongst Tory members to succeed May if and when she leaves her post, although reports vary between support for Davis, Boris Johnson or the archaic Rees-Mogg, to no support at all for her resignation in such unstable times. Yet, with all that in mind, if we look at the other side of the Atlantic we see a political system in just as much of a state. President Trump has always been under pressure with regards to his Administration’s links to Russian officials, and recent stories of his son meeting with Russian lawyers and ex-Soviet intelligence have seen the official pressure being ramped up to such a state that the White House has had to issue statements refuting the suggestion that Trump would be pardoning his family and even himself. These developments, which quite frankly are damaging the United States’ great reputation on an almost daily basis, are representative of the post-2016 political arena – what has been termed ‘populism’ is actually the degeneration of standards and values. So, it is in this arena that this trade deal is being promoted, and it is for that reason that both countries’ citizens, but especially the British, should be extremely worried. It is clear that these leading politicians are taking action for small and visible ‘wins’ to perpetuate their support based on the ‘populism’ narrative – i.e. people can argue that it was right to vote to leave the E.U. because of the trade-deal with the United States. Yet, this is extremely short-sighted and positions the British public to be first to take the hit if things go wrong, and last to reap the reward. Theresa May and Donald Trump are so close to being removed from their positions that the simply do not have the capital to implement long-term goals. One is reminded of the ‘New Deal’ political movement that followed the last major financial crisis, perhaps this version should be known as the ‘Short Deal’ political movement.

Saturday, 22 July 2017

The EU Rejects FinancialCraft’s Credit Rating Agency Status Application: Regulatory Vigilance or Restrictive Regulation?

Today’s post assesses the news that the European Securities and Markets Authority (ESMA) has had its decision to reject Polish rating agency FinancialCraft’s application to be registered under EU regulation upheld, after an appeal was lodged to the Joint Board of Appeal of the European Supervisory Authorities. In this post we will look at some of the reasons for the rejection and assess whether the grounds for rejection were fair, especially in relation to recent instances of the larger rating agencies flouting the European regulations.

FinancialCraft, a small Polish rating firm, had applied in 2016 to be registered as a recognised Credit Rating Agency under the EU Regulations on Credit Rating Agencies; on the 8th of December 2016 that application was rejected by ESMA, the supervisory body tasked with supervising the CRA sector. In accordance with the regulations, which allow for a second application, FinancialCraft swiftly reapplied, with the same rejection following. As a result of this, FinancialCraft then appealed to the Joint Board of Appeal of the European Supervisory Authorities, with the appeal set to be heard (without FinancialCraft and the ESMA present, as per their instruction) on the 20th July 2017. The basis of ESMA’s rejections were that the application was incomplete, with a number of details regarding methodological approaches, internal policies and other elements missing or only broadly addressed. After two formal notices of incompletion, ESMA finally notified FinancialCraft that it considered the application to be complete, and began an assessment of the firm’s compliance with the regulations; however, upon this assessment ESMA requested further clarification and FinancialCraft responded that it has ‘plans to hire new resources upon commencement of credit rating activity’ i.e. become compliant retroactively. It was on this basis that ESMA formally rejected FinancialCraft’s application for a second time.

The terms of the decision of the Board to reject FinancialCraft’s appeal are interesting. They acknowledge, almost immediately, that one of the key stated aims of the EU Regulations was to increase competition in the sector by encouraging small rating agencies to enter the marketplace. Because this author has already written on the practical difficulties of attaining that goal, it is not worth revisiting this issue in any great detail. With regards to the actualities of the appeal, the Board notes that FinancialCraft’s main argument is that the information that ESMA requires was actually submitted and that, essentially, ESMA’s repeated calls for detailed information are restrictive, as ‘the process must be stopped at some point because a description cannot be made any more specific’. Also, FinancialCraft allege that ESMA’s demanding of proof that FinancialCraft’s methodologies and have been tested and validated represents ESMA ‘using technical requirements to prevent the appellant from entering the market’. In response to this ESMA simply contested that ‘the appellant’s grounds for appeal are not well-founded’ and that failure to demonstrate compliance must result in rejection. The Board, when making its decision, unanimously sided with ESMA and rejected the appeal, finding that it is the firm’s responsibility to ensure compliance and that ‘merely quoting from CRAR [the regulations] or pointing to existing laws is not sufficient to demonstrate compliance’. Furthermore, the Board found that the management structure (the Owner’s partner) was conducive to developing a conflict of interest in relation to the opportunity to access fee information on rated entities, and that with regards to providing details on methodological approaches, there is not a case to be made by new entrants that methodologies cannot be tested until entities have been rated. Ultimately, the Board sets a particularly high standard for new entrants, meaning that every element must be adhered to in the strictest possible form. So, what is the problem?


