Wednesday, 30 August 2017

The Scourge of the “Private Finance Initiative”: An Ideological Assault

Today’s post looks at the news that companies that have built NHS hospitals and associated services over the past six years have recorded pre-tax profits of £831 million, with a further £1 billion expected to be made in the next five years. These companies operate under what is known as the ‘private finance initiative’ (PFI), which can be directly traced back to John Major’s Conservative Government in 1992, and indirectly associated with the socially-defining period of Margaret Thatcher’s reign in the 1980s, a reign which is synonymous with the concept of privatisation. This almost absolute transference of service provision to the private sector, will be the focus of this post as we look at the effect that the initiative is having upon the service that the NHS can provide – assessing where the money that can go to the NHS actually ends up will be revealing, and perhaps is what should have been paraded on the side of that infamous bus.

The issue of providing certain services to the public, and crucially how best to provide them, has long since been debated and theorised within a number of academic fields. One of the key approaches that has been adopted is that of the ‘public private partnership’ (PPP), which seeks to combine public and private endeavours to make the provision of a public service, or a ‘public good’, as efficient as possible. Furthermore, where a service is required but it is extremely inefficient for the State to provide it, they will often incentivise private companies to meet that demand – this author has discussed this at length with regards to Credit Rating Agencies. Yet, it is extremely important that we define these different endeavours correctly, because PPP and PFI are not the same thing (arguably, they are not even close). PFI describes a process whereby a certain service requirement is put out to tender for private companies, and a local authority will then enter into a long-term contract with that private company, or collection of companies through a ‘Special Purpose Vehicle’ (a special legal subsidiary that has its own legal status or ‘personality’); those contracts will usually see the local authority commit to a certain number of years for a certain amount, which is theoretically paid based on the performance of the provision of services etc. The PFI and the PPP are not the same, despite what the British Government say, because PPPs are usually designed to increase the provision of public goods without directly drawing from public funds (although this is not an exclusive characteristic, admittedly), whereas PFI have the ability to draw from public funds intrinsically interwoven within their creation, which is where the destructive and disgusting element of this mode of finance can be seen.

The best example of this is the NHS, and the recent news stories have brought this to the fore. However, they are a persistent problem, and one that we must acknowledge is of Conservative creation but was expanded by the policies of New Labour in the late 1990s; the then Chancellor Gordon Brown expanded their usage greatly as New Labour cemented the incredibly short-term philosophies that see the country in the mess that it is in now – the Chancellor was attracted to the ability to ‘buy now and pay later’, pushing the debt burden onto future generations and off the governmental balance sheet. It was reported in 2011 that the British Taxpayer owed a staggering £121 billion on projects worth only £52 billion, demonstrated the extraordinary profit to be made from the pockets of the taxpayer. In 2011 there were a number of scandalous reports concerning PFIs and the NHS, including jobs worth £750 being charged at £52,000, hospitals costing ten times what they are worth, and hospitals and schools still recording six-figure revenues for SPVs despite them being closed. Therefore, it should come as no surprise that reports today suggest that ‘large sums that could have been used for patient care have instead gone into the pockets of a handful of PFI companies’, with analysis from the Centre for Health and the Public Interest suggesting that not paying the pre-tax profits between 2010 and 2015 would reduce the massive NHS deficit by a quarter. The analysis continues by surmising that the capital value of assets built for health-related PFI initiatives stands at £12.4 billion, although the NHS will ultimately pay over £80 billion for their use; this incredible scheme, supposedly, will end up costing the taxpayer over £300 billion, or £10 billion a year, which is an extraordinary understanding to comprehend.

Labour MP Stella Creasy has been making the point loud and clear that there needs to be an urgent competition enquiry into this particular market, which comes in addition to her view that there should be an increased tax on their profits. However, this viewpoint has been excellently critiqued by one commentator, Joel Benjamin, to show that her particular understanding does not take into account the fact that rate-rigging (the LIBOR scandal) directly affects the value of the PFIs and that the physical construction of these services by the PFIs have questionable and concerning public-safety records, with the Fire Brigades Union warning that it is extremely concerned ‘about the risks posed by poor fire safety in hospitals and schools built for profit’ – the comparison with the incredible tragedy at Grenfell Tower needs no introduction here, but the comparison is absolutely correct. In essence, we have a system that is designed to siphon money from the public fisc, one that is not rigorously monitored, and one that is continuously expanding.

Ultimately, the stories of NHS trusts being left without any option other than to commit to more debt to offer the services the public require, and stories of the families of the poorly being charged exorbitant rates to visit their relatives and/or friends will continue to be commonplace. Only a small number of people can read this news and not see the scandal and the tragedy, but unfortunately those people likely wield considerable power or have plenty to gain from this incredible arrangement. However, the situation reveals a more depressing situation. The birth of the NHS is a defining and extraordinarily positive moment in British history, and should be protected at all costs; yet, news stories like the PFI scandal will be replaced with something else once the news cycle turns, with very little action being taken other than the continuation of the scandal. Rather than focusing on instances such as Brexit, or the intra-party squabbles in the Conservative, Labour, SNP or Liberal Democrat parties, there needs to be a sea-change in what the public react to. This particular news story demonstrates, without doubt, that both leading political parties are complicit in creating a scheme that is designed to remove funds from the public into private hands – it is traditional to blame the Conservative party, but this is a political problem, not a Conservative problem. This story is the realisation that the State is captured by private interests, and that the public only serve (under this system) to fulfil their duty of providing resources to be siphoned off to the few – whether that is ever truly realised on a large enough scale is the most important question to ask.

Keywords – Private Finance Initiative, Public Private Partnership, NHS, Health, Finance, Politics, Business, Ideology, State, Public, @finregmatters

Tuesday, 29 August 2017

RBS – The Latest Demonstration of a Poisonous Bank

On many occasions here in Financial Regulation Matters we have looked at two seemingly separate issues. We have covered, extensively, the developing story of the fraud at HBOS from the initial trial and conviction of a number of fraudsters, to the continued and difficult fight against Lloyds for compensation. At the same time, there have been a number of posts concerning RBS and their abysmal performance, ranging from their continued failings since being nationalised to their settlements with wronged investors and shareholders. However, there are now reports suggesting that these two streams can be neatly brought together, which unfortunate for the inevitable victims of such an amalgamation. This author has written extensively on the concept of oligopolistic dynamics within the credit rating industry and, regrettably, the same dynamics can be seen in the banking industry. The performance of the Reading Unit of HBOS in defrauding vulnerable SMEs was simply just the tip of the iceberg.

