Tuesday, 28 March 2017

Shareholders Attempt to Intervene in Tesco’s Business Plan: A Welcome Change of Mentality

In the second post today, the focus will be on the news recently that two major shareholders in Tesco, the massive retail company that engages in multiple avenues of business, have sought to publicly express their opposition to the company’s plans to purchase Booker, a wholesale grocery firm, for a reported £3.7 billion. Whilst there are more elements to this story which need to be discussed, the sentiment that is emanating from this news, that shareholders are taking the long-term into account and not succumbing to the destructive narrative of growth at any cost is the most important way forward, is a very welcome sentiment indeed. Therefore, this post will assess these details, and also the importance of this sentiment being repeated in other arenas.

The attempted merger with Booker, which was originally made public in January, was billed as a move which would bring benefits to customers, retailers, and ultimately deliver ‘significant shareholder value’. However, the deal began under a cloud of acrimony, with non-executive Director Richard Cousins quitting Tesco just before the news was made public, in a move we now know was because he opposed to Tesco buying Booker. However, that animosity reached a higher level yesterday with Schroders, a renowned Fund Manager, and Artisan Partners, another large Fund Manager – who, together, own 9% of the stock in Tesco – both calling for John Allan, the Chairman of Tesco who was the focus of a recent post in Financial Regulation Matters, to pull out of the deal as soon as possible. The shareholders have been reported as labelling the move ‘foolhardy’, and there is a notable reason for this.

Tesco has experiencing a poor period in its history of late, and for a number of reasons. Perhaps the most obvious, or at least the most reported issue is the recent fine given to Tesco by the Serious Fraud Office – a fine of £129 million, potentially rising to £214 million because of a compensatory package – because the firm were found to have purposefully overstated their profits in 2014 by £250 million for the first-half of the year. However, the problems go back much farther than 2014. Attributing the problems to the leadership of former Chief Executive Sir Terry Leahy, there are some who have spoken about the ‘legacy of the strategic decisions he made’ as causing this recent wave of poor performance for Tesco. These decisions can rightly be classified as forming part of a ‘blinkered pursuit of profit’, which can be seen in the failed endeavours like the purchases of Giraffe, Dobbies, Harris & Hoole, Fresh & Easy (which represented a failed attempt to break the U.S. market, Blinkbox, Homeplus (which represented a failed attempt to break the Asian market), and finally the Donnhumby data company. This remarkable period of expansion, based upon an overriding sentiment of confidence, arrogance, and bravado, would create incredible losses, and in fact would see Tesco post one of the largest losses in British corporate history, with an incredible pre-tax loss of £6.4 billion in 2015. As a result, a new CEO was put in place – Dave Lewis – and he was tasked with steering the massive company back towards the black, something which he achieved in 2016 with a pre-tax profit of £162 million for 2016. However, it appears that this blinkered pursuit of profit and ‘shareholder value’ is now back on the table, and it is this that the major shareholders are against.

The two major shareholders make the point that, at £3.7 billion, the proposed price of the merger would not represent significant shareholder value and that creating this value would be ‘extremely challenging’. The manager of Artisan’s global value funds has been reported as stating that ‘we just don’t understand, in a business as fragile as retail, why on earth would we risk distracting ourselves from that huge goal [of simplifying the business]’, which, in relation to the failed recent history of the firm, is a rational deduction. However, Tesco officially responded by saying that, although they value the views of their shareholders, they remain confident that ‘it will enhance our recovery plans’, to which Dave Lewis added ‘we’re absolutely, completely committed to the deal’. Lewis points at the response of the stock market over the past two years as evidence of the move to recommence the expansionist movement, with former senior executives adding that the views of Schroders and Artisan do not represent the general feelings amongst Tesco’s shareholders. There is clearly a long way to go before the proposed merger takes place, or is conclusively ruled out.

Nevertheless, the sentiment and activism displayed by Schroders and Artisan is a positive move. It is not positive because shareholder activism is always positive, but because the managers of these socially-central institutions must be held to account at every turn – although there demise of Tesco is not even on the table, a hypothetical understanding that if Tesco were to fail, it would be the taxpayer that saved it, means that it is important that blind campaigns of growth are kept in check at all times. We can see the reason for that in the recent punishment by the Serious Fraud Office – companies that seek to expand in this manner will usually transgress at one of two crucial junctures (and sometimes both): either as they seek to expand; or as they seek to reduce the consequences of their failure to expand. In Tesco’s case, the company purposefully and illegally overstated their profits, thus painting a better picture to investors than was actually the case. Whilst this mode of operating is usually attributed to large financial institutions, and quite rightly so, we should be more than aware that it applies to all companies – the recent post about the transgressions of Rolls-Royce, and now Tesco, should be clear examples of this understanding. It is vital that shareholders do their part for society and seek to encourage and insist upon sustainable and responsible growth, rather than that demonstrated by Tesco under the leadership of Sir Leahy.

The Bank of England’s ‘Exploratory’ Stress Test: An Important Precaution

Today’s short post is concerned with the news yesterday that the Bank of England is preparing to put the seven largest banks in the U.K. through an additional stress test, in addition to the resilience test that is conducted annually. The new test, which will examine the bank’s susceptibility to a number of additional aspects, including persistently low rates and higher costs, will run every two years and represents the central bank’s understanding that the volatile environment that we currently inhabit needs to be reflected in the stress tests. So, this post will focus on this new ‘exploratory’ test and assess whether it goes far enough, and whether there are any shortcomings which need to be addressed.

The Bank of England has created this additional test so that it may better understand the larger financial environment if the banks in its jurisdiction, as a whole, succumb to the same pressures. The tests, which are based upon 7-year projections, are intended to incorporate global developments, such as the U.K. seceding from the European Union, and the rising debt levels that are being witnessed in China. The test will also include the hypothetical scenario of a global downturn and how the banks would cope with that over a 5-year period, which is a new approach by the Bank (when taken in conjunction with the other new elements – which include factoring in continued financial penalties) and has led to some describing this new test as ‘unchartered waters for both the BoE and banks’, which is a particularly accurate summation.

However, there is one issue that reveals itself very quickly, and that is that we, as the public, will not know the results of the test. This is for obvious reasons, because it is logical to assume that the market would fall apart if it found out that, conclusively, a number of large U.K. banks were ill-prepared to survive an economic downturn. Yet, the largest banks have had difficulties passing the annual stress tests in the past, so it stands to reason that if they failed at the end of last year, they will fail again under this more rigorous test. RBS, who, as we have previously discussed in Financial Regulation Matters is in a particularly poor state financially, emerged only last year as the biggest problem in the wake of the stress tests for 2016. Even though RBS’s litigation costs contributed greatly to their poor position, the bank still had to revise its capital plans to adhere to BoE standards because, according to the parameters of the test, RBS would have suffered the second-largest ever percentage fall in capital (only behind the Co-operative Bank in 2014) – once this news was transmitted to the public, RBS shares fell 1.2% almost immediately).