With regards to setting high standards, there is no problem – it is pleasing to see supervisory bodies asserting their insistence that standards will be met. However, we spoke recently in Financial Regulation Matters, based upon a forthcoming article by this author, about a recent push by ESMA to develop competition within the sector, with the results being frustration and an acceptance that ‘unfortunately, successful implementation of these Articles [EU Regulations] has been hindered by a lack of clarity in a number of key areas’. Furthermore, Moody’s was fined only in June for breaching the credit rules, and the punishment was determined to be apt at €1.24 million. As Frank Partnoy noted recently, post-crisis reforms have had ‘little impact’ for a whole host of reasons but, for this post, the issue is the effect that these two stories have. It is worth clarifying at this point that FinancialCraft’s application should have been rejected, because it would be more than irresponsible to allow a firm registered status on the promise of quality – retroactive compliance is simply not an option (to alleviate this problem for new entrants, there is nothing stopping the agency conducting sample or trail ratings, or even issuing some unsolicited ratings to provide context). However, the question that must be asked is what is the perceived result of these recent instances? The result is that for new entrants they must be absolutely perfect in their obedience of the rules, whereas for established agencies, their disobedience is accepted and only ever lightly punished. The result of this is an implied barrier for access, whereby only the established can afford to operate, and only the established will be allowed to make mistakes. Whether or not everyone agrees with that conclusion is probably immaterial because, in a sector that survives on perception, the perception in this case is all that matters. The calls to increase competition in the sector, and meaningful competition at that, are just that – calls.

Thursday, 20 July 2017

The HMRC’s Investigative Capabilities Questioned: A New Case for a Targeted Agency?

Today’s post is concerned with the news that the HMRC (Her Majesty’s Revenue & Customs) are coming under increased pressure for their investigation, or lack thereof, of an aggressive tax avoidance scheme in the Recruitment sector which, according to The Guardian, is likely to cost the British taxpayer millions of pounds in lost tax revenues. The Guardian, which is leading the way in investigating this issue and reporting on it, suggest that the HMRC is underperforming in its role of investigating such tax-avoidance schemes and, as a result, it is likely that HMRC will not be able to get to the bottom of the scheme and its culprits, with the suggestion being that a criminal investigation could possibly ensue. In line with this passing suggestion, this post will first analyse the issue at hand, but will then build upon this to call for an agency which we have covered on a number of occasions here in Financial Regulation Matters – the Serious Fraud Office (SFO) – to take the lead. However, there are a number of reasons why the SFO may not be ideal, with the obvious one being that  the SFO is under considerable pressure from Theresa May, rather incredibly.