We will not cover the HBOS scandal here because it has been covered extensively throughout the posts of Financial Regulation Matters – for our purposes here, it is enough to say that the fraud can be defined as one in which vulnerable small and medium-sized companies where highlighted by the specific division of the bank and then exploited, with the result being the firm was wither stripped or destroyed at which point the fraudsters would pick up the pieces. The size of that scandal has, arguably, not been digested by the public – probably owing to the fact that the story has remained in the business pages of the mainstream media when it should be on every front page. However, if it was hoped that the banking sector would brush this scandal under the carpet then those hopes diminished greatly last week with the news that RBS, the incredibly troubled bank, has its own scandal ready to envelop its proposed recovery. Reports last Friday emerged that detailed that the ‘Global Restructuring Group’ (GRG) contained within RBS has been systematically ‘mistreating’ its clients, which included increasing interest rates and imposing unnecessary fees for those SMEs in trouble, rather than meeting their stated purposes. Incredibly, it is being reported that 92% of companies the group dealt with has been treated in such a way, although the FCA were at pains to declare that the group did not try to ‘profit from their distress’. Whilst the accusation of fraud has not been levelled at the group, the suggestion that no profit was sought is a difficult one to swallow, with the statistics showing that only one in ten firms survived the process intact, with almost seven out of ten companies remaining tied to ‘complex loans organised by the GRG which were often too expensive to leave’ – to suggest profit was not sought is to ignore the purpose of the bank entirely, particularly one is such difficulty.

Another issue that stems from this leaked report by the FCA is the supposed impotency of the regulatory framework. It has been reported that the Bank provided only ‘narrow compliance’ with the investigation which, although refuted by the Bank, details at least a major conflict between regulators and the regulated. In response, the Bank has stated that it has launched a new complaints procedure overseen by an independent third-party and an automatic refund process for GRG customers, although the experience of Lloyds customers should tell us that it is very easy to ‘talk the talk’. Yet, the complains of the regulator hint at an issue that is still to be resolved since the crisis, and that is the effect of unregulated finance, with a spokesperson for the FCA stating that ‘many of the activities carried out by GRG were largely unregulated and its powers were therefore limited’. This type of narrative should instantly remind of us of the regulatory surrender to the might of the unregulated ‘shadow banking’ sector, which was consistently paraded as an example of the consequences of an underfunded regulatory framework – the need to properly fund regulators is obvious, but the careering away from the Financial Crisis and the incessant need to show a booming economy makes that requirement wishful thinking at this stage.

Returning to RBS more generally, this latest instance marks the latest in a long line of negative press. The old adage that any publicity is good publicity is simply not true, and it is likely that RBS will learn that fairly soon – the question posed on a number of occasions here in Financial Regulation Matters is how much more can RBS get away with? There is seemingly an accepted understanding that RBS is too big to fail, which is supported by the crisis-era bailout, but is that truly the case? Lehman Brothers was a massive institution and it was allowed to fail, which means that, perhaps, there needs to be a recalibration in our societal perception of what is truly too big to fail. However, that last sentence is wrong, because in reality there needs to be a political recalibration, and on that front we may be waiting a while. A recent book by Ian Fraser titled Shredded: Inside RBS The Bank That Broke Britain, published in 2015, brilliantly describes the incredible problem faced by the United Kingdom, in that it plays host to a bank that is intertwined within its political and financial fibres, so much so that its removal would be catastrophic; however, what is required is that we keep addressing and analysing this relationship as much as possible because accepting it will normalise the actions of this incredibly poisonous bank. Recent news discussed how the Bank has been actively preventing rivals from reopening branches that it has closed as an attempt to stop the haemorrhaging of money, which has led to a number of small towns and villages without proper access to banking services, further compounding the problems highlighted in previous posts concerning financial literacy and financial exclusion. Ultimately, RBS is a problem that is growing by the day, and refusing to acknowledge that or downplaying the significance of this incredible problem only heightens the severity of the damage its implosion will cause – perhaps the next scandal will see RBS on the front pages, but one should not hold their breath.

Keywords – RBS, Fraud, SMEs, Finance, Politics, @finregmatters

Friday, 25 August 2017

Samsung’s Heir Jailed for Five Years: A New Era for South Korean Business?

Today’s post focuses on the largest business story today which is the news that Lee Jae-yong, the vice-chairman of Samsung and its de-facto head, has been jailed for five years after being found guilty of bribery, embezzlement, and perjury amongst a host of other offences. This massive news for South Korea, however, has the potential to fundamentally alter its environment in terms of the relationship between the massive family-owned conglomerates that dominate the South Korean landscape, and the Government. Yet, whether or not that comes to fruition is the focus for this piece because, as is usually the case, a realistic assessment suggests that the favoured outcome may not be attained.

Today’s sentencing of the heir to the sprawling Samsung Empire, Lee Jae-yong, marks the accumulation of a string of events that began in 2016 with the investigation into the then-President Park Geun-hye. Very briefly, Park Geun-hye, the country’s first female President and daughter of the Military Leader and President of South Korea Park Chung-hee, has been under investigation since 2016 for her connection with Choi Soon-sil, the daughter of a Cult leader who grew particularly close to Park Geun-hye but who was herself jailed in June for three years on charges of corruption. The complicated but fascinating story is perhaps made clearer if we understand that one of the main accusations against Choi was that she used her political connection to leverage favours and financial recompense for her daughter from some of the largest companies in South Korea. The former President, who was impeached as a result of the scandal, is currently on trial for the same crimes, with it being suggested that country’s first female leader could be imprisoned for life; many have suggested that today’s sentence will make for grim reading for Park’s future. However, the question for us is whether the current environment of punishment being administered will be a lasting one.

Lee Jae-yong is the heir to Samsung, a massive conglomerate that has assets of over £250 billion. In South Korea, firms like Samsung are known as ‘chaebols’, which are large family-owned businesses. Lee is the de facto head of Samsung because his Father, Lee Kun-hee, has been hospitalised since 2014 after suffering from a heart attack, who himself has not been a stranger to charges of corruption – in 2009 Lee Kun-hee was convicted of tax evasion and sentenced to a three-year suspended sentence, which was subsequently pardoned by then-President Lee Myung-bak. South Korea has had a long and often difficult history with its chaebols, with these multi-faceted companies being ran like operations outside of the law and general rules on a number of occasions. However, after Park Geun-hye’s impeachment her political party collapsed and ushered in a new political era – Moon Jae-in swept to power in the wake of the impeachment and immediately began establishing a hard-line against corruption in the country. On that basis, the former President should arguably be preparing herself for a lengthy, if not lasting prison sentence in October of this year.

Lee Jae-yong’s crimes are now clear for us all to see. Despite his lawyers’ claims that he was not part of the decision making process at Samsung, Mr Lee was convicted of bribery for the multiple instances of money and gifts he provided for Choi, including a £620,000 horse for her daughter. In return, the Samsung boss had wanted Choi to leverage her political affiliations to allow an $8 billion merger of two Samsung affiliates to go through, which would cement his control over the group despite the shareholder protests against the move – the merger was approved by the national pension fund, which itself is a major Samsung shareholder (thus demonstrating the interconnectedness of South Korean Business and Politics). Despite Lee’s fervent denials of complicity, prosecutors succeeded in establishing the picture of Lee being fully in control of the company and therefore his actions, with the resultant picture being a member of the South Korean elite attempting to leverage his position for further power, but coming unstuck by damaging revelations. Earlier we looked at the long history that South Korea has with its many chaebols, and that history is defined by feeble approach to justice where the chaebols are concerned, although one onlooker has suggested that this sentencing, if it holds up to the appeals process, represents the smashing of the ‘too-big-to-jail’ culture that has come to define the country. Whether or not the sentencing remains after the forthcoming appeal is another story entirely, but there are two prevailing outcomes from today’s sentencing: on the one hand there is hope that the seemingly impenetrable world of the chaebols is beginning to wear away, but on the other hand there is a feeling that nothing much will change.