In terms of the test itself, there is a question as to what comes next. Usually, the Bank of England will conduct the tests and the target banks will respond based upon their financial position. Once the bank responds as to how it would cope with the imagined conditions, the BoE then rates the banks in terms of the measures that would be put in place to remain in a positive stance, or at least how they would absorb the negative aspects of the downturn and still remain viable. However, it is likely that RBS, in particular, will fail this new test so spectacularly, that even alluding to this will have a significant and negative effect upon its position. Even though the results of the test will not be formally released, the business press will find out somehow, and the results could be particularly damaging for a bank that is still 73% owned by the taxpayer.

Ultimately, the test is required, but comes with significant connotations. However, the fear of the response from the market can never be an impediment to testing for a bank’s resilience, so in this light the actions of the Bank of England should be praised. Also, the fact that the issue of rising credit is being included, and a review of this rise is being incorporated into proceedings is particularly positive, because it was noted recently in Financial Regulation Matters how important this issue is to society, and it will also be discussed in an upcoming article by this author as to how the rise in automobile financing is creating an environment akin to that seen prior to 2007/8. Yet, there is more to be done. This new move by the Bank of England should be accompanied by a similar ‘stress test’ of the actions of all financial regulators and how they would manage the situation, because the financial crisis not only revealed the shortcomings of the regulated, but of the regulators as well. The move to incorporate the results of tests without revealing them to the public will likely not materialise, which will cause problems – but it is hoped that the Bank of England will forcibly direct the failing banks on how to proceed, rather than offer some friendly advice. One banker reportedly stated, regarding RBS, that ‘it is staggering they are still failing, we all know how much capital we need’ – it is clear that the failing banks cannot be trusted to protect against a major downturn, and that it will take an outside body to enforce that change in mentality; hopefully, the Bank of England can play that role.

Sunday, 26 March 2017

The Financial Exclusion Committee: A Necessary Endeavour in a New World

This post is concerned with the recent publication from the ‘Financial Exclusion Committee’, a committee that was set up by the House of Lords to ‘consider financial exclusion and access to mainstream services’. The report has created headlines that allude to the poorest in Britain being excluding from banking services, and ultimately being turned towards ‘high-cost credit’ and ‘rent-to-own’ products, However, there are a number of aspects, some of which are particularly vital for society, which emanate from this report and are worth considering. Ultimately, the report suggests a number of reforms and, although advisory in nature, strikes the right tone in terms of what is required to protect the vulnerable in society as we rocket towards a new phase.

The report tackles a number of issues in terms of what is being labelled ‘financial exclusion’. The first aspects that we will look at revolve around the role of the banks within society. The first recommendation that may have a major effect upon how financial institutions operate is the recommendation that the Financial Conduct Authority (FCA) should create rules which clearly set out the duty of care that financial organisations should exercise towards their customers. The committee discussed how, currently, the Financial Services and Markets Act 2000 which, as the date suggests, was established in the era that brought about one of the largest financial crashes on record, established the principle that the FCA must have regard to ‘the general principle that consumers should take responsibility for their decisions’. However, the Financial Services Consumer Panel rightly noted that consumers can only be expected to take responsibility if their actions were based on sound and impartial advice which was based upon the very essence of exercising a distinct duty of care – the panel concluded that forcing this issue should lead to a change in culture that would see these institutions ‘take their customers’ best interests into account at every stage of their engagement’. This is the correct sentiment to have, but there is a qualifying understanding that needs to be advanced before we get carried away with such endeavours, and this will be advanced at the end of this post.

The next element of the Committee’s recommendations that concern the banks’ behaviour is the issue of promoting the right financial products to the right people. The Committee recommends that banks should be compelled to promote their ‘basic’ bank accounts – i.e. accounts that allow for a direct debit card and access to cash machines, that allow for direct debits and standing orders, but crucially do not allow for the provision of credit in the form of an overdraft – because not doing so directly leads to an increase in exclusion from the marketplace for those who lack an understanding of the banking system, and for those who have little need for more sophisticated products. It was discussed in the Press how the Committee found that even branch employees were sometimes unfamiliar with their own bank’s basic account offerings, with the Guardian suggesting that the main reason for this is that banks make no money from providing these accounts – because they cannot recoup funds via overdraft charges – and in some cases are making a loss on their provision. However, it must be noted that since a government-led initiative to increase access to ‘fee-free’ bank accounts in 2014, there has been an increase in their provision, which is a good start and one that is should be expected. It is to be expected because it was very much ‘expected’ that the British taxpayer would be there to provide security for the incredible losses suffered by these very same institutions. However, there is still work to be done, with an estimated 1.7 million people in the U.K. not having a bank account, which in turn leads them towards ‘payday loan’ companies – the committee found, most harrowingly, that 77% of those who used these firms in 2013 did so to pay for food.

The social effect of this exclusion makes for appalling reading for an advanced society, and the recent development of the incredibly misguided notion of the need to develop a ‘shared society’ – which is based upon the notion of moving away from the ‘social justice agenda of prioritising helping the poorest people in Britain, and to instead focus on those who live just above the welfare threshold’, presumably because they may vote, should not inspire confidence. It was found that more than a million people (40% of the working age population) in Britain have less than £100 in savings, that 2.6 million are struggling with severe problem debt, that 8.8 million are showing signs of financial difficulty, and that usage of rent-to-own as a means of purchasing has more than doubled in the last five years to 400,000 households in Britain. There was also detailed research included in the report concerning the specifics of those affected by financial exclusion, like the fact that one-third of those aged over 80 avoid using cash machines, which is an increasing problem as it corresponds to the increased rate of branch closures in the U.K. There was also an insightful and carefully considered investigation into the links between financial exclusion and mental health, with the report finding that there is a two-way relationship between the use of financial services and mental health – either by way of having a negative impact upon one’s mental health because they are financial excluded, or by way of a person’s mental health affecting detrimentally affecting their usage of financial services – neither of which are adequately considered by those offering financial services. Martin Lewis OBE discussed the idea of enforcing the option of providing ‘control options’ for those that may need assistance in managing their affairs, and this was rightly recommended by the Committee. The report also looked at the issue of disability, and found that, rather incredibly in 2017, banks were still not making reasonable adjustments for their customers, with stories of customers who are registered as blind being sent documents that were not in braille form, and contacting those who suffer from hearing loss via telephone; the Committee rightly concluded that banks need to do much more in this area.