As mentioned above, The Guardian is really leading the way on journalistically investigating this tax-avoidance scheme which it suggests will see the HMRC lose out on millions of pounds. The reason for this is because the scheme is purposely collapsing in on itself so that it is becoming almost impossible to trace those involved. To give some context, the scheme itself is linked to a leading Recruitment-concerned company called Anderson Group which, according to its website, is the ‘U.K.’s leading provider of support services to the recruitment and contracting sector’. Anderson Group, according to the report, has been actively promoting a tax-avoidance scheme which creates a number of very small companies in order to ‘exploit VAT and national insurance rules that were originally designed to help very small businesses’, which was explained by the report by stating that ‘promotors transferred contracts of low-paid workers from a single large employment agency into a web of tiny companies. So, if an employment agency previously supplied a warehouse with 300 workers, the scheme’s promotors might create 150 new companies, each employing two workers’; the directors of these small companies were predominantly, if not always, of the Philippines. Citing a tax partner from Clifford Chance, it is stated in the report that in the view of the tax expert, the scheme had been set up to avoid tax because ‘I am troubled by the involvement of multiple Philippine individuals… the obvious inference is that the purpose of choosing the Philippines was to hinder HMRC’s ability to investigate and recover any tax due’. Yet, the scheme, containing around 2,000 companies, is now being dissolved with all of the small companies being ‘simultaneously liquidated’, which is a claim supported by the records. However, Anderson Group has responded to refute the allegations, insisting that their scheme is legal and is what is known as a ‘mini umbrella’ model which is commonplace in the recruitment industry. Whilst it has been accepted that this may be the case, the off-shore nature of the companies and the simultaneous liquidation raises issues of tax-avoidance and potential fraud that the House of Commons Work and Pensions Select Committee, for one, suggests is cause for a much more extensive investigation. The Chair of the Committee, Frank Field, has asked ‘what assessment [the Chancellor of the Exchequer] has made of HMRC’s ability to investigate and recover tax revenue lost to aggressive tax avoidance schemes’ which brings us to ask a. whether the HMRC has the ability to effectively investigate and b. whether the SFO may be a more willing and capable investigator.

Before anything else, it is important to note that HMRC are not feeble in this regard; in their most recent annual report, it was announced that HMRC had collected ‘£29 billion from its crackdown on tax evasion and avoidance and organised crime’, with £4 billion being collected through its ‘accelerated payment notices’ which allow for people under enquiry of tax avoidance to make amends quickly. However, the issue in this case lays in the fact that off-shore individuals have been utilised and the companies have been made insolvent at the same time, meaning that there has been a conscious attempt to avoid the scrutiny of the HMRC. Now, taking this into account, the situation seems to fall into the cracks of the definitions of tax issues, because it counts as tax avoidance because the firm has bent the rules and not acted within the spirit of the intended rules, but the firm has also, arguably, committed tax fraud because of the secrecy regarding the off-shore individuals (based on the National Audit Office’s definition of tax fraud, in which it states that a ‘hidden economy’ is a characteristic of tax fraud). The Conservative Government has been making plenty of noise concerning its approach to combatting all variants of tax abuse (for want of a better phrase), which included strengthening Britain’s response to financial crime by incorporating the SFO into the National Crime Agency; it is on that basis that this post asks the brief question of whether the SFO may be a better spearhead to investigate this particular instance.


The SFO is not a specialist in tax investigations, but it is a specialist in uncovering elements of a scheme. What is required in this particular situation is a two-staged investigation within which the SFO could play an extremely important role – the concerns regarding the HMRC’s ability to uncover the trail of influence across the scheme may be a good instigator for the SFO to take up that particular role, given that the actual actions of Anderson Group are hard to define in terms of the tax rules they have broken. Whether the SFO could spare the time and resources is another matter, and whether the Conservative Government would even allow such a cross-pollination of regulatory endeavour to come to fruition, particularly when it involves Theresa May’s long-held nemesis, is perhaps the biggest fly-in-the-ointment. Yet, the outright refusal to even publically engage with the issue from the HMRC does not inspire confidence when considered alongside the growing concerns. Whilst the law determines that the HMRC will investigate domestic offences and the SFO will investigate foreign offences with regards to tax evasion and other tax crimes, this case seems to fall between the cracks at every turn – which is a reason why the perpetrators may walk free; the effect of that upon the perception of the authorities to fight financial crime may be extremely detrimental.

Tuesday, 18 July 2017

Australia Moves to Challenge the Banking Community with Reforms: A Workable Strategy?