As usual, which outcome one ascribes to is dependent upon one’s views on the world of business moreover. For Samsung, the future looks only ever so slightly uncertain, with the arrest certainly not reducing its position – its stock prices continue to rise, its revenues continues to increase as it cements its global position as the leader in markets like the smartphone and computer chips markets. Experts are suggesting that the company’s long-term future may be uncertain, with the prospect of internal battles taking place at some point, but in all reality Mr Lee will be released relatively shortly and will surely resume his role as the natural successor of the chaebol. The more interesting development will be the trial of Park Geun-hye in October, with the impending possibility of a former President being jailed for life containing the possibility of restructuring the country’s attitude towards high-end corruption; however, and certainly in no attempt to provide support for Park, the story of her early life and the presence of Choi and her Father Choi Tae-min should be considered, particularly if she receives life in prison whilst Mr Lee receives only 5 years – what message does that send? Ultimately, there is an overriding message from this news and that is that, although South Korea’s relationship with big business is slightly unique, there is still a picture to be extrapolated for other countries; politics and big business is fundamentally intertwined, and when we read political stories we must consider the role that big business plays in those developments, and vice versa – the biggest difference between South Korea and the West is that their business leaders have a more prominent public face; apart from that, the lesson is the same.

Keywords – South Korea, Samsung, Corruption, Bribery, White-Collar Crime, Corporate Crime, Politics, Business, @finregmatters

Thursday, 24 August 2017

Will China’s Latest Bout of Nationalistic Economic Policy Work?

In today’s post the focus is on the recent news emanating from China that the Chinese Government has introduced a cessation on foreign investment by Chinese entities on anything over $5 million. However, recent news concerning the potential investment in one of the world’s leading car manufacturers suggests that the outflow of Chinese capital will not be stopped, but rather will now carry a governmental-licence, which has the potential to alter the dynamics of the global capital flow and, more importantly, the global political balance.

China has long since employed different variants of economic nationalism, ranging from Mao Zedong’s 30-year reign to Deng Xiaoping’s radical transformation of the Chinese State. Today’s version, led by Xi Jinping, is part of a growing world-wide trend but with one crucial difference from other components of the trend like the United States or the United Kingdom; China has the political ability to enforce its nationalistic policies upon its business entities in a much different way than its political competitors. Last week, in announcing to the Chinese economy its intentions, the Chinese State Council announced that it would be implementing the latest phase of a long-held initiative to curb the outflow of capital from Chinese shores. In November last year it was announced that any investment outside of the country worth over $5m would need to be cleared by Central Authorities first, but this has seemingly not deterred the rate of investment abroad. However, the ever-growing debt crisis that is enveloping China has forced the State into action, despite suggestion that a general raising of corporate taxes could provide room for the State to breathe. In the wording of the document released by the State Council, it is affirmed that the levels of debt being incurred because of the vase outflow of investment are now being fundamentally considered, with the effect being an immediate prohibition (with the caveat of the requirement of a licence) of investment in overseas hotels, cinemas, the entertainment industry, and real estate. This is being witnessed already with the withdrawal of Wanda Group’s rumoured $1 billion acquisition of Dick Clark Productions, and the recent ordering for Anbang Insurance Group to liquidate its foreign assets, which include the famous Waldorf Astoria Hotel – although Anbang maintains that it will have the final decision, the reality will tell a different story.

Apart from the need to maintain capital within China to ward off any sort of financial crisis, the State Council makes clear that one of the aims of the State is to encourage internal investment in initiatives like President Xi’s signature ‘Belt and Roads’ project which, although far too expansive to define neatly, is a massive $900 billion infrastructure initiative which aims to connect China to a host of other countries in Asia and beyond – it is being heralded as the biggest ‘development push’ in human history. Therefore, the need to keep investment internal is clearly important to the Chinese state but, interestingly, it has not stopped the rumoured attempted outflow of capital. One relatively small development recently was the 80% takeover of English Football Club Southampton FC by Gao Jisheng, worth a reported £210 million – the latest in a recent flurry of Chinese investment in football-related endeavours since President Xi’s visit to the U.K. in 2015. However, the largest piece of news in this regard is the rumoured Chinese interest in the Fiat-Chrysler company, the seventh-largest auto manufacturer.

Rumours have picked up pace recently after an official from the Great Wall Motor Company confirmed U.S.-based speculation that a ‘well-known Chinese automaker’ was interested in purchasing Fiat-Chrysler; the official stated that ‘with respect to this case, we currently have an intention to acquire’. The deal, which if completed would represent one of the largest auto-based deals a Chinese company has taken part in, would be very-much needed by Fiat Chrysler as it struggles to keep pace with its requirements to stay competitive in an extremely competitive marketplace, and comply with emissions regulations and the need to develop technologically. However, Fiat Chrysler was forced to admit that it has not been the subject of a takeover bid, which was closely followed by Great Wall Motors declaring that it had not entered into discussions with Fiat Chrysler, which immediately sent Great Wall’s stocks down in price. At the time of writing the deal is considered as very unlikely to proceed, but whether that is because of the conditions in China is up for debate – there certainly seems to be a persistence in Chinese appetite for foreign investments.

Ultimately, however, the position of the Chinese State over its business entities will dictate the outcome. The impending threat of a debt crisis, when placed in conjunction with the Belt and Roads project which will cement China’s position as a global leader, will take precedent if needs be – and it is likely that it will need to be. The ability to position the Government as the provider of licences for foreign investment means that the Chinese Government can attempt to ward off what is a real and imminent problem with regards to its levels of debt being incurred. The IMF has been clear in its warning for China, noting that levels of private-sector debt and the use of complex financial instruments are putting the Chinese economy at great risk, with the world having a real understanding of what those risks are after seeing the U.S. and the U.K. fall to the same risks – however, it is unlikely that China will be deterred by this. In reality, China’s growth is incessant and based upon a sentiment of this current phase being representative of China taking its place amongst the global elite, which it has every right to do. China’s political structure allows it to take actions that Western countries (theoretically) only take during a crisis, which may mean that the situation will not develop as Western-based onlookers like the IMF believe it will. Either way, the future for China’s economy will have a massive effect upon the global stage, but whether that effect is positive of negative remains to be seen.

Keywords – China, Debt, Politics, Fiat-Chrysler, Great Wall Motors, Economics, Xi Jinping, Belts and Roads Project, @finregmatters

Monday, 21 August 2017

Johnson & Johnson’s Persistent Talcum Powder Scandal: Yet another Pay-out

Today’s post looks at the news that Johnson & Johnson (J&J), the massive pharmaceutical, medical devices and consumer goods company, has been ordered to pay a massive $417 million to a claimant regarding the company’s failure to ‘adequately warn consumers’ about the cancer-related risks of one of its most famous products – talcum powder. In this post the focus will be on the string of claims that have resulted in awards for the claimants against J&J and what it may mean for the company and its reputation.

