Thursday, 31 January 2019

“The Fearless Girl” and the Importance of her Fearlessness: Gender and the Boardroom

Today’s post departs from the usual approach adopted here in Financial Regulation Matters. Usually, we will discuss elements within business and regulation that are breaking, have a guest post, or we will preview forthcoming articles and books from this author. Usually, the posts are not written in first person, but in this post I will use that approach to discuss why the “fearless girl” statue is the focus for this post.

I have visited Manhattan on a number of occasions, and those close to me know that New York City represents something very special to me. Quite often, when visiting the city, I will take a trip to Wall Street and take in the surroundings. One element that is often on my to-do list is to take a look at the legendary ‘charging bull’ statue located near Battery Park and Wall Street. Whilst the location is prime, it is worth noting that the original location, as placed by the statue’s creator Arturo Di Modica, was directly outside the New York Stock Exchange (we will discuss location later on). The statue, as a piece of art, brings forward a number of emotions. Despite the many tourists who visit the location of the statue and have their pictures taken with it (some, for some reason, have their pictures taken behind the bull which is a sight to behold, mostly out of confusion!) – it has been said that the statue is ‘one of the most visited, most photographed and perhaps the most loved and recognised statues in the City of New York’ – the statue is particularly thought-inspiring. An article in Business Insider talks of how the statue can be both seen as a symbol of the ‘strength and power of the American people’ (according to Di Modica), ‘an image of a surging market in the lore of high finance’ (according to a New York Times article published not long after its erection in 1989), or a symbol of America’s ‘money, power, greed, or high finance’. It is probably telling that, perhaps, all of these statements are true. Personally, the charging bull represents strength, determination, but also represents a forward-moving mentality that arguably defines the city itself. The global domination of American finance, centred in the City, is perhaps perfectly illustrated in the poised posture of the Bull. Irrespective of what it means to every individual (a ‘selfie’ opportunity or meaningful piece of art), it is indisputable that it is impactful.

However, on the eve of International Women’s Day in 2017, State Street Global Advisors commissioned Kristen Visbal to create and erect a 50-inch statue named ‘Fearless Girl’. The statue was originally erected directly opposite the ‘Charging Bull’ and attracted much attention. State Street suggest on its website that the statue generated over 10 billion social, print, and digital media impressions. Di Modica himself however protested against the erection of the statue, not on the grounds of its connection to gender equality but in relation to the artistic integrity of the ‘Charging Bull’ – he argued that ‘contrasted with the soft, altruistic characteristics of the bronze girl… “Charging Bull” now appears menacing and aggressive’ (quote taken from The Washington Post and not Di Modica). It was also suggested that State Street’s connection to the statue was borne out of a marketing campaign for its ‘SHE Index’, with the plaque at the feet of the ‘Fearless Girl’ reading ‘Know the power of women in leadership. SHE makes a difference’. State Street responded by arguing that this was not the case, and that in fact the company has been a vocal supporter of gender equality in the financial sector, with three of its 11-member board being women; Stephen Tisdalle, State Street’s Marketing Officer, stated that ‘what this girl represents is the present, but also the future… she’s not angry at the bull – she’s confident, she knows what she’s capable of, and she’s wanting the bull to take note’. It is widely stated that art is supposed to inflame thoughts, expression, and debate and it is certainly the case that these two pieces of art do that.

Yet, when I first saw the opposing statues it left quite an impression. The young girl depicted by the statue demonstrated defiance, resilience, determination, and most of all courage. Her juxtaposition against the Bull was clear, which perhaps supports Di Modica’s argument. Her diminutive stature was overshadowed by her poise and direction, making the statue particularly impactful. However, on the 28th November 2018 the ‘Fearless Girl’ was removed from the location opposite the Bull and moved to the pedestrianised zone directly opposite the New York Stock Exchange. It was suggested at the time that this was done on safety grounds, owing to the popularity of the two statues and the busy nature of the traffic on that intersection. It was also suggested in April of last year that the Bull would be moved to outside the Stock Exchange alongside the Fearless Girl but, for one reason or another, that has not happened – one may be lead to question why it was for the Fearless Girl to be moved on safety grounds, but not the Bull who is apparently one of the most photographed icons in the City. The Executive Vice-Chairwoman of the NYSE welcomed the Fearless Girl, stating that ‘we see [in her] our daughters, mothers, nieces. She represents potential, progress and hope, but also all the women who have fought for equality before us’. Now, the Fearless Girl resides directly opposite the NYSE and, as you can see from the picture for this post (picture courtesy of Danielle Smith).

The Fearless Girl, standing opposite the NYSE, to me now takes on a whole different character. When she was facing the Bull, it was very contextualised against a symbol in the Charging Bull. Now, however, she is standing opposite an institution that is a real representation of American power. The NYSE has a long and storied history, and its role as a facilitator for moving money around, from, and to the American economy is unrivalled in terms of financially-related icons in the American psyche. Now, the Fearless Girl stands, hand on hips and with her head raised up towards the iconic building, fearlessly. Art is defined by the individualistic effect that it has, and I am certain that the statue will elicit different reactions which is tremendously positive. When I visited earlier this month, I was taken aback by the change in her appearance within the new context. It is very much a parallel understanding, but she appears to be much smaller in the new context, but at the same time she has grown immeasurably in stature. Now, her resolve appears to be solidified, irreversibly. When I considered writing this post, I thought deeply about my position as a male commenting upon issues affecting women within society. There are elements to the existence of a female that I cannot obviously know, but it struck me that this 50-inch statue developed by a company that itself has had a number of gender-equality issues, has transcended its origins – its impact on me was considerable, but I wonder what impact it would have on a girl, or a woman, examining it as I did. Would a young girl take inspiration from the context within which the statue exists? Obviously, there is no answer to that question, but one would certainly hope so.