Although Australia has weathered the supposedly global storm after the Financial Crisis (a number of countries, of course, were simply not as affected by the Crisis like their Western colleagues), with consistently positive results being reported by their largest banks (until recently), and solid economic fundamentals in place to protect them from external shocks, the Australian Government is pressing ahead with plans to reform the banking system in the Country and, in today’s post, these reforms will be the focus. We discussed the situation in Australia only recently here in Financial Regulation Matters in relation to the Credit Rating Agencies taking aim at Australian banks, so it is clear that the Australian banking system is currently experiencing a very challenging time. In that sense, the proposed reforms, which are currently at the consultative stage, are the epitome of that changing environment, but the question for us today is whether the reforms can make a difference, and also whether the proposed regulations may be transferrable – although that is obviously not a concern for the Australians.

Even though the Australian ‘Big Four’ banks had performed well since the Crisis, a review was still commissioned by the Government, to be conducted by the Standing Committee on Economics. That review, which is known as the ‘Coleman Report’ – named after the review’s Chair David Coleman MP – aimed to present several recommendations concerning the banking industry and, as is common since the Crisis, put consumers right at the very heart of their proceedings. The key aspects for the review were to put forward recommendations concerning a new tribunal system, affecting Executive’s remuneration packages, develop protections for the consumer in the financial arena, and also to develop more competition in the sector. In response to these calls, the Government has proposed to introduce the ‘Banking Executive Accountability Regime’ (BEAR) which is primarily concerned with the accountability-related proposals and forms the largest component of the proposed reforms. The most significant elements of the BEAR reform are that all Directors and Senior Executives would have to be registered with the Australian Prudential Regulation Authority (APRA), APRA will have more power to discipline and review the banks, the variable elements of senior banking officials will be deferred at a rate of 40% for Senior Executives and 60% for CEOs. The underlying sentiment of the BEAR reforms is that there must be increased transparency so, for example, the roles and expectations of each position within a large bank is now clearly identified so that, in the event of a failure, any divergence would be clear. However, there are a number of other reforms being put forward by the Australian Government.

Writing in May 2017, the Treasurer Scott Harrison MP declared that a number of elements were up for reform. With regards to the BEAR reforms, he announced that APRA would receive $4.2 million over four years to enforce the rules – this, admittedly, sounds nowhere near enough, but we will discuss this shortly -, that a one-stop shop for Dispute Resolution was to be set up, and that an initiative to encourage the development of a FinTech centre was to be introduced. Keeping with the banking industry, Harrison confirmed that would be pushing through measures to encourage competition, including altering the requirements for an institution to be called a ‘bank’, and that there would be the introduction of a levy on Banks, which he suggests will raise over $6 billion over four years. However, as mentioned above, the funding detailed by Harrison seems awfully limited for an endeavour so extensive and when we look at the proposed funding, it does not make for comfortable reading. For these grand regulatory endeavours, APRA will be afforded a total of $39.4 million over 4 years, whilst the Australian Competition and Consumer Commission will be given $13.2 million, and the Australian Securities and Investments Commission will be given $4.3 million over four years to supervise and establish the dispute resolution initiative, and $16 million to increase its ‘financial literacy’ program, which brings the total funding proposed by Harrison to just under $73 million over 4 years – this seems like a case of either under-funding or plans that are too ambitious.


Ultimately, the plans that have been proposed meet the recommendations of the Coleman Report and make for excellent headlines. However, the reality of situation may be a little different. Firstly, $73 million worth of funding does not sound like enough to regulate the banking industry in relation to these new regulations and to increase the protection of consumers. We have discussed financial literacy before in Financial Regulation Matters and one thing is for sure - $16 million will not cover what is needed, particularly for a country that has the population that Australia has. Secondly, and probably most importantly, it seems almost irrational to suggest that the largest banks will just accept these reforms – it is to be expected that large and concerted lobbying campaigns have already begun and will have had an effect before the legislators produce the final pieces of legislation. For this reason, it is likely that all of the reforms will not be introduced, or will at least be watered down, and also this is the reason that the reforms are unlikely to be transferrable. For our purposes, in terms of assessing the world of Financial Regulation, the influence held by large financial entities in countries like the U.S., the U.K., and the E.U. mean that reforms that seek to negatively affect the earning potential of financial elites are unlikely to be adopted in such a rudimentary form; regrettably, it is likely that these reforms will be lobbied against so vociferously that diluting them, or removing some of them altogether will be the likely outcome or, alternatively, the initiatives will be under-resourced so as to make them ineffectual. The development of the regulatory process in Australia, however, will make for a fascinating watch to see how it survives the gauntlet that stands in the way of all regulatory reforms in the modern day.

