Saturday, 30 December 2017

2017: A Busy Regulatory Year

As Financial Regulation Matters ends its first year, this post will review some of the main themes that have emerged (or persisted) over the last year. With nearly 200 posts since starting in February, it will be too much to review each post, but assessing the themes that have been discussed throughout the year will be useful; in what is a turbulent era politically and socially, understanding the role that financial regulation plays in that arena, and how that arena affects the development of financial regulation, is of interest. With that in mind, we will look at some of the main stories that have been discussed in Financial Regulation Matters from within a few specific areas: fraud and corruption; industry developments; social and political developments; and lastly developments for financial regulators.

Fraud and Corruption

As the world (particularly the Western World) comes to terms with the devastating Financial Crisis and its ensuing effects, fraud and corruption has consistently come to the fore within the business media. In this respect, there have been two particular categories that have emerged, with each having a significant impact upon the field of business, and society moreover. The first category we will look at is the issue of systemic fraud and corruption, and nowhere is that demonstrated better than in looking at the massive stories of money laundering and the financial practices of the elite. Following on from the revelations stemming from the law firm Mossack Fonseca – the so-called ‘Panama Papers’ leak - the year started with revealing investigations into the actions of HSBC, who were identified as having particularly lax anti-Money Laundering (AML) systems in place, with that story being followed in the summer by the journalist-led investigation into what was termed the ‘global laundromat’. The ‘global laundromat’, which described a network of banks around the world laundering money that emanates from Russia, took on added significance with the political aspect of American-Russian relations continuing to teeter on the edge; whilst national regulators sought to address concerns at banks domiciled in their own regions, the fact that over 700 banks from more than 90 countries were implicated pointed towards a systemic problem that also demonstrated an underlying understanding that legal and illegal financial procedures operate almost simultaneously, if conducted in an opaque enough manner. This was continued with the massive story (that would not go on to survive too many news cycles, in truth), in which files from the offshore law firm Appleby had its documents leaked – the so-called ‘Paradise Papers’ leak. The leak saw the elite’s business practices publically displayed, with members such as the British Royal Family, Business leaders like Robert Kraft, and celebrities such as Madonna having their investment practices revealed. Whilst there was plenty of commentators keen to make the distinction between tax-avoidance and tax-evasion, the short-term effect was for the public to negatively react in relation to the pain being felt by the general public at this time of continuing austerity. However, the extent of that reaction, and the media coverage of it, was to be extraordinarily limited, and there may be a number of reasons for that. Before we get to those reasons, there were plenty of instances of corporate fraud, bribery and corruption that deserve a mention over the past year.

In terms of corporate fraud, it was interesting to note the amount of corporate bodies who were, or who continue to be charged with fraud over the past year (which saw us concentrate on a small number of regulatory bodies leading that fight, like the Serious Fraud Office (SFO) in the U.K.). In the banking industry, a number of leading banks were charged throughout the year, with Barclays, RBS, HSBC, and a number of others charged for various offences. Furthermore, both RBS and Lloyds have become embroiled in bitter battles over the compensation for those who have been proven to have been effected by their fraudulent practices (or those carried out in their, or companies they have acquired, name); RBS is currently attempting to stem the bleeding from their ‘Global Restructuring Group’ unit, whilst Lloyds are still yet to compensate the victims of HBoS’ Reading Unit – both instances concern the banks and their affiliates deliberately pilfering failing (and sometimes healthy) SMEs. In other sectors, two of the ‘Big Four’ accounting firms were charged and fined by the U.S. Securities and Exchange Commission, the massive Aerospace Company Airbus is currently under investigation in the U.S. for flouting compliance regulations, and in the Automotive sector Rolls-Royce entered into the largest ‘Deferred Prosecution Agreement’ with the SFO in British history. There have been many other instances, like those seen in the tobacco industry and the current investigations into the Oil and Gas industry as we saw yesterday; however, certain instances have suggested that we should be guarded when lauding these developments in the fight against corruption, fraud, and illegal financial activities.