Simply put, scandal is never far away from this particular field of medical science and its connection to the public. There have been a vast number of cases over the years which can be described as ‘corporate scandals’, with many becoming etched into the public consciousness. In the U.K. (although the effects were certainly not restricted to the U.K.), perhaps the most famous corporate scandal in relation to the medical sciences field was the case of those affected by the morning sickness drug Thalidomide. The effects of the drug, which after retrospective testing 50 years later was found to be caused by a component of the drug preventing the growth of new blood vessels in embryos, included the child suffering from a number of deformities, with it being stated that the stage at which the pregnant woman took the pill determined the nature of the deformity suffered by the child. This horrific instance of corporate crime and failure, which casts a long and persistent shadow upon society, is just one of a number of unfortunately memorable instances of corporate failure in this field. In France, the Poly Implant Prothése (PIP) scandal which involved the switching of medical-grade silicone for breast implants with industrial-grade silicone resulted in nearly 50 ruptured implants, a wave of litigation and the dissolution of the firm. In the United States, the recent case of the New England Compound Centre and its role in the widespread dispersion of medicine that, because of severely lax standards, resulted in over 700 people being infected with Meningitis with 64 people dead. A recent case against the owner of the centre – Barry J. Cadden – resulted in his acquittal on 25 counts of second-degree murder, but conviction for racketeering and fraud, for which he was sentenced to 9 years in Prison. These clearly are just some of many examples of corporate transgressions that have led to drastic effects upon public health. If we look at J&J however, we see somewhat of a mixed situation.

In the 1980s, J&J were widely praised for their reaction to a similar situation. In 1982 in Chicago, 7 people died as a result of taking pain-relieving ‘Tylenol’ capsules that actually contained potassium cyanide. Yet J&J, who has manufactured the drug, immediately recalled 31 million bottles of the drug and replaced them in a safer tablet-form – it is not known for certain how the drugs came to be tampered with. The company earned praise for its rapid response and forthright sharing of information with the public, an approach which has been discussed widely when looking at crisis-management strategies. Yet, if this period represented a positive view of J&J (relatively speaking), then recent events paint a very different picture. The products in question contain talc, a mineral which is made of magnesium, silicon and oxygen. The mineral is heavily used in a number of J&J products for its ability to absorb moisture – popular products include baby powder and facial powders. However, the American Cancer Society confirms that in its natural form ‘some talc contains asbestos’ which, even though the use of asbestos has been widely prohibited, has still seen the link between the use of talc-based products and cancer claimed and examined on a near-consistent basis. In the early 1970s a possible link between talc and ovarian cancer was established by British scientists, which as a study was followed by further studies in the ensuing decades that claimed women were three times more likely to contract ovarian cancer when they used talc-based products near their genitals. Although J&J were made aware of the associated risks by their suppliers in 2006, the company refused to attach warnings over its usage and that is the central claim to litigation concerned with this issue. In 2006 a federal jury found that J&J should have warned consumers of the risks (without awarding damages), and in recent years the company is facing a wave of litigation. In 2016 the company was ordered to pay $72 million to the family of Jacqueline Fox, $55 million to Gloria Ristesund, $70 million to Deborah Giannecchini, and in 2017 $110.5 million to Lois Slemp and now $417 million to Eva Eheverria; it is suggested that over 1000 women will claim against the company. The names of the women who have been awarded damages was not listed to ignore the details of their individual cases (far from it) but to highlight the remarkable situation that, rather incredibly, just keeps developing. The company responded by stating that ‘we will appeal today’s verdict because we are guided by the science, which supports the safety of Johnson’s Baby Powder’, with the company using tried-and-tested legal defences like the protection offered by the U.S. Supreme Court that states that lawsuits must be confined to states where the alleged wrongdoer i.e. J&J is based. Yet, the recent ruling and the sheer size in relation to previous awards surely hints at a change in the offing.

Ultimately, the trajectory of awarded damages may reveal for us the eventuality that J&J seemingly does not want to face: it is far from inconceivable that talc-based products will be wholly, or mostly prohibited. This case represents a slightly different case in that the divergence in medical opinion and evidence is allowing the scandal to continue unabated, whereas other scandals were arguably much clearer. However, it is contested here that this scandal is just as clear, and the result of the scandal should be forthcoming immediately: the correlation, at the rate it stands at now, between the use of talc-based products and ovarian cancer, is more than enough to take lasting action. The question for regulators across the world – this is not just an American problem – is how many people, and women mainly, have to die or contract ovarian cancer before serious action is taken? Another thousand? Ten thousand? The losses that J&J will incur with the prohibition of one of their famous products should have no bearing whatsoever on the decision to take action and prohibit the sale of talc-based products; unfortunately, the power of the corporation is well and truly at play in this case.

Keywords – Johnson & Johnson, talc, Baby Powder, Scandal, Corporate Scandal, health and safety, public health, consumer protection, corporate power, Thalidomide, Poly Implant Prothése (PIP) scandal, New England Compound Centre, Tylenol, @finregmatters

The Plight of the Co-Operative Bank

Today’s post focuses on the news that the Co-operative Bank (the ‘Co-op’ bank) has had a £700 million rescue package approved by its members today. The bank, which has experienced a decline in its fortunes since the Financial Crisis, has presented this recent package as a viable method of stemming the bleeding that goes back to its merger with the Building Society, Britannia, in 2009. The obvious question is whether this latest attempt to halt the slide will be effective, or whether the associated 145-year history looks like it will be coming to an end in the not-too-distant future.

As stated above, the co-op bank can trace its roots back to the Co-operative Wholesale Society of Manchester, which was established in 1872. However, this British institution as experienced dire times of late, and that is commonly traced back to 2009 when the company merged with Britannia, a large Building Society; the deal was heralded as the ‘next step in the renaissance of the co-operative and mutual sector’. Although job losses were announced shortly after in 2011, the promoted health of the company looked good when the Co-op group announced that it was bidding for 632 branches from Lloyds Bank in August 2011, although that perceived buoyancy was dashed shortly afterwards when the regulator overseeing the attempted purchase warned Lloyds that the Co-op group did not have the funds to underwrite the proposed deal. After George Osborne, our old friend, had championed the deal as creating ‘a new challenger bank’, the group announced a massive £600 million loss the year later, which preceded the withdrawal from the bidding process for the branches of Lloyds. Since that time, the bank has suffered disaster after disaster, ranging from its chairman being filmed arranging to purchase illegal drugs, to the bank’s declaration that there was a £1.5 billion hole in its accounts which, for a bank this size, is usually terminal. Recent news confirms the deterioration of the ethically-minded bank, with reports (from the Competition and Markets Authority) suggesting that it was not clear enough when informing customers about overdraft charges – so, not very ethical on that front; this is likely just one of the many reasons why over 25,000 customers left the bank in the first half of this year alone. Yet, today’s news may be seen as a positive outcome from recent negotiations regarding the bank’s health, but in reality it may be anything but.

The deal with the bank’s creditors, which consists of a number of large investors like BlueMountain Capital, Silver Point Capital, and GoldenTree Asset Management, has been tentatively framed as a pathway to success by the bank, with the CEO claiming that the second half of 2018 and 2019 will represent periods of growth for the company. Whilst the deal, which will see investors swap their bond holdings for shares, may be being tentatively promoted, the bank itself suggests that more job losses may be imminent; also, whether the deal will be enough is another matter entirely.