Monday, 17 July 2017

The City of London Comes Under Even More Pressure Because of Brexit: A Bind That Only Has One Winner

Here in Financial Regulation Matters we have looked at the potential landscape for British finance post-Brexit on a number of occasions. Firstly, we looked at the battle for the marquee names in the wake of the U.K.’s secession from the Union between France and Germany. Then, in a later post, we discussed the strength of one of the frontrunners in the battle for post-Brexit business – Dublin. So, in today’s post, we will look at how this issue is developing – as it will no doubt continue to – and how the City of London is being put under increased pressure. Yet, in keeping with the underlying sentiment of Financial Regulation Matters, we will conclude by looking at what effect these pressures may have upon the wider society, particularly in Britain but in Europe also.

Earlier this week, it was announced that Barclays are in talks with Irish regulators about substantially increasing its presence in the Country after Brexit, with the company noting that Ireland represents a ‘natural base’ for its European operations. Barclays are not alone however, with it appearing likely that Dublin will be the major winner with regards to the financial fallout from Brexit, with up to 12 major firms confirmed as moving to Dublin already – including U.S. giant JP Morgan – although Frankfurt has been recording some prized scalps of late, including Citibank (announced this evening), Morgan Stanley, Nomura, and Goldman Sachs making substantial moves to the German finance capital. This was presented here because the apparent exodus from the City – although it must be made clear that the firms of building bases in Europe, they are not completely abandoning London – represents just the first wave of pressure that the City is feeling. The second wave can be encapsulated by the Daily Mail’s headline ‘Exposed: French Plot to “Wreck” Britain’ which, in keeping with the newspaper’s sensationalist agenda, provides an excellent insight into the propaganda being developed by the City in anticipation of what is to come.

The newspaper, on Saturday, broke the story based on a leaked document from the City’s Brexit Envoy Jeremy Browne that French officials have been ‘boasting’ that they will use Brexit to sabotage the British economy. Whilst it is important that one rejects the Mail’s sensationalism, what is of interest is the leaked document in question, and it makes for fascinating reading. The document, headed Report of the Special Representative for the City to the E.U., Jeremy Browne, starts on an incredible footing by degrading Romania by stating that the conversation with Romanian officials was ‘amiable but unsophisticated’, whilst Browne then goes on to proclaim ‘France was the opposite in every regard’. Browne is unequivocal in his damnation of the French, stating that ‘the meeting with the French Central Bank was the worst I have had anywhere in the E.U. They are in favour of the hardest Brexit. They want disruption’. Now, it is important to note that one is not disputing Browne’s version of events because, obviously, there is little basis too – it may have happened like he says, it may have not – but the important issue for is the effect of the rhetoric in the ‘leaked’ report. Before we get to that, it is worth looking at the incredible rhetoric that Browne employs more: ‘France sees Britain and the City of London as adversaries, not partners’; ‘what we are witnessing is a whole-of-France collective endeavour’; ‘They are crystal clear about their underlying objective: the weakening of Britain’; ‘There is plenty of anxiety elsewhere in the E.U. about the French throwing their weight around so aggressively’ and so on and so on. If we look at the potential effects of this rhetoric and sentiment, then we can see there are clear winners and losers to the aftermath.

