Thursday, 13 July 2017

Blog Updates: Lloyds Predictably Falls Short; RBS Take an Expected Hit; The Treasury Committee Gets a New Leader; and the Credit Rating Agencies Flee Russia

As a number of posts recently in Financial Regulation Matters have been focused upon the credit rating industry, it would be useful to catch up on some of the other stories that we have looked at before to see how they have been developing. There have been a number of key developments – or alternatively lack of development in the case of Lloyds – regarding a number of organisations that have been the focus of posts in this blog on quite a number of occasions. So, in this post, we will take a look at the story of Lloyds not meeting its own deadline for compensating victims of fraud, the massive fine given to RBS in the U.S., the selection of Nicky Morgan as Chairwoman of the influential Treasury Select Committee, and finally a small mention of the leading credit rating agencies’ withdrawal from the Russian marketplace tomorrow.

Lloyds Predictably Fails to Meet Its Own Deadline

Here in Financial Regulation Matters we have reviewed the story of HBOS Executives running small firms into the ground from the point at which six of the leading conspirators were jailed, to Noel Edmonds (a British T.V. Personality) leading the public fight for adequate and timely compensation from Lloyds Bank. However, since the last update which was concerned with Lawyers labelling the compensation scheme a ‘sham’, mostly with regards to its lack of adequate funding and perceived lack of independence, there have been two particular developments which place the whole story in context. Firstly, just as Noel Edmonds and a number of other victims had predicted, Lloyds missed its own target of settling compensation claims by the end of June 2017; in fact, to date, ‘of the 64 [victims’ who have joined [the compensation scheme], it’s understood that fewer than 10 have received offers and only one settlement has been reached’. Furthermore, it was then revealed that the bank will be paying the victims £35,000 each to cover their costs associated with the delay, although the criticisms of the bank’s handling of the affair continues to grow by the day. However, whilst the criticisms have been predominantly on the basis of the firm’s impersonal handling of the scheme with what are, lest the bank forgets, victims, anger has been growing on the back of more troubling news. The Thames Valley Police Commissioner, Anthony Stansfeld, was unassuming in his affirmation that the bank had refused to accept the existence of the fraud for a number of years despite receiving ‘overwhelming evidence’ – the Commissioner likened the Bank’s stance to a ‘cover up’, which is extremely damning, whilst also making the point that has been raised here and in many other outlets that £100 million cannot be enough to compensate the victims. However, the evidence continues to mount against the claims by Lloyds that they were not aware of the fraud, with reports linking the Bank’s knowledge back to 2009 and a report, commissioned by Lloyds to be seen only by the Financial Conduct Authority, which intends to detail the internal knowledge of the fraud – which one commentator has correctly suggested should be made public in light of the ever-growing disaster that Lloyds is facing.

Ultimately, the bank is doing what almost everyone expected it to do – employ the old tactics of delays and reports and propaganda, with the hope being that money can be saved by complainants taking an early and reduced settlement etc., which is a truly despicable approach. There is very little basis upon which Lloyds can drag its feet; it knew of the fraud and its victims, and it is quick to champion its return to the private sector, which means it has the resources to compensate its victims. Furthermore, Lloyds is becoming entangled in the affair even more because of the claims, which appear to substantiated, that the Bank was aware of the fraud but dismissed it – allowing Scourfield to continue in his post for longer than he should have been. The longer this continues, the worse it will get for Lloyds’ reputation as it rebuilds from the embers of the Financial Crisis.