However, before we look at the qualifying conditions that must be applied to understanding the effect of the Committee’s findings, it is worth looking at one very important, and often overlooked issue – financial education. The Committee discussed the issue of secondary schools not being monitored on their provision of Financial Education classes, despite it being mandated in England (only) since 2014. Whilst the devolved nations have incorporated the teaching of Financial Education into their curriculum, often via Mathematics, England still lags well behind in the enforcement of this push. Also, the Committee makes it clear that it wants to see Financial Education taught earlier in the development of children, with the teaching of financial education in Primary schools aiming to give children ‘life-long skills’ that would be accentuated as they developed. This was discussed further, with the Committee maintaining that it was important to have this type of education represented at all levels, including further and higher education. The Committee ultimately suggested that OFSTED should make monitoring the provision of this element of education specific, rather than classing it in general terms i.e. under the banner of ‘skills’. They then suggested that providers of education should incorporate the teaching of financial education into their programmes of study, as the 16-24 age group is particularly susceptible to making financial mistakes in a period of their life where an vast array of financial products are offered to them.

This cohesive and universal approach to resetting the attitude towards financial exclusion is precisely what is required. There is nothing to be said in opposition to the recommendations made by the Committee – it is simply appalling that people turn to unscrupulous lenders because of a lack of education in a supposedly advanced society. For these recommendations the Committee should be praised, and it is genuinely hoped that the movement they hope to inspire begins in earnest. However, as with any discussion of the financial sector, it is important to take a pragmatic approach to understanding the capability and potential for initiating such changes. There have been a number of posts in Financial Regulation Matters which show that banks and other large financial institutions are continuing to transgress, despite being indicted in one of the largest financial crashes on record. So, why would we believe that these same institutions would proactively, which is what the Committee calls for, engage with the need to exercise a duty of care to their customers – these are customers that are extremely unlikely to garner any profit for the banks. It is therefore important to recognise two interrelated aspects. Firstly, what we desire from these institutions and what they actually are is a completely different thing. We require them to be conscious, proactive, restrained, and forthcoming in their citizenship i.e. offering fee-free services to those who need it; yet, in reality they are organisations that only serve to create profits for their owners and to do so irrespective of the consequences, whether that be through dismantling the pensions of thousands of their employees – Philip Green and British Home Stores - or by way of the banks and their conscious mis-selling of insurance to the tune of billions upon billions of pounds; this is the reality of the situation. The solution to these problems is to use the power of the state to compel such actors, or initiate real punishment for not doing so, but there is another element currently developing which directly affects this potential solution. The post-2016 world is rapidly altering the power balances between the state and private entities. It is arguably unthinkable for the British Government to compel large financial institutions to act in the best interests of its citizens at a time when it is doing everything possible to stop those organisations leaving its jurisdiction, and it is this understanding that needs to be attached to the positive work undertaken by the Committee, regrettably. These organisations, or even schools that are themselves under intense pressure, will only initiate such forward-thinking and humanist programmes if they are compelled, because the negative effects of doing so in a world which is being defined by the acute pressures and the need to succeed at all costs can cause irrevocable damage to their position; unfortunately, the leaders of our society have deemed it more important to court the favour of these entities rather than compel them to do anything – any forward-thinking change can only be realised when that sentiment is reversed.

Saturday, 25 March 2017

Is Dublin Ready and Able to Take Advantage of a ‘Hard-Brexit’?

Today’s post looks at the jostling for position currently taking place within Europe in anticipation of the U.K.’s and the E.U.’s negotiations over the U.K.’s secession deteriorating into what has been termed as a ‘hard-Brexit’ i.e. an almost total separation from the Union and the benefits that come with it. We have already discussed this jostling in Financial Regulation Matters through the lens of a battle between Paris and Frankfurt, but Dublin is emerging as a very credible alternative to those aspiring financial centres. However, there are consequences that come with being the host of such vast but socially-dangerous institutions, and Ireland’s recent history means that it is important to ask whether Ireland should be making itself as open as possible to these organisations.

The debate about the jostling for position between Paris and Frankfurt is well covered in the financial press. Also, another issue that has been raised in the press is that the propagation of jobs from London, if the right deal is not struck during negotiations, is that there are different levels of jobs that will be moved – with Poland being cited as being likely to be the big winner when it comes to attracted mid-tier level banking jobs from the U.K. However, for this post the focus is on the potential for Dublin to become the main location for those fleeing London in order to continue their business with the E.U., and it is fair to say that Dublin is a real competitor for this potential influx. The obvious selling point of the city, to the employees of these large firms at least, is the issue of language, with experienced onlookers confirming that ‘the attractions [of Dublin] are that it is English-speaking, has flexible labour laws [and] the transportation links to the U.S. are pretty good’. Furthermore, the fact that Dublin is home to major subsidiaries like hosting the E.U. headquarters of Google, Facebook, Twitter, LinkedIn, and ‘more than half the world’s leading financial services firms’ means that it should already have the infrastructure, and also the culture, to accommodate the new arrivals. However, is this actually true? There are a number of ways of viewing certain elements of Dublin’s ‘package’, and not all are positive.

The Republic’s Minister for Foreign Affairs and Trade recently discussed the post-Brexit issue, and described how the country has people in London drumming up support for Dublin’s ‘package’, with the campaign being most built upon the facts that a number of leading companies are already there, and that the low corporation taxes witnessed in Ireland would remain low. However, this issue of Corporation Tax reveals the first of a number of problems for Dublin’s ‘package’. Firstly, Ireland’s use of these tax rates and tax incentives resulted in the headline-generating €13 billion fine for Apple (which has yet to be resolved fully), which has potentially dented the confidence large corporations have in investing in Ireland. This perceived advantage over London may not even last, however, with Theresa May hinting that Corporation taxes would be slashed significantly in the event of a hard-Brexit. Secondly, there are doubts as to whether Ireland can even accommodate an influx of workers (estimated at 400,000 plus), because of a chronic shortage of residences, both residential and commercial; it has been suggested that there ‘just isn’t space’ enough to see the London skyline replicated in Dublin. Whilst residential rents may be cheaper in Dublin than in Paris, Frankfurt, or Luxembourg, the shortage of homes and commercial buildings in Dublin is particularly acute, and this would obviously be exacerbated with an influx of financial services workers looking for certain types of properties based upon a certain standard of living that they have been used to in London. However, these practical elements are overshadowed by a much larger issue.

