Thursday, 9 November 2017

How Independent Can a Financial Regulator Actually Be? Saudi Aramco Reveals the Reality for Financial Authorities

Earlier in the year we looked at the British Government’s attempts to attract the Saudi Energy Giant Saudi Aramco to the U.K., for the purposes of using the London Stock Exchange (LSE) as the foreign listing organisation for what will be the largest Initial Public Offering (IPO) in history. In the post we discussed how the Financial Conduct Authority, the regulator tasked with regulating the listing mechanisms within the jurisdiction, was actively attempting to reduce the stringent rules surrounding who can use the LSE to enable Saudi Aramco to bring its record-shattering IPO to London. The obvious issue was that the reduction of standards related directly to concerns that have been mentioned almost consistently here in Financial Regulation Matters and across the majority of the literature/commentary, in that the uncertainties that are fundamentally intertwined with Brexit will cause a ‘race to the bottom’, in a number of sectors including the regulatory sector. There have been a number of occasions whereby the U.K. has flirted with this reality, but has only ever suggested a devotion to that approach; today this approach was arguably confirmed with the clearest signal of all that the British Government is about to engage in a level of ‘mercantilism’ that has to have a demonstrable, and likely negative effect upon the potential levels of prosperity that the majority of British citizens will experience over the coming decades.

The details of the proposed IPO need not be repeated here, as the previous post covered it in enough detail. Essentially, for our purposes here, it is enough to know that Saudi Arabia, a country renowned for its extraordinarily conservative approach and, amongst a list of proposed issues, a number of human rights violations, is attempting to modernise its oil-based society by way of what is being promoted as ‘Vision 2030’ – a wide-ranging suite of reforms that has a reduction in oil-dependency, an increase in infrastructure-related investment, and increasing social rights at its heart. Whilst the extremely important issues of Human Rights, Social Rights, and domestic investment are the target for Vision 2030, with development being reported in these areas (although questions are being raised to whether lasting development can be achieved), the focus for us is the attempt to liquidate just 5% of the holding in Saudi Aramco, which could see the company valued at over $2 trillion, although these estimations are continuously reducing. With the IPO being performed through the Country’s own listing mechanisms and one other, there has been an ever-increasing battle to seduce Saudi Aramco to the major financial centres of the world, with New York, London, Tokyo, and Hong Kong vying for their favour. Earlier this week U.S. President Donald Trump sent yet another in a never-ending barrage of tweets in which he encouraged Saudi Aramco to choose New York, confirming the obvious by saying that it would be ‘important to the United States!’. Then, today, we received the British Government’s response.

With the unapologetic back-bending approach taken by the FCA initiating an avalanche of criticism, the Government has now decided that it needs to be much more direct. It was announced today that the UK Export Finance department is preparing for a $2 billion (£1.52bn) loan guarantee for the Saudi company, which comes on top of a credit support arrangement totalling of £500 million that has been developed over the past 5 years. Whilst the British companies who may benefit from this arrangement have yet to be named, a number of events are lined up to allow British suppliers to win contracts with the Saudi company. The deal, which would be the second-largest on record after last year’s $2.1 billion credit arrangement for Oman to purchase military hardware from BAE Systems, has predictably drew heavy criticism, with the former secretary to the Treasury – Nick MacPherson – absolutely clear that the Government’s arrangement ‘would be a further lurch in descent to mercantilism. Mr Gladstone will be turning in his grave’. With criticism coming from Treasury Select Committee Chair Nicky Morgan and the Institute of Directors, who both urge caution against mercantilism, it is extremely difficult not to conclude that this deal is anything more than a bribe to entice Saudi Aramco to London. Yet, this should not even be a controversial statement, because the British Government has appointed a ‘special representative’ to Saudi Arabia to help assist (and position the U.K. with regards to) the Vision 2030 strategy. Also, in the current climate, why wouldn’t the Government take this approach at the same time that Brexit negotiations are developing at a snail’s pace and leading global political figures like Wilbur Ross, recently caught up in the ‘Paradise Papers’ scandal, suggesting that Britain will only find favour with the U.S. if they scrap rules put in place by the E.U. and accept American regulations like those that allow for the chlorine-washing of chickens. The Anglo-American headlong rush to divisive and nationalistic political systems in 2016, which many did not follow, is continuing to bleed into society and effect the futures of large sections of the global populace, but for us here it is worth asking what this means for the regulator?

What it means for the regulator is that, now, there can be no pretence that they operate for the consumer or the every-day citizen – they do not. Whilst the conservative-supporting reader may suggest that economic growth, at any cost, is in the interests of citizens, the Financial Crisis, and other crises, suggest the opposite. In just ten years after the Crisis, we now have the remarkable situations whereby City regulators and Government departments are actively bribing foreign firms, linked to political regimes which have questionable track records and who are currently engaged in particularly brutal wars, not only to the country but on their terms. This is not just a regulator allowing for the listing to take place, it is the regulator lowering the standards of the process to allow for minority shareholders to have their protective capacity lessened. This is not just a country that is saying ‘please choose us’, it is a country providing the company in question with a particularly large credit arrangement to induce it into coming to London. These developments suggest something that we should probably already know, that regulators are agents for the development of business, not protectors of the public. Some may read that and say ‘why is that wrong?’, and probably it is not wrong – yet, the question then should be if regulators are not the ones to protect the public from the iniquities of the financial system, then who is? To find the answer to that question, we need only look at the last ten years…

Keywords – Saudi Aramco, Financial regulators, Financial Conduct Authority, London Stock Exchange, Initial Public Offering, Brexit, Politics, Business, @finregmatters.

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