In the U.S., their largest actions have come in relation to the massive trade-related confrontation that began in the aerospace industry with the trade battle between Boeing, Bombardier, and later Airbus; this falls in line with the proudly-declared protectionist rhetoric uttered by President Trump during and after his run for office. In the U.K., advances in the fight against financial crime have been consistently trolled by the underlying reality that, for whatever reason, the political elite in the U.K. seek to eliminate the Serious Fraud Office, which has been demonstrated by their endeavour to either underfund, directly dismantle, or covertly dismantle the regulatory body that is, by far, leading the fight against financial crime in the U.K. and around the world in certain cases. The reasons for these developments are plenty, but the time afforded to either (a) the successes or (b) the developments of the financial-crime related stories is extraordinarily telling. Whilst ‘real’ crime is given excessive air time, the crime of the financial arena is barely discussed – focusing on the airtime offered to the revelations stemming from the Panama and Paradise papers illustrated quite clearly that the public will have to look intently for these stories; they will not be told. The inference is that other crime is more important for the public to understand and comprehend, but in truth no crime affects society more than financial crime, particularly when it is systemic in nature. When the stories are taken in isolation, they can be written-off as a ‘culture’ within a certain industry or amongst a very few individuals, but when taken as a collective, the impact is abundantly clear. To that end, we will continue now by looking at the developments within certain industries to achieve that aggregated outlook.

Industry Developments

Industry in this section relates to developments within certain sectors, so obviously it will be impossible to adequately review every sector that has been discussed over the past year. However, some stand out and the sentiment these analyses offer is one of a battle against a systemic culture, which is a key element in understand why certain actors in the way they do, and how one may realistically predict developments – the need to analyse from within the actual v desired framework that will be promoted in a forthcoming monograph by this author will be clear. Starting close to (this author’s) home, the credit rating agencies have been discussed on a number of occasions, with their transgressive nature being used as a warning as the ‘Big Three’ endeavour to spread their products and presence to a number of new markets, like Saudi Arabia and the developing sustainable finance ‘movement’. In the banking industry, smaller banks have been facing trouble (like the Co-Operative Bank and a number of Italian Banks) whilst larger banks have enjoyed protection based on their size a.k.a. too big to fail which, as a concept, was successfully challenged by the insurance industry as demonstrated by AIG’s removal from the at-risk register in that regard. In the banking industry, there have been a number of remarkable failures over the last year like the increased closure of branches, the removal of whistle-blower protection, widespread AML failures, and disregard for their victims, but all of these issues have been buttressed by a political and regulatory foundation that continues to offer unwavering support, as demonstrated by Trump’s insistence on deregulation and Philip Hammond’s insistence that we ‘live in the real world’ in relation to taxpayers paying for the crimes and failures of the financial elite re RBS, as just two examples. There have been many other instances, across the financial and commercial sector, that suggest the current environment is one of appeasement with only one loser; the public. Whilst this is the undercurrent of a lot of posts here in Financial Regulation Matters, is with good reason. Throughout the year, there have been countless instances of the sheer disdain from the powerful for the general public, and the following are just some of the examples that we have looked at.

Social and Political Developments

We began the year by looking at the findings of the ‘Financial Exclusion Committee’ that was tasked by the House of Lords in the U.K. to assess a number of aspects whereby the financial world negatively impacts upon society, and they certainly had their work cut out. Just some of the angles they examined was the remarkable increase in predatory lending that continues to plague the vulnerable. In relation to the vulnerable, the issue of the incredible but unfortunately necessary (in the current paradigm) explosion of the usage of food banks across the country (including in Universities), as well as the simultaneous mental health epidemic (amongst a whole host of societal issues) was covered frequently, as too was the disgusting sentiments offered by Jacob Rees-Mogg with his declaration that the use of food banks was actually ‘uplifting’. Returning to mental health for one moment, we saw how the increased pressure that austerity and the effects of an era-defining financial crisis, or wealth-extraction event was negatively affecting the general public, particularly those in vulnerable positions or high-pressured position in relation to their life chances i.e. students facing an onslaught from tuition fees to exploitative accommodation prices; the mental health crisis that exists within the U.K.’s Higher Education system is as clear an indicator as is necessary. Yet, for all the posts that discussed these issues throughout the year, the post that responded to the ‘landmark study’ that suggested the austerity-era policies account for nothing more than ‘economic murder’ was perhaps the most revealing; to have an extra 120,000 unnecessary deaths, with an extra 150,000 predicted between 2015 and 2020 all related to austerity-era policies, on the back of an event that has saw not one person of any real significance jailed demonstrates the reality of the situation. The pattern is clear to see; on the back of the largest wealth-extraction event since the Crash of 1929 and the ensuing depression, it is the vulnerable who pay the real price. The ultimate question, then, is who is supposed to prevent, or at least reduce the impact of such a pattern? The answer to that is financial regulators, and in a number of posts this year we have assessed some of the major regulatory players in detail.