Ultimately, there is a debate regarding whether the privatised bail-out represents a desperate attempt to survive, the right course of action, or more broadly whether it suggests that the proposed reduction of the too-big-to-fail safety net is working i.e. banks will look to private resources for assistance. One commentator suggests that the broader effects of this deal on the discussion regarding the regulatory approach to bail-outs should not be overstated, and that is correct – the co-op bank is not your usual bank; despite the introduction of hedge-funds and the like into the equation, the bank is still an institution driven by core principals which, theoretically (and, in all honesty, practically) make their client base ‘stickier’ than other institutions’ client bases. There is a potential that the £700 million finance package may help the co-op banks situation, but at the moment the bank is particularly at the mercy of its environment, and the current environment is extremely volatile. Whilst it is hoped that the bank remains because, as banking cultures go, it is important that ethical banking exists, the exposure to the elements is a real concern. With the U.K. still to formally leave the European Union, and the erratic situation in the United States, the co-op bank needs some unexpected ‘wins’ and soon if it is to last another 145 years – in 2017, these ‘wins’ are apparently few and far between.

Keywords – Co-operative bank, banking, bail-outs, too-big-to-fail, United Kingdom, Ethics, Corporate Culture, @finregmatters

Thursday, 17 August 2017

Companies and Morality: A Prevailing Issue

Usually here in Financial Regulation Matters, the focus of posts is on the world of business and usually its connection with the world around it – business, rather obviously, is part of a much larger societal picture, particularly in this modern era. The focus of the posts is usually upon business and/or regulatory developments, which are then assessed against a broader backdrop. However, today’s post represents a slight departure from that approach in that it responds to the recent wave of headlines praising corporations for taking a stand against the developing situation in the United States regarding President Trump and his views towards outwardly racist groups. For this post there is only one question that is of concern, and that is whether the praise being showered upon companies like Apple, Spotify, and Go Daddy is correct.

The first wave of public, and specifically media praise for companies began after a number of CEO’s left the President’s advisory councils. Before the President officially disbanded the ‘Manufacturing Jobs Initiative’ and the ‘Strategic and Policy Forum’, he had suffered a number of high-profile losses in the form of Kenneth Frazier, the head of pharmaceutical giant Merck, and the CEOs of Under Armour and Intel. According to media reports, the actions of the members of the Strategic and Policy Forum, in informing the administration that the vast majority would be standing down, precipitated the closing of both initiatives. Whilst the President’s reaction of ‘grandstanders should not have gone on’ the initiatives anyway is to be expected, the negative reaction to his failure to repudiate the actions of far-right activists in Charlottesville at the weekend continued unabated, with JP Morgan Chief Jamie Dimon ‘strongly disagreeing’ with the President’s handling of the situation, Apple’s Tim Cook warning the President that ‘hate is a cancer’, and General Electric’s Jeff Immelt leaving the initiative because of the ‘ongoing tone of the discussion’.

Whilst corporate leaders abandoned the President, other corporations were taking action against the far-right. Earlier this week, Go Daddy, the website hosting company, announced that it had given The Daily Stormer, a neo-Nazi website, 24 hours to find another domain provider as a result of its articles concerning the murder of Heather Heyer. Spotify, the music subscription service, has started removing so-called ‘white power music’ from its databases. Facebook and Reddit have sought to ban hate groups, whilst the heads of Google, Apple, Facebook, Go Daddy, and a number of other corporations have pledged million-dollar donations to the Southern Poverty Law Centre (SPLC) and the Anti-defamation League. Spotify stated that ‘illegal content or material that favours hatred or incites violence against race, religion, sexuality or the like is not tolerated by us’, whilst Twitter and LinkedIn has removed accounts related to The Daily Stormer. There is an obvious question that must be asked, and regular followers of Financial Regulation Matters will likely know that what that is; what changed? The answer is perception, which is an all-important concept for corporations.

The despicable murder of Heather Heyer at the weekend has forced deep-rooted issues to the forefront of the public consciousness once more. However, if we take a step back and look at the situation, the situation is damning for corporations. Before the weekend, the content of The Daily Stormer was still illegal as it inspired hate and violence; yet it remained freely available via social media and the internet. The hate-filled songs on Spotify were still available. The leading corporations were not increasing their donations to the SPLC or the Anti-defamation League. Yet, the most damning realisation is that the viewpoints of the President, viewpoints that these business leaders were citing as the reason for their abandoning of him, were not new. Before the weekend, there were so many signs that Donald Trump held the views that he reiterated over the last week, but there was little disgust from business leaders then. There was no disgust when he filled the White House with people like Steve Bannon. The travel-ban on people from Muslim-majority countries caused angst, yet they did not abandon him. His repeated links to far-right and racist groups like the Ku Klux Klan has not deterred their support, whilst historic comments like ‘laziness is a trait in blacks’ have been forgotten about. The reason for this is simple, and calls into question any praise levelled at the actions of corporations. There has been some analysis in the media that looks at the economic effect of Trump’s relationship with these CEOs, and therein lies the problem; these corporations are not people. When they disregard the actions of Donald Trump who, throughout the course of his campaign made no secret of his ambition to sow division and hatred amongst the fabric of America, they do so to maintain influence within the political component of the State – as corporations, they must do this. As corporations, they must seek to look after themselves first before they consider any societal issues, so the theory goes, and that takes the form of lobbying for preferential treatment by way of reductions in tax or subsidies etc. Whilst some who are reading this may believe that this is acceptable, as is their right, we must remember that it is corporations who are preserving Trump’s power and, in reality, are the main reasons for his successes in the first place. Their retrospective disgust for hate and division needs to be contextualised properly, and that will start by considering the pro-corporate headlines of their removal of sites like The Daily Stormer – it should not take the murder of an innocent woman to push corporations to flush out such avenues of hate. It should not take the incredible footage that went all around the world of Nazi flags being paraded through an American city to prompt corporations to do what is right and publically disavow a President who does not disavow those flag carriers. Corporations have a lot to answer for, and stepping down from forums created by the President will not change that.

Keywords – Donald Trump, Corporations, Society, Morality, , Charlottesville, Corporate Culture, @finregmatters

Wednesday, 16 August 2017

Two “Big Four” Auditors Fined for Misconduct: A Persistent Problem Being Met With Persistently Lenient Punishment

Today’s post looks at the news that KPMG has been fined by the U.S. Securities and Exchange Commission (SEC) for ‘misinforming’ investors about the value of a certain company. This follows the news from the U.K. where the Financial Reporting Council (FRC) have fined PricewaterhouseCoopers (PwC) for ‘extensive misconduct’ relating to its audit of a professional services group. This recent flurry of regulatory activity has led some to discuss the ‘growing concerns’ regarding the quality of the Big Four’s output, but in this post we shall see that it is a surprise that this behaviour is not expected of the Big Four, and that the regulatory response should certainly be expected.