Ireland’s banking crisis, in the wake of the Financial Crisis, was particularly dangerous. As a result of ‘lighter-touch regulation’, the country was particularly exposed to the downturn emanating from New York, and would go on to pay a heavy price. After injecting billions upon billions of Euros into their banking system, Ireland would eventually accept a ‘bail-out-package from the EU and International Monetary Fund at a total of €85 billion. This massive loss, which is astounding when we consider the size of Ireland, resulted in the loss or more personal wealth per Irish citizen than in any other Eurozone country and the sharp increase of socially-important factors such as unemployment, poverty, and the impact upon psychological and physical health. These factors cannot be forgotten, particularly as it was only a decade ago that Ireland was plunged into a national crisis. However, the sentiment being displayed is paradoxical, in that there is a conscious effort to encourage any business from London, but also a declared belief that the country will not just accept any institution – this divergence hints at a naivety that may prove particularly costly.

Ultimately, Dublin is a contender in an arena that is becoming particularly ruthless by the day (with Ireland officially complaining to the E.U. about the behaviour of its competitors). There are advantages to moving to Dublin that would appeal to big business, like the tax rates and sentiments displayed towards big business, and this is being demonstrated by recent news regarding a number of important expansions in the city. However, there are a number of disadvantages, which include a lack of a ‘financial ecosystem’ when compared to more established financial centres like Frankfurt, the issue regarding housing and hosting this proposed influx, and finally a shortage of ‘cachet’, which is vitally important in respect to courting the business of Middle-Eastern Sheiks or Russian Oligarchs, for example. But, it is contested here that there is a much bigger problem, and that is the capability of Ireland to protect itself from institutions that have the upper hand, just seven years on from having to accept an €85 billion bail-out. These financial institutions, rightly or wrongly, have seen their positions improve beyond recognition since the U.K. electorate made its decision in 2016, and the institutions know it. If they deem it necessary to move, which is certainly not guaranteed, then they will have their pick of locations that are competing with each other for their business – this imbalance of power puts the host location in grave danger, and that danger is, arguably, far too great for Ireland to consider. It is advisable to aim to host a proportion of the business that may leave London, but this sentiment that Dublin will want to host the majority of the major players leaving London is not, in reality, something that will happen. Nor should it happen, because the Irish people will see their positions irrevocably threatened, and it is for this reason, more than any other, that the fight for the business leaving London is a straight fight between Paris and Frankfurt – they, particularly Germany, are the only countries capable of hosting such dangerous entities if they decide to leave the U.K. 

Friday, 24 March 2017

Chinese Financial Regulation: The Need for a Single Regulator to Guard Against ‘Financial Crocodiles’ and ‘Poisonous Demons’

This short post looks to understand the current financial regulatory environment within China, because there is a growing debate as to whether the decentralised and fragmented framework that currently exists is capable of protecting the world’s second-largest, yet arguably fragile economy. The overriding call is to create a ‘super-regulator’ who would oversee all the major elements of the Chinese economy; this is something worth considering, but the recent calls for the People’s Bank of China (PBOC) to take the lead may not be as optimal as it seems. This post, therefore, analyses the problems facing the Chinese economy, and why it has them, and ultimately suggests that a centralised financial regulator would be the best option, but that there must be conditions attached to make it effective.

Currently, within China, the PBOC has a broad remit over the macro elements of the Chinese economy, but the detailed elements of overseeing aspects such as banking, securities, and insurance, are overseen by three different regulatory agencies (stemming from moves between 1998 and 2003 to respond to the increasing complexity of financial products and services). However, in response to the ever-changing financial world, and how that may affect China, there has been an increasing chorus of calls to give more defined power to the central bank. These calls are based upon understandings that each of these sub-elements of the regulatory framework are facing extraordinary pressure from having to regulate unscrupulous actors. The Chairman of the China Insurance Regulatory Commission stated that insurers engaged in speculation would face severe punishments, ultimately referring to those who operate outside of the welfare-creating mandates as ‘barbarians’. The Chairman of the China Securities Regulatory Commission, Lui Shiyu, described tycoons who unfairly profit from the stock markets as ‘financial crocodiles’ and vowed to stop them sucking the ‘blood of the retail investors’. The Chairman of the CSRC continued this colourful attack, describing some private companies who seek to work around the rules as ‘poisonous demons’. The reason for this influx is China’s moves to fend off the negative effects of the Financial Crisis, which saw it incorporate an ‘era of financial liberalisation’, represented by a massive financial stimulus, an increase in the acceptance of novel and exotic financial products, and a general lowering of regulatory oversight in the name of encouraging growth – the result was obvious, with the collapse of China’s Stock market in 2015 being rather inevitable.

So, in response to the general increase in systemic risk within China, President Xi Jinping has made reducing this risk a key objective for 2017. This narrative is gathering pace, with the Governor of the PBOC stating that ‘regulators need to step up their coordination in scrutinising such products’, which was further consolidated by the leadership of the country. The increase in ‘shadow banking-based lending’, which is notoriously under-regulated, is proving to be a major concern for regulatory officials, and is beginning to prompt the practical realisation of the aforementioned narrative, with the leaders of each of the three regulatory agencies calling for ‘greater cooperation’. This seems to allude to one understanding, because the Governor of the PBOC is more interested in promoting the narrative that the three regulators must do more, rather than depriving them of the ability to regulate and transferring that power to the central bank – the only outcome, therefore, is what is being dubbed a ‘super-regulator’. This coalescing of the three regulators would provide a unified face to the ‘crocodiles’, which can only be a good thing, in theory.

However, that theory may not necessarily translate into practice. The SEC, which is responsible for large swathes of the American Economy, is consistently being criticised for a number of issues, ranging from a lack of meaningful powers to the blight of the ‘revolving door’. The centralised Financial Services Authority, the regulator in charge of the U.K.’s economy in the lead up to the Crisis, was disbanded and divided in the wake of the Crisis, mostly on the understanding that a centralised regulator was not appropriate for the British market. So, there is no guarantee that a centralised, all-encompassing financial regulator would be suitable for the Chinese market, particularly when we understanding the incredible pressures facing such a massive and expanding economy such as China’s.

Ultimately, if the leadership of China introduces such a regulator, then it must be accompanied by substantial powers. This narrative being developed by the leaders of the regulator agencies, that the offenders are ‘crocodiles’, ‘barbarians’, and ‘poisonous demons’, should translate into extensive powers to punish and make an example out of those who seek to plunder markets and leave without consequence. On the one hand, the single-party nature of Chinese politics makes this outcome likely, because there are not competing economic ideologies at play within the politburo (not on the surface anyway). But, on the other hand, the need to continually expand and develop the Chinese economy exposes the Chinese society to the iniquities of the marketplace which are a blight on Western Societies – the need for Britain to ‘grow’ in the wake of its secession from the E.U., the need for the E.U. to ‘grow’ without the power of the City of London, and the need for the U.S. to ‘grow’ on the back of its voting for protectionism, leaves all of these globally-vital societies at the mercy of the venal. Finding that balance between the need to grow and the need to protect for the future is the defining dichotomy of our time.

