Tuesday, 6 June 2017

Blog Updates: Shareholders Settle With RBS; Lloyds’ Compensation Process Accused; and the Financial Reporting Council Shies Away From Action.. Again

In today’s post we will assess a few pieces of news that are pertinent to a number of recent posts here in Financial Regulation Matters, with the focus being on the potential case looming over RBS against 9,000 shareholders and investors, a public rebuke for the Lloyds’ Compensation Scheme that is still to be concluded, and finally the news that a major case of potential fraud has been dismissed by a leading regulator, which comes at an unfortunate time with the Government publicly denouncing another regulator/agency that is concerned with punishing instances of fraud (the Serious Fraud Office).

Fred Goodwin and RBS Appear to Have Dodged a Bullet

At the end of last month we discussed the case concerning RBS and its £12 billion cash-call in 2008 which, subsequently, resulted in a large number of shareholders and investors losing substantial amounts of money. The investors have been claiming that the Bank purposely obscured details of the health of the bank before issuing the call, which is the basis for this potential case to be heard. However, we discussed how, for a number of reasons, it was very unlikely that the former CEO of the Bank, Fred Goodwin, would have to stand trial for his actions because, essentially, it would be a PR disaster for the bank. Well, this was seemingly confirmed today when, one day before the case was due to be recommenced, a spokesman for the shareholder action group declared that ‘the directors met last night to consider the legal advice. They’ve accepted that advice and the matter will not now proceed to trial’ – reportedly, the settlement is valued at 82p per share. However, it is being reported in The Guardian that there is still one group of ‘diehard’ investors that are refusing to settle, and ultimately are requesting more money, with one leading member of that group currently courting funding to the tune of millions of pounds, just to keep the legal battle alive.

Although the prospect of seeing Fred Goodwin having to enter a court of Law is naturally a welcome prospect, it is unrealistic. The ‘diehard’ group of investors are, unfortunately, being poorly advised in this instance; the reduction in claimant numbers reduces the pressure on the bank, and the incredibly high costs of litigation make it almost a worthless case to pursue – unfortunately, 82p per share from a solid member of the financial elite represents a very good deal. What is of interest, however, is the fear amongst the leaders of the bank when resolving this case, which alludes to an understanding that preventing this case from going to court was worth much more than 82p per share for the bank – we can safely infer that the Bank, in 2008, was conducting itself in a fraudulent manner in order to stay afloat. Regrettably, there is very little appetite to punish that fraud, or its perpetrators.

The Financial Reporting Council Lets Tesco off the Hook

As we are on the subject of regulatory incompetence, news broke yesterday that the Financial Reporting Council (FRC) has concluded that PricewaterhouseCoopers (PwC) will not be facing action over its auditing of Tesco in 2014 when the giant Groceries retailer overstated its profits by £326 million. We have discussed Tesco on a number of occasions here in Financial Regulation Matters, but the issue of regulatory intervention is of importance here. The Serious Fraud Office who, as we discussed are potentially going to be dissolved and repatriated by the Conservative Government should they be elected back into office on Thursday, fined Tesco £129 million for overstating its profits and for committing market abuse. Yet the Financial Reporting Council, who oversee the auditing sector (mostly in terms of ‘soft’ regulation), ruled yesterday that ‘there is not a realistic prospect that a tribunal would make an adverse finding against PwC’. Whilst there may be merit to the regulator not pursuing such action, the record of the FRC is particularly poor when it comes to taking action – the regulator was scolded for not taking action against KPMG for its auditing of HBoS in 2013 and, with regards to this case of Tesco’s accounting scandal, the regulator again cited ‘no realistic prospect’ of success when pursuing Tesco’s former Chief Financial Officer Laurie McIlwee for his role in the scandal. This author has been critical of the proximity that the FRC has to its regulated subjects before (in a forthcoming article in the European Business Law Review due in 2018), as have other commentators, and this is encapsulated by the FRC’s self-declaration on its regulatory approach which is based ‘as far as possible on facilitation rather than dictation and on principles rather than rules’ – there are two conclusions that should be made from this; one is that this sentiment is not fitting for business in 2017 – there is no reason to believe that big business can be trusted to regulate itself- and the second is that this sort if feeble regulation, in a sector that is vitally important to the sustainable and responsible running of the economy, begs the question: why is the Serious Fraud Office in the crosshairs of Theresa May, but the FRC is deemed to be performing well? The answer to that question can be found in the actions taken by each regulator.

Lawyers Label Lloyds’ Compensation Scheme a ‘Sham’

Lastly, it is worth revisiting, briefly, a story that is yet to be concluded but appears, very much, to be heading towards a wholly unsatisfactory conclusion for everyone concerned – except the bank, of course. We discussed recently the development of the scheme that Lloyds has set up to provide compensation to the victims of the £245 million fraud at HBoS, which has taken on more public prominence with the fact that British Television personality, Noel Edmonds, is amongst the victims. Edmonds has been attempting to keep the pressure on the bank and the compensation panel by maintaining a public presence during the proceedings and even developing a ‘countdown clock’ online so that the process does not extend longer than it should. Yet, recently, that pressure has been ratcheted up substantially with the lawyers who are representing Edmonds claiming that the process is a ‘sham’ and, in turn, questioning the independence of the proceedings and the expertise of the head of the process, Professor Griggs. In a letter to the committee, the lawyers argue that Griggs is ‘entirely dependent’ on the information given to him by Lloyds, and that he lacks financial expertise with which to make the right decision, or indeed ‘access to independent experts’ in order to assist with the process. The claims go on to accuse Griggs of having nothing more than a ‘rubber-stamping’ role, but the noise from Lloyds is what is really setting the tone with this case. Lloyds are adamant that their compensatory fund of £100 million is enough to compensate the victims, but Edmonds is seeking £73 million – something has to give. The rational conclusion would be that Lloyds will get its way, via the flexing of its financial and legal resources, and Edmonds will leave with substantially less than the £73 million he is seeking. However, though Edmonds is up against an institution, he is not defenceless, as this public campaign suggests – the findings of the Griggs review may not be the end of this case at all.

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