The City of London has started what may be a chain reaction. On the one hand they are actively promoting themselves as an innocent victim in the proceedings, and as with all victims it is likely that they want to be compensated. This type of propaganda is arguably the precursor to the British Government being lobbied heavily, and most likely succumbing, to the calls to ease regulations on British financial entities to allow them to ‘survive’ in the wake of Brexit – it is, however likely that a. this lobbying campaign is well under way already, and b. worth clarifying that the financial elite who are claiming to be victims are a very large component of the collection of root causes to our current societal predicament. Yet, as we know, the U.K.’s reliance upon the Financial Sector fundamentally binds the National interest to the City’s interests, which mean any concessions that are requested arguably have to be provided, based mostly on the fear, whether perceived or real, that the Country will go into freefall upon formally separating from the European Union. Yet, there is another element of a potential chain reaction that the City of London are creating. The rhetoric attempts, overtly, to sow division amongst the ranks of the European heavyweights for its own cause. Now, although one cannot foresee the future, it is likely that these attempts will be futile, simply because there are too many plans in place to relocate financial bases to European centres. However, the effect (although we can attribute this all to the City) is that the social burden that comes with being an established and leading financial centre is now being transferred to the Continent, and it is important that the European citizens brace themselves for it. Any moves by the financial elite will have been incentivised by the host nations, to beat off competition, and that is a dangerous cocktail – financial entities being incentivised to take advantage of competitive pressures. The E.U. is therefore faced with two outcomes if we proceed along those lines, and that is firstly that the risk to hosting these entities will be localised in places like Frankfurt (therefore meaning E.U. and German regulators need to be increasingly vigilant) or secondly the division of ‘sectors’ across the continent spreads the risk, meaning that either the potential for damage is reduced, or cynically it is alternatively multiplied.


What can be said at this stage is that, quite simply, nobody knows what will happen. The current environment is becoming increasingly difficult to predict by the day, but there is scope to provide warnings. The battle to host the financial elite fundamentally downplays the negative effects that the sector has and, looking at the daily headlines, it seems as if though national leaders are placing their citizens at risk in order to be rewarded in the short-term. When people look at the riches associated with London and its connection to the financial elite, they would do well to cast their minds back a decade when the country was brought to its knees by that very same sector, and who continue to pay the penalty for their venal endeavours to this very day. What is for sure, in relation to Mr Browne, is that the division he hopes to create only has one winner. 

Saturday, 15 July 2017

Tobacco Companies’ Lobbying Intensifies in the Face of Increasing Opposition: Another Blow to Trump’s “Drain the Swamp” Campaign Pledge

There are two issues which are the focus for today’s post, and both have been covered on separate occasions before here in Financial Regulation Matters. In February we discussed how the stated aims of President Trump, namely to ‘drain the swamp’ with regards to lobbying influence in Washington, D.C., were immediately proven to be nothing more than lip-service with the introduction of an Executive Order that preserved the ability of Congressional and White-House Officials to lobby after their term has expired. Then, in June, we discussed how large investors and other financial organisations were beginning to develop a societally-focused approach to their business, which translated into a reduction in investment in companies that profit from providing social ills, like tobacco companies. In today’s post we will look at an article that was published in The Guardian that discusses the actualities of the lobbying environment since Trump took office, with particular attention paid to tobacco firms – ultimately, the tobacco firms, in line with the revelation that massive concessions have already been made to energy firms, provide proof if proof were needed that one of Trump’s main campaign pledges was not only false, but entirely misleading.

The rise in shareholder activism this year essentially marked the accumulation of an underlying trend within the business arena concerning socially-concerned business, one which has seen the development of ‘sustainable finance’ as a genuine foundation for the future of business (despite the many shortcomings at present), and also extremely influential investors begin to the set the tone with regards to responsible investment. However, that surge in support for the responsible-investment movement has, rather predictably, led to a concerted response by those who stand to lose out. One of the key components of that opposition is the tobacco industry which, everyone should know apart from the companies themselves apparently, contribute negatively to society in terms of their products’ effects on public health, and marketing campaigns designed to entice the young and the poor, amongst a list of other negative effects. In response to a World Health Organisation (WHO) ‘International Treaty for Tobacco Control’, one of the leading tobacco companies – Philip Morris – has been waging a covert war against the Treaty by way of a ‘clandestine lobbying operation that stretches from the Americas to Africa to Asia’. In the Reuters report detailing the leaked documents which describe this campaign, it is stated that because of the anti-smoking treaty it is estimated that 22 million smoking-related deaths will be averted, although Philip Morris responds by labelling the treaty as a ‘regulatory runaway train’ that is driven by ‘anti-tobacco extremists’. Yet, whilst the companies continue to aggressively pursue business in developing countries due to the stringent policies affecting their business in developed countries, they have found a welcoming home in the United States which, rather incredibly, adds further weight to the notion developed by MIT economist Peter Temin that ‘America is regressing to have the economic and political structure of a developing nation’.