Credit Suisse and its Insistence on Bucking the Executive Pay Trend

This very short post aims to take a brief look at the recent news that Credit Suisse, the large banking entity that has a substantial presence in a number of key markets, have recently increased the amount that it will pay in bonuses, increasing its bonus pool by 6% which is represented by a total figure of £2.5 billion. However, for a firm carrying the negative reputation that Credit Suisse is currently carrying, this seems to be an exorbitant increase at a time when its competitors, who are similarly experiencing incredible amounts of negative publicity, have cut their bonus pools significantly – Deutsche Bank cut its 2016 bonus pool by almost 80%. This move by Credit Suisse represents either one of two things; either it shows the need to retain talent by way of increasing the remunerative package being offered, or it shows the disregard to those affected by Credit Suisse’s poor practices. Once again, the notion of ‘perception’ proves to be central here.

Credit Suisse, like a number of leading financial organisations, has an extensive history of transgressions which have been punished by financial penalties and banning orders. In terms of its financial practices, a few instances really stand out. At the end of 2016, the bank agreed to pay the Securities and Exchange Commission (SEC) $90 million for ‘misrepresenting performance metrics’, which is, unfortunately, a common method in the financial service sector (this was discussed in a previous post regarding the actions of the leading Credit Rating Agencies) – the practice of declaring one thing to the investing public, and then doing the opposite to favour big business, is nothing short of deplorable. Before this, in 2014, the bank was the subject of an extensive report by the U.S. Senate which detailed its involvement in elaborate and widespread tax evasion schemes, an investigation which ultimately led to the levying of the ‘highest ever payment in a criminal tax case’ – the Bank agreed to pay $2.6 billion - and the indictment of eight Credit Suisse employees. Then, most recently, the bank agreed to pay $5.28 billion in connection to its purposeful transgressions within the Residential Mortgage-Backed Securities market – the Department of Justice stated upon the conclusion of the case that ‘Credit Suisse claimed its mortgage backed securities were sound, but in the settlement announced today the bank concedes that it knew it was peddling investments containing loans that were likely to fail’.

As a result, the bank posted a £1.9 billion net loss for 2016, which means that the bank is now in its second consecutive year ‘in the red’. To counter the effects of the downward turn, the bank announced in February that it would be cutting 5,500 jobs in 2017, which comes on the back of 7,250 job losses in 2016. This push is part of CEO Tidjane Thiam’s restructuring plans to move the bank towards wealth management and away from investment banking. However, today’s news that the bank is increasing the bonuses of those involved in this degradation of the bank’s reputation must surely be particularly unpalatable to those who have lost their positions. The bank argues that having ‘experienced key employee retention issues’ in the first quarter last year, after slashing remuneration packages, the increase in bonus packages would ‘ensure that employees who meet their performance targets could be compensated in line with the market’. This may be true, but the market is also demonstrating instances of employees being denied this opportunity because their performance simply does not warrant any extra remuneration – therefore, we must take it that Credit Suisse believes its employees to be worthy of such an increase.

It is this understanding, when understood in comparison to the continued transgressions of the bank, not just the incredibly poorly-worded ‘legacy’ issues (which has been discussed previously in Financial Regulation Matters), which means that Credit Suisse is actually rewarding poor performance, simply because of the fear that the employees they have will leave to their competitors. This balancing act that financial institutions must perform, in terms of compensating their employees but also having to be seen to be operating in the interests of their shareholders and stakeholders, is a reality facing most financial institutions. However, there is a great risk, particularly in this current climate, in rewarding those who cause damage in their marketplace – that risk can be categorised under the banner of ‘perception’ and the effect that any real loss in reputation may have. The news that the leaders of the firm are having their pay increased on the back of massive fines for misinformation, fraud, and facilitating tax evasion, adds to a growing narrative that these institutions’ actions over the past 15-20 years is not an aberration, but is representative of their culture; if that narrative continues to grow, institutions that continue to disregard this important element of ‘perception’ may regret it dearly.

Tuesday, 21 March 2017

HSBC and its Consistent Connection to Money Laundering

Yesterday, the Guardian Newspaper in the U.K. broke the story that a gigantic money-laundering operation, dubbed the ‘Global Laundromat’ had included a number of leading banks, amongst which was HSBC. This short post will look at how the mentioning of money laundering is becoming almost analogous with the mentioning of HSBC and that, ultimately, the bank is in danger of facing the greatest threat that a bank can face - an irreversible loss of its reputation.

HSBC has a long association with facilitating the illegal flow of money, either from illegal sources or via tax evasion. In 2010, the bank was ordered by the Federal Reserve to improve its money laundering procedures. Then, as was discussed in a previous post in Financial Regulation Matters, the bank was fined $1.9 billion in 2012 by U.S. authorities for ‘exposing the U.S. financial system to money laundering’. This was predicated upon a damning investigation led by Senator Levin of the U.S. Senate, that systematically described how HSBC has consistently performed particularly poorly when it comes to preventing the flow of money from criminal organisations, banned entities and countries, and terrorist organisations. In 2013 Argentina initiated criminal charges against the bank for facilitating tax evasion and money laundering, and in 2014 an independent compliance monitor stated that the bank had ‘much work’ to do in terms of fortifying its Anti-Money Laundering (AML) procedures. Yesterday, the story continued with the news that of the billions of dollars emanating from Russia and Eastern Europe, HSBC processed at least $545.3 million. Whilst HSBC was not the only bank indicted by these reports (RBS processed $113 million, Deutsche Bank $300 million, Citibank $37 million and Bank of America $14 million), this repeated association with money laundering is approaching terminal for the bank.

It was reported last month that HSBC was being investigated by the Financial Conduct Authority (FCA) over concerns about its AML procedures. However, the recent allegations have seen that rhetoric harden. Today, the Economic Secretary to the Treasury, Simon Kirby, declared to a hastily assembled House of Commons Committee that the Government ‘will do what it takes [to] ensure that sophisticated criminal networks cannot exploit our financial services industry’. However, MPs were vitriolic in their condemnation based upon a common understanding that Kirby was ‘complacent’ with his answering of extremely important questions and for ‘failing to acknowledge the ease with which such cash can be transferred through London’. Shadow Chancellor John McDonnell went further by stating that it was ‘deeply disappointing’ that British Banks were, once again, involved in an international scandal, and that it ‘appears that some of these banks haven’t learnt the lessons of the past, and are clearly not doing enough to clamp down on financial crime and money laundering’. It has been proposed that the National Crime Agency (NCA) immediately commences an investigation into this scheme and how it has infiltrated the U.K., with the Guardian declaring that the money has flooded London and has been used for purchasing luxury items and even a place at a prestigious school for a child of Russian national.