Only very recently here in Financial Regulation Matters did we discuss the ever-growing problem of accounting firm quality standards, with it being suggested that Andrew Tyrie may be looking to establish some sort of oversight board to further regulate the accounting industry. These suggestions followed on from what is being imagined as a new regulatory wave coming the accounting industry’s way after Brexit, but recently there have been a number of instances which suggest the Big Four firms – PwC, Deloitte, Ernst & Young, and KPMG – are beginning to lessen their standards on a systemic level (this will always be the case with a financial oligopoly). In May of this year, the FRC handed out its highest ever fine, this time to PwC, to the tune of £5m. This was for serious failings in the auditing of Connaught, a social housing maintenance group, for which the FRC proclaimed that it has ‘severely reprimanded’ PwC, with the Connaught fine coming just a year after the regulator had to fine PwC £3m for the same thing for its audit of Cattles, a financial services group. Yet, rather predictably, that severe reprimanding had little effect, and now just 2 months on from Connaught, the FRC has fined PwC a new record total of £5.1 million for its audit of RSM Tenon, a professional services group that went into administration in 2013. Strangely, the regulator continued with the narrative that the fine represented a ‘severe reprimand’ again, with PwC admitting to five separate instances of misconduct – perhaps the regulator has a new definition for ‘severe reprimand’. This all follows on from fines for PwC for its role in a recent audit of Merrill Lynch, and also the Ukrainian lender PrivatBank; clearly, the reprimands are not working.

The growing concerns regarding the quality of the Big Four’s output have been flagged up in the media because of the recent fine given to KPMG by the SEC, totalling $6.2 million. The fine, which was in relation to the firm’s valuing of Miller Energy Resources (a Tennessee-based oil and gas company), punished the auditor for ‘grossly overstating’ the value of the company, even to a point of overvaluing certain assets by more than 100 times their actual value (!). As part of the fine, the auditor agreed to improve its quality control mechanisms, but the ludicrousness of that statement, coming from a member of the Big Four, beggars belief. Yet, these fines, and the sentiment that is attached to them, provide an excellent demonstration of the problem at hand.

If we look at the companies who the auditors have failed to properly audit, there is a distinct correlation. These ‘financial services’ firms are prime targets for the Big Four’s array of ‘consultancy services’, which serve in the same way the Credit Rating Agencies’ ancillary services do, in that the additional services are worth much more to the auditors than the actual audits themselves. This is a common problem within the world of financial gatekeepers, and one that is widely recognised. Yet, in the decisions of the regulators above, the issue is not addressed at all, and all that we see are nominal fines and throw-away comments like ‘severely reprimanded’. Speaking in the Financial Times, Emeritus Professor Prem Sikka stated that ‘a £5m fine is less than half a day’s work for PwC’, and he is absolutely right – there is simply no way that this can be regarded as a deterrent. So, if the fines cannot be counted as a deterrent, then what are they? In essence, these fines represent a pacifier for the public, and that regulatory must stop as we oscillate away from the Financial Crisis.

In the aftermath of the Crisis, the Big Four were criticised, but that criticism could hardly be heard against the wall of criticism aimed towards the banks, mortgage companies, and rating agencies (and rightly so). It needs to be established more clearly and more often that the auditors had a very important role in facilitating the crisis – this should be a given, given their centrality to the financial marketplace. Yet, this is not really the case, and although the transgressions of the Big Four are steadily creeping back into the public consciousness, where they belong, there is a growing problem on the horizon. New rules which dictate that large firms must put their auditing accounts out to tender every ten years has seen the Big Four switch their focus from the auditing section of their business (which is, by far, the least lucrative) and turn their attentions towards the consultancy side of their business (which is, by far, the most lucrative). This attachment to the firm’s consultancy arms is directly at fault for a number of the failings of the industry, in that it makes sense that the firms would pressure their clients to take consultancy services, or vice versa clients can impart influence upon the threat of taking their business to an oligopolistic competitor. The theoretical deterrent is that the firms would not want to risk either their reputation, or their standing with the regulator, but neither of these apply – the oligopolistic structure protects them from competitive pressure, and the regulators, in levying £5m fines, confirm for the auditors that they will not be punished for transgressing. Simply put, until the regulators join reality and begin to fine the firms excessively, there will be no change in the culture of these societally-vital financial firms.

Keywords – Accounting, Audit Firms, KPMG, PwC, SEC, Financial Reporting Council, Fraud, Financial Regulation, @finregmatters

Saturday, 12 August 2017

The Premier League and Corporate Scandals: How Corporate Scandals May Stem the Premier League’s Unrelenting Growth

Today’s post covers a topic that will be of interest to a lot of people all across the world. According to figures from the last couple of years, the Premier League – the highest football league in the U.K. – is massively popular, and its rates of growth in terms of expansion, income, and transmission across the globe grows year on year. The Premier League, which sells the ability to televise its games to multimedia companies like Sky or BT, is preparing to auction off the rights to televise its product at the end of the year, with the expectation that this round of auction will produce new record amounts of revenue. Whilst that is likely, there are external factors that may affect this incessant growth, and those factors are the focus of today’s post.

Simply put, the ‘Premier League’ has been an incredible success since its inception in 1992. Figures taken from the last few years confirm this, with the Premier League being broadcasted to 156 countries with 4.2 billion fans watching every week. Since the league’s inception in 1992, its development has been synonymous with television rights, and the modern era is no different. In this post we will focus on the British rights mainly, because the dominance of the British marketplace in the business model of the League is demonstrated when we consider the prices that are being paid to broadcast the matches. In 2015, the Premier League auctioned off the rights to broadcast its product, and the traditional frontrunner in the auction was Rupert Murdoch’s Sky brand, one which has been synonymous with the Premier League since it began. The auction of rights are divided into ‘packages’ i.e. certain packages have different classifications of matches, with which the broadcaster can broadcast at peak times etc. (one may notice a slight similarity with the securitisation process!) and in 2015 Sky paid £4.2 billion for five of the seven available TV packages for a period of 3 years, with BT paying £960 million for the other two packages. BT stands as Sky’s only competition within the U.K. in a marketplace which Sky has thoroughly dominated and seen off every competitor so far (Setanta Sports, ESPN), but in difference to their predecessors BT has developed quite an extensive, albeit expensive approach to challenging Sky in this particular market – BT recently acquired the rights from Sky to air the UEFA Champions League and UEFA Europa League for a record price of £1.2 billion (almost £300 million more than what Sky had paid previously). This inclusion of heavy-hitting competition is causing particular problems for Sky – the theory goes that it helps consumers, but there is no evidence for that in reality – as BT continues to bid way over the odds for packages that Sky cannot even contractually bid on; a former Sky executive claims that BT’s strategy is costing them hundreds of millions of pounds and can easily be rectified. This understanding has led to analysts predicting that the next auctions rights will see Sky pay an extra £1.8 billion on top of the £4.2 billion it paid in 2015 just to retain its standing, which of course has the Premier League bosses purring – it is likely that the recent increase in transfer fees witnessed in the Premier League in the past two seasons alone (Paul Pogba for £89 million and Romelu Lukaku for £75 million) will be dwarfed by clubs spending the increased revenues. However, the threat of incoming competition from tech heavyweights Apple and Amazon has seen fears of an explosion in bids during the auctioning phase become palpable within Sky and BT recently, with the fear being that the companies will have to have their influence reduced – Sky are already making noises that they will pull out of some packages and instead focus on their other offerings (Drama offerings like Game of Thrones and Riviera), whilst BT Executives are also downplaying the notion of BT attempting to challenge Sky’s dominance. Whilst it may be that the explosion in costs, particularly in line with waning viewing figures (despite the recent ban on illegal streaming) is proving simply unsustainable, it may be the case that the wider world of business provides a clearer reason for the companies’ hesitance to engage each other.