Since Donald Trump took office, America’s largest cigarette manufacturer – Reynolds American and Altria Group – have donated $1.5 million to the President’s inauguration and have hired 17 lobbying firms to ‘have an active presence on the Hill’, with other leading tobacco companies following suit. The claim that many of Trump’s appointees ‘have deep commitments to the tobacco industry’ is seemingly confirmed when we consider that Jeff Sessions, Trump’s Attorney General, had to return money to the tobacco companies during his campaign to become a Senator in the 1990s because they had contributed too much! This facilitative environment was arguably demonstrated as soon as Trump took office, with British American Tobacco announcing its merger with Reynolds in a $49.4 billion takeover. The tactics developed by the tobacco companies really should not be a surprise at this point, with similar tactics being deployed in the U.K. with regards to plain-packaging, but the issue really is the environment that allows such behaviour and in this vein we must return to a concept that raises its head frequently here in Financial Regulation Matters – capture.

The actual tactics of the tobacco industry range from recruiting ‘experts’ to rally on their behalf via funded research and opinion, developing underhanded campaigns to influence public opinion, or simply to ‘persuade’ policymakers by offering copious amounts of money for support. Yet, the campaign is particularly targeted so that those who can influence are specifically considered, which is represented by the understanding that tobacco firms have been lobbying excessively to keep the decision to regarding tobacco regulation as close to financial policy makers as much as possible because, rather crudely, ‘finance ministers, however, can potentially be persuaded that there is a risk of losing revenue’. Tobacco firms, in that sense, have demonstrated their intelligence and the benefit of a concerted campaign because they have realised that the new political landscape is dominated by individualism and perceivable short-term growth – seemingly the calling card of the U.S. and U.K. governments. This realisation is demonstrated by the tobacco companies consciously and disproportionately funding Republican election campaigns, the Trump Administration actively delaying regulatory endeavours against the tobacco companies, strategically-inspired governmental promotions of those opposed to tobacco reforms, and proposed legislative cuts to endeavours that are concerned with education regarding the negative effects of smoking; Trump himself has been a keen investor in Tobacco companies, and Vice-President Mike Pence recently argued that ‘smoking doesn’t kill’ before accepting donations from the leading tobacco lobbyists’.


Ultimately, there a few deductions that one can make. Not that previous American governments were not captured because, quite frankly, lobbying is a massive a business in the U.S. but, in Trump’s America, it is clear that the Government is captured. Secondly, the absolute nonsense that Trump espoused during the campaign trail that he would ‘drain the swamp’ was not just a mis-statement, but an outright lie. Lastly, the disdain that is demonstrated by Governmental and elected political officials for the poor in the U.S. and the U.K. is reaching levels that have rarely been seen in the modern day – smoking affects the poor considerably more than any other group, yet the people who went to the polls are actively having their interests ignored and downplayed. The result of this one instance, of which we can attribute many others like the Leave-Campaign in the U.K., is that political statements are losing whatever authority they had: it is remarkable to think that anyone could truly believe in a politician after the last few years’ proclamations have, almost universally, been proven to be untrue – the focus on short-term economic success is masking a growing disillusionment in politics that is usually the precursor to a socially-defining era of unrest and conflict; hopefully, that is not the case this time around, although subscribing to the lessons of History means that particular hope may be very fanciful indeed.