The calls from opposition MPs should be enough to initiate an effective investigation into how British banks became part of this international system of moving illegal money. There is a defence to be had for HSBC, that their operations are so global, and so extensive, that it is almost impossible to effectively guard against such sophistication. This may be true, but there is a bigger issue – HSBC is close to becoming synonymous with money laundering, and that could be particularly dangerous for the bank’s future. The issue of ‘perception’ has been discussed on a number of occasions in Financial Regulation Matters, and that is because, quite simply, the financial system must be seen to be working, even if under the surface all is not well. The infamous Bank of Credit and Commerce International, much better known as BCCI, is a case in point for the new Chairman of HSBC, Mark Tucker, who was appointed last week. BCCI is rightly remembered as being so intertwined with illegality that it was colloquially referred to as the ‘Bank for Crooks and Criminals’ and, arguably, Tucker’s job is to make sure HSBC does not become BBCI mark II. Mark Tucker was hired because of his successes in Asia, with the obvious intent being to expand HSBC’s operations in that continent. However, it is far more important that HSBC turns its attentions inwards, rather than looking to continuously expand – any expansion will make the process of eliminating these AML failures even harder, not easier, and that may prove to be a terminal error for this massive bank. It is likely that the $543 million figure quoted by the Guardian will steadily increase as investigators seek to understand the extent of this global scheme, and with every increase in that figure HSBC becomes exposed to the greatest threat that a bank faces – an irreversible loss of its reputation. Mark Tucker’s job has just become much harder, and he has not even officially taken over yet (that will happen in October of this year).

Monday, 20 March 2017

Blog Updates: Lloyds Sets up HBOS Review for Victims of Scourfield’s Fraud; A New Wave of Warnings for Executive Pay in Advance of AGM Season; and Barclays Threatens Theresa May Because of Brexit

Today’s post provides for updates on posts from last month in Financial Regulation Matters, as recent news has suggested that there are particularly important developments looming. Firstly, the post will look at the developments being undertaken by Lloyds in response to the fraud undertaken by Lynden Scourfield, via Halifax Bank of Scotland (HBOS). Then, the post will provide updates on the new wave of warnings being aimed at executives in receipt of large pay packages. Lastly, the post will provide a passing comment on the recent, undeniably brash warnings given by the Chairman of Barclays to Theresa May.

Lloyds’ Griggs Review

On the 6th February, the case of six financiers being jailed for almost fifty years was the target of a post in Financial Regulation Matters. The financiers, led by the head of the Corporate Division in HBOS Lynden Scourfield, conspired against the owners of small and medium sized enterprises (SME) – the scheme was to funnel the business into the hands of Scourfield’s division, enforce the acceptance of increased levels of finance (often without merit), and then pick up the pieces for a fraction of the true value once the businesses inevitably collapsed under the fabricated pressure that increased financial pressure brings to such companies.

So, in response to the claims by those affected that they have spent years attempting to have their claims taken seriously, and in response to the recent convictions of course, Lloyds has now commissioned Professor Russel Griggs to lead a review into the cases of those affected. The bank says that it has selected Professor Griggs to lead the independent review because of his ‘experience in overseeing high profile reviews of a complex nature and for his clear understanding of SME businesses’, which is based upon the Professor’s appointment as an External Reviewer to the SME appeals process in 2011 which ensured that SMEs were provided with a fair and transparent appeals process whenever they were denied credit. The bank continues by confirming that the customers who have been identified as being affected will be included within the review process, and those that have claims to be affected will be consulted shortly and a decision made as to whether they should be included in the review. The news cycle has rightly opined that the recent successes of Lloyds, as detailed in a previous post, should not become a reason to shirk responsibility and sweep issues like this under the carpet and this, arguably, cannot be doubted. With banks, it is vital that we judge them by their actions, and not how we would prefer them to act, because the divergence puts society at a distinct disadvantage – it remains to be seen what the outcome is regarding the compensation awarded to those affected by this despicable fraud, but Professor Griggs’ appointment to an independent review is an encouraging start.

Executives Warned Again Ahead of AGM Season

On the 9th of February, the focus of Financial Regulation Matters was on the warning from leading British institutional investors that the forthcoming Annual General Meeting (AGM) season would be characterised by an ‘increased amount of investor-activism when it comes to executive pay’. The post looked at the instances of Imperial Brands, the massive tobacco company forced to scale back its plans for an increase in the remunerative package for its CEO, and also the pressure being exerted by Church-led groups against energy giants BP and Shell in terms of improving its environmentally-concerned actions.

Today, in the Guardian, the Chief Executive of the Investment Association described how the number of companies approaching the Investment Association – an association of institutional investors, investors like pension funds, that have binding voting power to veto the pay packages being put forward for management teams – has more than doubled in the past six months in advance of this coming AGM season; the companies know that the power to veto or confirm the pay packages for the next three years is now stronger than ever before and that the flag-ship sentiments offered by the Prime Minister – namely that she would lead a crackdown on executive pay abuses – have only increased the pressure on them to justify the pay increases. Chris Cummings continues by stating the focus of investors this AGM season will be on three key components: pay and future increases; the structures of those awards and the need to simply them; and finally the link between pay and performance. If this tripartite approach is realised, then the effects may be particularly beneficial for holders of pensions up and down the country.

There is a distinct need to proactively monitor the actions of companies who only exist to create profit. The current environment is slowly developing into one that is fertile for abuse (as will be discussed next), so it is vitally important that someone with influence takes the leading role in doing so. As will be discussed next, there is a growing concern that regulators will be hamstrung in their ability to do so because of external pressures, so perhaps that societal protection can come from pension funds who have the power and influence to direct the actions of the largest institutions in society. That state of affairs is unnerving, because we are then trusting private institutions with the regulation of private institutions when it is the public who will bear the biggest brunt – however, in this post-2016 world, it may be best opportunity we have. The results of AGM season should be followed particularly closely this year as a result.

Pressure Grows on Theresa May to Open the Gates for the Venal

It was discussed on the 5th of February in Financial Regulation Matters that Theresa May, the British Prime Minister, was facing an era-defining predicament in terms of choosing to focus upon the short-term successes of the country in response to the decision to leave the European Union, or whether she would use the opportunity to institute lasting financial practices that would protect the British people and lead the way in terms of corporate governance. It was opined that the pressures facing the U.K. after it secedes from the E.U. would be too great, and those that have the capability to exert pressure because of their importance to the British economy i.e. banks and other large financial institutions, would be far too great. Today, that opinion was ratified by the Chairman of Barclays.