Starting with BT, we have looked before here in Financial Regulation Matters at the accounting scandal that began in Italy but spread to affect a large part of BT’s business. As a result of the accounting scandal in Italy which saw the company write off more than £530 million, it also paid Deutsche Telekom and Orange £225 million to avert litigation resulting from the fraud, which in turn has led to 42% drop in their profits; simply put, now is not the time for BT executives to wage war with Sky over broadcasting rights to football matches. Sky, on the other hand, are having problems of their own. Rupert Murdoch, whose 21st Century Fox Company owns 39% of Sky now, is in a battle with British politicians and regulators with regards to his attempted takeover of the Sky Company – the claim is that the merger will afford Murdoch too much influence over media in the U.K. owing to his ownership of Fox, Sky, and a number of newspapers. Murdoch’s proposed £11.7 billion takeover demonstrates the willingness for the deal to happen, but also the state of flux that Sky is currently in; it can also not afford to engage in a battle with BT or any of the tech giants. How these corporate issues will develop will determine the future of the Premier League.

In short, the individual business concerns of both Sky and BT mean that whilst this next auction at the end of the year will see the price rise again, the next auction may see that rate of growth decrease. The noises coming from both camps indicate a potential shift in sentiment – the cost of broadcasting the Premier League is, potentially, getting to the point where it no longer makes commercial sense to win the auction for the rights. However, the squabbling between the two companies, which plays right into the narrative of pro-market thinkers who proclaim that competitive forces are better for the end users, is in fact producing absurd results. At the same time the Premier League is recording record rates of income, the end users – the fans of the game – are seeing the prices they pay to watch just some of the matches (not all matches are televised) rise exponentially, the price of match-day tickets rise, the price of associated merchandise rise, and also there is evidence that there is only a very small percentage of that profit being reinvested in the game at grassroots level. When we consider that all this coincides with the public experiencing a recession, it is little wonder that the past few years have seen a number of fan protests against the growing costs. There is an old saying that ‘you can fleece a sheep many times but you can only skin it once’, and it appears the leaders of the Premier League have not heard it – the incessant abuse of the public’s affection for the game of football has lured the Premier League bosses into a belief that that adoration is unconditional – only time will tell if this is the case, but the noises coming from Sky and BT suggest that they are reaching a point of saturation. Then, one of two things will likely happen; both prices and demand will begin to plateau, or competitive forces will encourage a bigger player to enter the marketplace and continue the ever-present rate of growth – the potential inclusion of Amazon and Apple to the marketplace does not sound good for football fans.

Keywords – Sky, BT, Premier League, Football, TV, Accounting, Fraud, Amazon, Apple, #finregmatters

Friday, 11 August 2017

Donald Trump and North Korea: A Necessary Slight-of-Hand

On quite a few occasions here in Financial Regulation Matters we have focused on the growing credit bubble and its potential effects when it collapses. In today’s post, we are going to continue this assessment by looking specifically at the situation in the United States, which will encompass an array of reports and studies that discuss an ever-growing problem that is beginning to set records. As we often do in Financial Regulation Matters, we will position this discussion within a much wider context and discuss how the proximity of this bubble to the last Crisis is particularly worrying, but also we will look at how impotent the system is at actually constraining it, with the result being methodologies that are moving into absurd territories.

We have discussed the rising credit problem on a number of occasions before, but mostly in terms of the warnings posed by British regulators. However, looking at the global picture reveals a much more dangerous situation in that the world’s leading economies are witnessing record levels of debt. In China the current ratio of credit in relation to GDP stands at an incredible 260%, which has led to an influx of analysis that essentially confirms that a bursting of that bubble is almost inevitable, but would cause devastating shockwaves around the world. China’s increasing consumer and governmental debt represents the pinnacle of a growing systemic problem, one which has seen the levels of debt issuance by countries and major supranational organisation almost double since the Financial Crisis, with organisations like the E.U., the Asian Infrastructure Investment Bank and the World Bank all entering the capital markets in an attempt to raise massive amounts of resources for their needs. Yet, if we are looking for a massive pile of debt then we need not look further than the U.S.

It was reported recently that the rate of outstanding consumer credit-card debt (just credit cards) has recently surpassed the record set before the onset of the Financial Crisis by reaching $1.02 trillion. Then, in other news, an analyst from UBS has recently been discussing how there is a $1 trillion bubble of corporate debt in the credit markets that have been fuelled by institutional investors being driven to speculative-grade credit in the wake of decreasing yields from bonds such as Treasury Bonds. Student loans in the U.S. are outstanding at an incredible $1.4 trillion, outstanding loans on auto-loans stand at $1.16 trillion (particularly sub-prime auto-debt), and all of this is operating under the umbrella of the impending impasse concerning the raising of the national debt ceiling in the U.S. – Treasury Secretary Steven Mnuchin has been warning Congress that levels will need to be increased, using the Civil Service Retirement and Disability Fund as the emotional black-mail battering ram to get his way – a debt ceiling that now stands at $19.808 trillion and one that will be renegotiated in September of this year. It is clear then that the U.S., like many modern countries, is addicted to debt; yet, the question of how to reverse this addiction is proving as elusive as ever.  

During the campaign trail Donald Trump proclaimed that he would end the credit-related threat facing the U.S. in 8 years by fixing what he saw as imbalances in trade with other countries (something which he suggested would be facilitated by tax cuts for the rich); whilst we can write that statement off as one of the many statements that have or need to be written off from Trump, the behaviour of Trump is a significant indicator of the chances of finding a solution. The reaction to the highs of the stock market (before the North Korea issue hit the headlines) demonstrated a massive u-turn from his election rhetoric, and also signified the need to make the absolute most of any perceived ‘win’ owing to the turmoil that is consistently attached to his Presidency. However, as the hubris of a booming stock market begins to recede, the reality of the political and economic situation becomes ever clearer, and Trump is left with the reality that the debt levels are rising to obscene and record levels on his watch (amongst an array of other problems). As with most elements of the situation, there has been no inclination that a solution is being sought or considered, so if we take a step back and look at the totality of the situation, we see that the President is deciding to create a diversion rather than deal with the issue at hand, and that ‘diversion’ is North Korea.

Though there is no need for a qualifier here, mainly because followers of Financial Regulation Matters already know that the underlying sentiment within every post makes clear that following the promoted opinion of mainstream media is a fool’s errand, the divisiveness of the North Korea issue should not cloud the reality of the situation. To begin with, the incredible rhetoric we are hearing from a sitting U.S. President is having the desired effect in that the mainstream media’s adoption of his frankly ludicrous rhetoric is resulting in increased levels of fear regarding North Korea and the usage of nuclear weapons more generally. Though the ‘politics of fear’ as a concept should be well known, its usefulness still remains, with Trump relying upon it and especially when his position or abilities are in question. Almost none of Trump’s speeches, or his incredible tweets, have an air of peace or calm, with all outputs being based on fear or division and, with no easy ‘wins’ in sight, it appears that Trump has gone to his, and arguably America’s favourite imperialistic play-book. Trump’s adoption of the invasion and militaristic narrative is one that has served a number of leaders throughout history (not just American history) extremely well, but if we consider the large number of experts who have been emphatic in their analysis that North Korea does not actually pose the threat that it (arguably by way of survival) and Trump (arguably, for the same reason) advertise, then the reality of the situation comes into view. Rex Tillerson, the U.S. Secretary of State has been almost dismissive of Trump’s warmongering, strategically-vital aircraft carriers are in fact leaving the region, and the Brookings Institute confirms that the threat posed by North Korea is certainly not what Trump and his supporters suggest. Whilst one must acknowledge the dangers of North Korea, the elevation in rhetoric in fact paints the U.S. President as the greater threat to world peace, a threat that is based upon levering the might of the U.S. to coerce what are, in effect, third-world countries and in doing so move the global narrative to one that the U.S. President can affect, rather than one that he cannot.

