Monday, 11 December 2017

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

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

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

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

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

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

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

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

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

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

HSBC is Spared, Despite Concerns

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

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

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

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

Tuesday, 5 December 2017

News from the Regulators: Blink and You Will Miss It

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

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

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

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

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

Monday, 4 December 2017

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

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

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

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

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

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

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