Developments for Financial Regulators

We have focused on a number of regulators throughout the year from within a number of jurisdictions, ranging from China, Australia, Europe, and the U.S. However, we have spent a lot of time looking at British regulators, with the Financial Conduct Authority, the Financial Reporting Council, and the Serious Fraud Office mostly taking centre stage (in addition to national treasuries like the Federal Reserve and HM Treasury). A common theme that has emerged, rather predictably but still unfortunately, is that these regulatory bodies are particularly underfunded and intrinsically bound to national protection, which as we have seen consistently trumps the requirement to protect the public: regrettably, the impact of a failed bank or even the perception that would be created if leading financial figures were to be imprisoned is more important than public protection. The issue of regulatory budgets came into focus in August, and what we found was that many, if not all, regulators are directly underfunded, and continue to have their budgets slashed, just as their importance continues to develop; the overriding inference, as directly articulated by Trump and his followers (as is their way) is that regulation is bad for business, and that if one wants economic growth then one must deregulate to achieve it. What is rarely questioned, in the mainstream at least, is what does this yearning for economic growth actually mean? What we learned recently, or perhaps had confirmed, as was brutally demonstrated by Trump’s new tax laws, is that deregulation is designed to provide a green light for the financial elite to begin processes that systematically extract wealth from the system; Greenspan’s efforts were the direct precursor for the financial crisis – the elite understood the system and executed their respective roles in a ruthless manner. Whilst the cycles of the economy oscillate away from the Crisis, the lessons of history have been ignored, yet again, on a grand scale – the threat of political populism threatened a return to the post-Depression era that was mired in war and death on a remarkable scale, but the effects of the post-Crisis era are still to unfold, even a decade later. Reviewing the actions of regulators in the post-Crisis era has demonstrated that whilst words are easily spoken, the actions of influential regulators are the same as ever – they are pro-business and always will be; the situation with RBS and the regulator’s complicity in helping them to cover up their actions drew scorn, but was not in the least bit surprising. Whilst one would not to be entirely pessimistic, the reality of the situation historically leaves little room for optimism, although what the future holds in terms of the cyclical development for business, regulators, and the public remains to be seen.

Ultimately, the year in business has been directly representative of the global undercurrent that has been developing since the Crisis. We have seen extensive political upheaval and reconfiguration, with China and Russia repositioning themselves to increase their influence against the backdrop of isolation and protectionism from established leaders like the U.S. and the U.K. What is a common theme, particularly since 2016, is one of uncertainty, and the common adage is that business hates uncertainty. However, we are seeing business, and particularly big business, avoid accountability for their actions and, quite remarkably, we are seeing their interests actually dominating the political dialogue. Yet, is that really remarkable? In reality, is probably unremarkable, but the continued assault on the public, and particularly the vulnerable sectors of the public, continues to astound. It continues to astound not because of its existence – it is hardly a Marxist view to suggest that the poor lose out in the current system – but it is the severity, and the unrepentant rhetoric that astounds, because irrespective of political affiliation it is surely never acceptable to see nurses, students, and the disabled funnelled into food banks and made destitute whilst executive pay continues to rise, criminal prosecutions in the financial arena continue to be confined to the confines of make-believe, and politicians continue to deflect attention towards nonsensical issues like the colour of passports etc. Ultimately, it is hoped that that the assault at least subsides in the coming year to allow for some much needed relief, in whatever limited form, for those who bear the brunt of the system – the impending secession of the U.K. from the E.U., and the continued presence of President Trump in the Oval Office suggest that one may have to wait for that hope to become reality.

Keywords – financial regulation, banking, regulators, business, politics, poverty, economics, @finregmatters

** As it is the end of the first year for Financial Regulation Matters, I would like to take this opportunity to articulate my sincerest gratitude to a number of people. I would like to start by saying thank you to a dear friend who helped to me to develop the blog initially, and encouraged me to continue to develop it in the early stages, that support was and is very much appreciated. I would also like to thank my contributors over the year who have kindly written for the blog and who have helped enhance it considerably. Lastly, but certainly not leastly, I would like to express my sincerest gratitude for the support the blog has received over the last year. Having only started in February the blog, with almost 200 posts, has garnered hundreds of thousands of views and hundreds of subscribers, and that support has been invaluable as the blog has continued to go from strength to strength. For those of you that read and subscribe to the blog, your continued support is very much appreciated and is a constitutive component of why I continue to critically assess these developing business stories – your continued support by way of readership, subscriptions, and spreading knowledge of the blog across your social media platforms will also be genuinely appreciated, and will help the blog elevate to that next level in 2018 and beyond. To all of you, wherever you are around the world, Financial Regulation Matters wishes you the happiest of New Years!

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