With Theresa May poised to formally signal the U.K. Parliament’s intent to secede from the Union, John McFarlane broke ranks with other bank leaders and declared that ‘the challenge for the U.K. is not to assume it’s unassailable’, and that ultimately ‘advantage needs to be renewed’. McFarlane continues this remarkable declaration by stating that ‘there needs to be a tangible, compelling economic or collateral reason to be here or to do business here, rather than somewhere else, and this needs to be renewed continually’. So, Barclays, the British bank that traces its origins back to London in the late 1600s, is now leveraging that historical connection and informing the British Government that unless it creates a favourable environment for it to earn, it will take its business elsewhere. The British Bankers’ Association has also had their say, with its head, Anthony Browne, opining that if the U.K. wants to remain attractive as a financial centre, then ‘having a range of bank-specific taxes is not a good way to go about it’.

It is very likely that Paris and Frankfurt will now seek to demonstrate how friendly they can be to these massive financial institutions if they are to leave the U.K., as was discussed in a previous post. However, there is little to suggest the French or German governments will bow to the excessive demands of these institutions to facilitate the firms’ movement to their capitals – their citizens will be put at risk just like the British will be if the British government bow to the demands. Not only is it the case that London will undoubtedly remain a location for high finance, but these statements by McFarlane have had an unintended consequence, hopefully. What his comments show is the irrepressible venality that the largest financial institutions have incorporated into their very fibre. Yes an institution must seek to advance its own interests above others – this is logical and rational – but this uncompromising push to destroy everything in their way for the purpose of short-term gains is remarkable, clear, and something that needs to be addressed and repressed as much as humanly possible. It is vital that the British government respond to these threats with the vigour with which they were uttered – whether they do so remains to be seen.

Saturday, 18 March 2017

Student Accommodation and Big Business: The Need for Regulatory Vigilance

This post focuses upon a piece in the news cycle last week that ran with the headline ‘Student digs in Britain giving first-class returns’. The content of the piece concerned an increased influx of big business into the student accommodation market in the U.K., which has ultimately brought serious international players like Goldman Sachs and UBS directly into the realm of Higher Education. The focus of this post will be to detail this influx and to look at some of the possible connotations of this increase in profit-driven characters now associating themselves with an arena that is fundamentally based upon educational growth, rather than the growth of a profit margin.

This week saw the massive Mipim Property conference take place in Cannes, France. The conference, which is held every year and draws developers from around the world, is also a forum at which government ministers attend to ‘promote’ their approach to developers in their given countries. This year was no different, and the U.K. Housing Minister, Gavin Barwell, was on hand to deliver Theresa May’s personal message to the patrons of the conference: ‘attracting investors to the whole of the U.K.’s real estate would be a key driver of the U.K. economy in the post-Brexit world’. Previously in Financial Regulation Matters, the focus was upon the predicament facing Theresa May regarding the pressure she is subjected to in terms of surviving the secession from the E.U. in comparison to the needs to look after the country’s long-term interests, and this ‘open for business’ mantra is, arguably, a clear indicator of where Theresa May has determined her efforts should be concentrated. Whilst it seems rational that a Prime Minister will want to develop as many trade and business links as possible in preparation for the secession, there is an overriding risk that the understanding of that weakened position exposes the country to the most venal in society, and it is upon that basis that this news of increased investment into student accommodation should be viewed.

Last year alone, institutional investors, like wealth fund managers and pension funds, invested more than £4.3 billion buying over 50,000 student rooms in the U.K. Research suggests that the value of the contracts awarded to construction firms applying for the opportunity to satisfy this demand totalled more than the value of contracts awarded for care homes, housing association housing, local authority housing, and sheltered housing combined. UBS, the Swiss banking giant that was fined $1.5 billion in 2012 for fraud, and who are consistently fined almost every year for malpractice, recently paid £31 million to buy a 184-room hall from Imperial College London, whilst also purchasing property in Newcastle, Durham, and Belfast. Goldman Sachs, another banking giant who is consistently fined for its behaviour, holds a majority stake in a group which owns 23,000 student rooms, whilst a Canadian pension fund spent £1.1 billion buying Liberty Living, a company that runs more than 40 student properties with a grand total of 16,000 rooms within 17 cities across the U.K. However, the British market is drawing so much attention, the market is beginning to saturate – this has resulted in a concerted effort to apply the same financial interest to Continental Europe, with research suggesting there is up to €5 billion to be invested over the coming few years – although the mitigating factor in this lack of application is a ‘lack of supply’, which takes us onto a much more important issue.

Whilst there will be those who champion this influx, like those in the recent news article who stated that it is the parents of students who are driving this supply, and that what students require in this generation are purpose-built, more homely examples of student accommodation, there is a much more worrying element at play. To begin with, the ever-increasing student population, which research suggests now stands at a record 2.28 million students studying within Higher Education institutions, are not only paying more in tuition fees than ever before – the increase to £9,000 a year (and rising) has created a surplus of nearly £2 billion across the sector – but are also being charged more in rent than ever before. Research suggests that there has been a 23% rise over the past five years in the average cost of student accommodation rent in purpose-built properties, which unsurprisingly led to student demonstrations outside the conference in London last year.

Ultimately, there will be many who champion this influx in investment. The benefits of cleaner living, collegiate environments, and arguably safer environments which will appeal to the parents of students, are clear to see. However, we must take a much broader view of this situation. The commercialisation of education cannot be denied, and this is now being recognised by the most venal entities in the world. Institutions like UBS and Goldman Sachs exist only to make as much profit as humanly possible, irrespective of the unethical and anti-humanist effects of their actions – this mentality should not be allowed anywhere near education. Yet, it is. Not only is it being allowed near Higher Education, the bastion of societal development, but it is being actively encouraged by a Government that is seemingly hell-bent on internalising the pressures that are being associated with seceding from an economic bloc. However, there is no evidence that has been conclusively advanced that this ethical abandon is even required because of the impending secession, which makes the actions of the Government even more distasteful. What is required now is an extremely strong-minded and forward-thinking regulator, or Parliamentary Committee, to examine this influx and ask whether it should be curtailed. The associated risks are clear: the inclusion of these venal monsters, who impart pressure on everyone they are involved with (as was clearly demonstrated by their actions in creating the Financial Crisis), places Universities in grave danger – the pressure to recruit more and more students, irrespective of whether that particular route is correct for their, and the institution’s development, is a natural knock-on effect of the influx of these venal institutions. It is vital that someone who has the power to intervene observes this trend and seeks to examine whether this pressure is, or is likely to be exerted – the development of future generations depends upon it. 