RBS Takes the First of Two Massive Penalties

RBS, mainly because of the terrible position that it maintains since the Financial Crisis, has been the subject of a number of posts here in Financial Regulation Matters, ranging from its woeful financial reports, to its narrow avoidance of a court appearance regarding a cash-call in 2008. Yet, in the most recent post regarding RBS, which looked at the potential for the recent upgrade of RBS by Moody’s as being representative of the belief that impending fines would be as expected, news broke yesterday that challenged that viewpoint. We discussed how although the Bank had put aside £6 billion for the fines it knew were coming from two U.S. Governmental departments, £6 billion would not be enough, with some investors stating that if the Department of Justice (DoJ) fine alone stopped at $10 billion they would be happy. The recent news that the Federal Housing Finance Agency has fined RBS £4.2 billion ($5.5 billion) therefore confirms that the post was right – there is simply no way the remaining £1.8 billion that would be left over from the original £6 billion pot is going to satisfy the DoJ when they come calling. It is likely that, all in all, RBS will have to pay somewhere close to $15 billion in combination, which paints Moody’s recent upgrade in a particularly poor light.

Ultimately, the fine is absolutely deserved and the impending fine by the DoJ will be absolutely deserved also. However, the British taxpayer is paying a heavy price for the globalised ambitions of a Bank ran into the ground and, in that sense, it appears that the continued failings of the bank may prompt a reassessment of what to do with the bank. The taxpayer has been lumbered with a firm that is getting worse, not better. Therefore, rather than just continuing to see the bank perform poorly, there may be scope to look at the possibility of breaking the bank up and moving its parts around the system because, as we stand, things are only getting worse for RBS at a time when its competitors are recovering, albeit tentatively.

Nicky Morgan Succeeds Andrew Tyrie as Chair of the Treasury Select Committee

In April we discussed, here in Financial Regulation Matters, the departure of Andrew Tyrie from the Treasury Select Committee. Rather than cast aspersions on Tyrie’s political connections to the Conservative Party, the post focused upon his contribution to the Committee which has become an important component of the regulatory framework, mostly in terms of holding people and companies to account in a public setting. It was announced this week that Nicky Morgan, formerly Secretary of State for Education, had won the race to lead the committee, beating the rising star Jacob Rees-Mogg in the process. The race between the two, such was their dominance in the process, has led to suggestions that Rees-Mogg is being primed for something else – the Conservative Party Leadership – which may sound fanciful but the recent upsurge in manufactured popularity for the ‘Old Etonian’ suggests otherwise. Nevertheless, Morgan takes the important role apparently free from conflict (unlike Rees-Mogg) and willing, apparently, to uphold the purpose of the Committee and ‘question Ministers on their decisions’. However, Morgan, for one reason or another, is seemingly preoccupied with Brexit which may be a problem because the role, and the Committee itself, should not be a political tool. Rather, it should represent the opportunity for elected officials to publically deconstruct what are often purposefully-complicated financial dealings and hold those who partake in such endeavours to account. It is hoped, rather it is vital, that Morgan does not lead the Committee down an overly-politicised road in which private actors will escape censure for their actions – the Committee is a small but important part of the British regulatory framework and as the country heads towards Brexit, that framework will undoubtedly be required to protect the public from the iniquities of the marketplace.

The Leading Credit Rating Agencies Prepare to Leave Russia

Finally, just a small nod to a subject that has been covered extensively by this author, in this blog, online, and in Journals. After reviewing the newly-created rating agency – the Analytical Credit Rating Agency (ACRA) – which is a Russian endeavour developed in response to both a feeling of being hard-done-by and the new Russian laws determining the entry criteria for credit rating agencies, the sentiment advanced was that the agency was a good idea, but would ultimately struggle for authority due to its perceptible connections with the Russian Government (an issue plaguing a lot of new entrants to the worldwide marketplace). However, as of tomorrow, the ACRA will be the primary rating agency in the jurisdiction as the Big Three prepare to leave which, although seems great for the ACRA will actually be quite a test for such a small and under-resourced agency. Russia, depending on the first phase after the Big Three leave, will be faced with an important conundrum: if the market struggles without the ‘national scale ratings’ developed by the Big Three, then it will have to lessen its accreditation standards to draw the big agencies back in; alternatively, if the experiment does work, then the ACRA will need to be funded adequately, which will help ACRA grow but will not help the calls regarding impartiality as the firm attempts to broaden its horizons outside of Russia. The next three to six months will make for an interesting time period in Russia’s economic development.

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