Ultimately, that sentiment of narratives that can be affected is perhaps the most important one to consider when we are being bombarded with the ludicrous sentiments like unleashing ‘fire and fury’ and reminding North Korea that the U.S. is ‘locked and loaded’. These statements are simply not befitting of such an established and revered office, but they are indicative of a desperate attempt to shift the narrative. Yes North Korea needs to be challenged, but stifling the economic lifeblood of the country and then reminding them that their people can be ‘destroyed’ is not only unwise, it is perhaps damaging the position of the American government irreparably. Whilst dialogue with North Korea rather than in increase in militaristic tension is needed, the issue serves as a diversion from the fact that Trump is leading an administration that has no idea of how to address the incredible economic situation threatening America on a daily basis. The ease at which Steven Mnuchin offered up the support of civil-service workers as a sacrificial lamb and bargaining chip against the U.S. Congress is demonstrative of an administration whose answer is simply ‘more debt please’ – the danger for us all, however, is if Trump’s slight-of-hand, which he no doubt considers a safe option, backfires, is evidently clear; the sentiment of ‘buyer’s remorse’ on both sides of the Atlantic is almost palpable.

Keywords – Donald Trump, North Korea, Kim Jong-Un, Nuclear War, Credit Bubble, Politics, #finregmatters

Wednesday, 9 August 2017

Regulatory Budgets in Perspective: The Bank of England Issues Yet Another Warning over Brexit

In today’s financial news, the Deputy Governor of the Bank of England – Sam Woods – said that the Bank would see its regulatory capability stretched in the wake of the U.K.’s secession from the E.U. to a point that would demonstrate a ‘material risk to [the Prudential Regulation Authority]’s objectives’. The basis for Woods’ suggestion is that the potential loss of financial ‘passporting’ in the wake of Brexit would both result in dispersed regulatory entities, and also an influx in companies needing to be regulated due to the removal of the ability to essentially outsource the regulation of an entity to another ‘competent authority’. Whilst this point is worth assessing, and this post will briefly do that, it is also worth taking a broader look at the state of the U.K.’s regulatory framework in terms of its capability.

Sam Woods’ comments regarding the ability of the Prudential Regulation Authority (PRA), the regulatory arm of the Bank of England, were extremely direct. Woods further emphasised that ‘we may have to make some difficult prioritisation decisions’ in the wake of the differing dynamic created by Brexit, which comes as a stark warning if we consider that it is those changing dynamics that may (or, more likely, will) encourage speculation, a reduction in quality controls, and so on. The nature of Woods’ warning is based on the increased risks that would accompany the diversification of financial service providers across Europe (we have spoken before here in Financial Regulation Matters about the movement of sectors of financial service provision across a number of countries) in terms of the reduced ability to hedge risks, but also on the increased confusion that will emanate from contractual confusion, as well as the ‘extra burden’ that may come from the repatriation of a number of companies who are regulated by other financial regulators across Europe. However, one onlooker has described how ‘the only encouraging news’ is that the Bank has requested only an extra £5.4 million for its ‘Annual Funding Requirement’ – as the PRA is funded by the regulated entities – which would take its total funding for 2017/18 to £268.4 million. Yet, a question that could be asked is does this news really count as encouraging?

If we begin by looking at the operating budgets of the other financial regulators in the U.K., it will be possible to obtain an understanding of the tools available for regulators with regards to their mandates to regulate and maintain order in the marketplace. Starting with the Financial Reporting Council (FRC), whose role it is to set standards for auditing firms and also help develop the U.K.’s Corporate Governance Code, the news is hardly ‘encouraging’. The FRC is tasked with regulating the accounting industry, amongst other things, which means that it must aim to insert its dominance in a market that is dominated by four firms that are serial offenders; as of 2015, the FRC faced an oligopoly that had a combined income of over £8.5 billion which, when combined with the pressure of providing regulation for seven major bodies responsible for registration and education standards, and conducting well over 1,000 visits per year, the operating budget for the FRC of £36 million for 2017/18 does not add up.

The Financial Conduct Authority (FCA), which as a regulator is tasked with regulating over 56,000 businesses, 18,000 of which count the FCA as their prudential regulator, has a defined aim of protecting consumers, financial markets, and also to promote competition. Yet, for this vitally important regulator who have a massive task ahead of them, their proposed budget for 2017/18 stands at £475.3 million, representing just a rise of £5 million from the previous year. The Serious Fraud Office, although not technically a ‘financial regulator’ – though, as we know here in Financial Regulation Matters, are an extremely competent body despite the aims of Theresa May – currently has a budget of £54 million, despite garnering over £460 million in fines since 2014. The details of all of these budgetary breakdowns are available through the links provided, and it is worth noting that most of these budgets come from levies on the regulated entities. Yet, there is a glowing issue that seems to be ignored more generally.

These regulators, just in regards to the U.K. alone, are tasked with regulating a marketplace that operates in the billions, if not trillions, of pounds. They are tasked with preventing the pervasive and unethical culture that struck in 2007 from happening again, and must balance this task in relation to a wider picture that is defined by an economic downturn that perseveres over the years (the credit bubble is an excellent example of something ‘external’ that these regulators must account for). They do all of this with a combined budget of just over £800 million a year which, when considered in these aggregated terms, is ludicrous. It is ludicrous because we know, beyond doubt, that markets left to themselves will wreak havoc. It is ludicrous because the effect of lax regulation is in front of us every day when we see the increased use of food banks, increased poverty, illness, and depravity. Yet, the small increase in funding required by one of the most influential regulators in the country is ‘encouraging news’ – it is not. What is required is one of two things, and either will suffice. Firstly, and this option is the most righteous, regulated firms should see the amount they have to contribute increased substantially, and should see this increase enforced by legislation. It is not acceptable to have the companies’ contribution limited whilst the public’s contribution is unlimited. However, the alternative to this is that the public, via government spending, substantially increase the operating budgets of the regulators. Whilst this may sound distasteful, it is a social hazard to have financial regulators underfunded, and the cost of providing this extra funding is far less than the cost of rectifying the damage caused by underfunding - the haphazard bonanza we saw in 2008 is a testament to that. Ultimately, there needs to be a societal shift away from the altar of economics. This discipline is extremely useful to society, but at its heart it discounts the effect of the economy – the detachment involved in theories like ‘the economic man’ is fundamentally constraining societal development, and only when that mode of thinking changes shall we see a reduction in the social harm associated with modern finance. 

Keywords - "Financial Regulation", "Financial Conduct Authority", "Prudential Regulation Authority", "Serious Fraud Office", "Politics, Economics", "Financial Regulation Matters", #finregmatters