Friday, 17 March 2017

News Roundup: George Osborne Continues to Monetise His Position and Bob Diamond Returns to the City

Today’s post offers a short roundup of the day’s business news, and focuses upon the stories of George Osborne taking up the position of Editor of the London Evening Standard Newspaper, and of the news that former Barclays Chief Bob Diamond is returning to the City of London by purchasing the venerable British Broker Panmure Gordon.

In a previous post in Financial Regulation Matters, the focus was on George Osborne’s monetising of his previous position as Chancellor of the Exchequer, mostly by way of his new role with the giant investment firm BlackRock which will see Osborne pocket £650,000 a year from that role alone. It was discussed that Osborne is embarking upon a conscious and concerted campaign to turn the influence that he wielded as the architect of austerity into considerable compensation, and the next stage of that campaign was revealed today. It was announced that Russian Billionaire Evgeny Lebedev has installed Osborne as the Editor of the London Evening Standard Newspaper. Whilst his salary has not been revealed, it is logical to conclude that it will be much more than his £75,000 salary he receives as an M.P., but in truth it is the influence that he can now wield and the fact he is a current sitting Member of Parliament that has attracted the headlines today, with one newspaper suggesting that the position gives him the basis to seek ‘revenge’ for the undignified way he was side-lined upon Theresa May’s arrival at the helm. Nevertheless, what is clear is that the title of the previous post – the art of monetising your position – was an incredibly apt moniker; Osborne is demonstrating, in the truest possible sense, what can be done when you are willing, in an almost Faustian manner, to ‘call in your chips’. Osborne’s tenure at the helm of the Evening Standard will surely be an interesting one.

Bob Diamond Returns to the City

In 2012, Bob Diamond resigned from his position as CEO of Barclays Bank in light of the rate-rigging scandal that engulfed the British bank. The bank, under his stewardship, had consciously sought to manipulate the LIBOR rates, a rate which essentially acts a benchmark for a range of financial deals and can be recognised as a ‘measure of trust in the financial system’; the bank was ultimately fined £284.4 million by the Financial Conduct Authority and over £1.5 billion when fines to other regulators were totalled. After 15 years with the bank, and only 18 months as CEO, Diamond, who had rose to prominence because of his work with Barclays’ investment divisions, left after extreme pressure from external forces, including the now-defunct Financial Services Authority and the Bank of England, and ultimately left the City as a result. However, today, he meekly returned.

Diamond, as part of his buyout vehicle Atlas Merchant Capital, has teamed up with QInvest, investment vehicle for the Qatari Royal Family, to purchase the stricken stockbroking firm Panmure Gordon in a move which values the firm at £15.5 million. Whilst the sums involved are low for players of this calibre, the return of Bob Diamond from the wilderness, at the same time we are expecting Theresa May to trigger Article 50 and begin the formal secession from the E.U., will be a welcome shot in the arm for British politicians who are keen to promote the health and future of the City in response to the manoeuvrings in Paris and Berlin, as was discussed in a previous post. However, the analogy that circling sharks are rarely a positive sign can be attributed here – Diamond has demonstrated, even admitting before committees, that he actively engaged in unethical practices to promote the financial health of his companies and, ultimately, his own position; Diamond’s return then, unfortunately, adds fuel to the theoretical fire that the decision to leave the E.U., rightly or wrongly, will coincide with the reduction in supervision… it is hard to believe that Diamond’s reappearance is purely a coincidence. There is an extremely limited amount of impact he can make at such a small firm, but his quiet reintroduction to the City represents the opening act of a story that is beginning to build and build and which may not have a happy ending. 

Thursday, 16 March 2017

Wells Fargo and Its Attempt to Repair Its Image: Cosmetic Dismissals

Today’s short post looks at the case of Wells Fargo and how it has responded to the scandal that saw it fined $185 million for fraudulently opening up to 2 million accounts, on the basis of extensive pressure from the very top of the company to hit quotas – with its now former CEO John G. Stumpf famously developing the mantra of ‘eight is great’ meaning that each customer should be hold at least eight Wells Fargo products. However, recent news suggests that investors in the massive bank are starting to mobilise in order to affect some sort of positive and responsible change, a development witnessed in the U.K. recently as well, as alluded to last month in Financial Regulation Matters, but this post will suggest that the chances of affecting that change are slim and that, ultimately, how Wells Fargo responds in reality will be a clear indicator into the power of the institutional investor.

The scandal which hit Wells Fargo recently, despite Warren Buffett’s (a major investor in Wells Fargo) brazen but perhaps accurate assessment that the damage is not ‘material’, has generating an enormous amount of publicity. Essentially, in attempting to respond to incredibly coercive demands from the leaders of the bank, up to 5,300 employees engaged in a systemic approach to manufacture sales, which included creating fake email accounts to sign up customers for online accounts, sham accounts, and even issuing credit cards to customers without their consent. The damage then spread, with four executives being fired in connection with the scandal, and then the executive responsible for the culpable division and then the CEO leaving their positions and facing attempts by the bank to ‘clawback’ the compensation that they left with, which accumulated to over $60 million between them.

This has led to major institutional investors, including those representing religious institutions, to seek to pressure the bank to seek to investigate the ‘root causes’ of fraudulent activity and to commit to a ‘real, systemic change in culture, ethics, values and financial sustainability’. However, the bank has responded by declaring that a report will be made available next month and this it has already taken ‘decisive steps’, which including the dismissals mentioned above. However, the bank is still continuing to suffer from the scandal, with losses at the end of 2016 coming at 4.3% lower than before, and a reduction in contact with customers in most areas including credit card applications and the opening of checking accounts (although deposits and debit card spending did increase).

So, in essence, Wells Fargo represents a classic dichotomy in terms of moral-based institutional investors attempting to initiate change by way of capitalising upon poor performance, and a dominating and influential core i.e. Buffett, who believe that the damage is temporary. Also, the calls by investors to initiate a root-cause investigation of fraud and immoral behaviour in the firm essentially walked out of the door with millions in his pocket – the case of Wells Fargo differs from other financial scandals because the line of command, in terms of setting the culture, is particularly clear. The mass dismissals were regarded as a positive step, but in reality it has made it much harder to punish wrongdoers and make an example of them; it is very unlikely those that committed this fraud will ever be brought to justice. There are signs that the leaders and nurturers of this culture may not get off so lightly, with leading senators calling for action, but it remains to be seen as to whether the current political climate in the U.S. is fertile ground for corporate prosecutions. What is for sure, though, is that the dismissals at Wells Fargo do represent a ‘decisive step’, but potentially in the wrong direction; it is now important that those responsible are prosecuted for their crimes, but it is advisable not to hold your breath.