This consideration of the Fearless Girl’s impact upon women of all ages, as well as men of all ages, led me to think about aspects that I researched as part of this blog, and as part of past degrees. We have looked at the issue of inequality on a few occasions here in Financial Regulation Matters, including variances such as gender inequality, race inequality, and many other variances. However, I was reading an article in Business Insider recently that cited a recent study into the issue of gender diversity at the CEO level, and interestingly the correlation between that issue and the careers of those at that level. The academic article, written by Vishal Gupta, Sandra C. Mortal, Sabatino Silveri, Minxing Sun, and Daniel B. Turban for the Journal of Management – entitled You’re Fired! Gender Disparities in CEO Dismissal – aims to examine ‘whether CEO gender influences the likelihood of dismissal’. The researchers discuss the opposing arguments within the literature that suggest, on one hand, that women are given preferential treatment compared to men – ‘female leadership advantage’ logic – whilst on the other hand women are disadvantaged even after obtaining the highest organisational positions – the ‘glass cliff’ scenario describes where ‘women in leadership positions face more perils and risks compared to their male counterparts’. So, to examine this issue, the researchers focused on large public firms in the US. Specifically, the study uses board variable data, accounting data, stock return data, and a large sample consisting of nearly 2,400 firms from 2000 to 2014 (CEOs who had been in office for less than a year were not included as they are less likely to be dismissed). The results of the study suggest a number of crucial understandings. Though the total number of dismissals for men was substantially higher, relatively ‘the percentage of women dismissed is significantly higher than men’. Furthermore, the study finds that ‘dismissal probability for female CEOs is less likely to be influenced by changes in performance than male CEOs’. In addition to this, the study finds that when a company is operating at ‘low levels of performance’, the dismissal probabilities between the two genders do not differ, but when the organisation’s performance improves the chances of a female CEO being dismissed are significantly higher than that of their male counterparts. Ultimately, the study concludes that female CEOs are 45% more likely to be dismissed, which is an extraordinary statistic.

I will not discuss every element of the study, but its findings are fascinating. The question is, however, what does it tell us in reality? The scholars discuss the concept of ‘bias’ being commonly referred to as one of the key issues, but that the study adds to the discussion by confirming that women who break past the bias barrier are still extremely vulnerable to having their livelihoods affected even after they reach the top of their fields. Bias, which is a societal ill unlike most others, is clearly a core issue that must be addressed, but those words mean very little. Yes, it must be addressed, but how? That is a very difficult question to answer, and I do not offer a quick-fire way that is achievable. One way is to increase the education surrounding the issue, and studies like the above help to influence that movement. However, it takes a commitment to that education, and a real willingness to act upon an enlightened state that will make the real difference. The issue is can that really happen in this world?

Nevertheless, if we return to the ‘Fearless Girl’ statue, the effect of the understanding derived from the study is impactful. The hope that I, and many others see as represented by the statue becomes contextualised in a much different manner. For, say, a young girl looking at the statue opposite the NYSE and dreaming of a high-flying career, what effect would the study have? The positive spin would be that, when that young girl grew into a woman, things may be different because of studies like the one above that highlight the issue, and the pathway being developed for her by women who battle against such bias even at the top of the hierarchy. A negative spin would be that a vision is being developed at the ground-level which is not replicated nor represented at the highest levels; the take-away sentiment is that, when it comes to making money and leading institutions, it is still regarded that a male will do a better job. Whether or not this is technically correct is another matter, and with the incredible amount of variables that would be considered when attempting to scientifically examine that issue – though success is success, and there is no reason why a male should be more competent than a female, or a person of one race more competent than another in a balanced world – it is not something to discuss here. But what is to be discussed is the extraordinary impact that the concept of ‘bias’ has – it is fundamentally attached to society and, if we were to take a holistic view, is perhaps the main impediment to equality. Yes, again, education and enlightenment to these issues is important, but it will take much more than that. It takes more than lip-service, and paradoxically to this post, it takes more than a statue. What it will take is a fundamental and irreversible commitment to removing those barriers and examining the competency of people, not just categories of people. The study suggests that this competency-based assessment is not the driving force behind decisions at the CEO-level, and that is something that must change.

Yet, despite this, the ‘Fearless Girl’ is tremendously important. As a piece of art it is impactful, but opening pathways of dialogue on this issue is the statue’s greatest achievement. It strikes me that such a diminutive piece of metal can be so impactful, but that is the beauty of the ‘Fearless Girl’. Despite her origins (her ties to State Street should likely be ignored), her new location, in my eyes, has elevated her importance. It draws people now to the NYSE, and gives them the opportunity to reflect upon her performance away from the hustle-and-bustle of the Charging Bull location. Whether or not enough people take this opportunity to reflect and consider the issues at hand are another matter, but one thing is for certain in light of the study we have discussed in this post – the ‘Fearless Girl’s fearlessness is a necessary characteristic for young girls and women of all ages in the pursuit of equality. Furthermore, fearlessness is a necessary characteristic for all people seeking equality. I encourage you all, if you visit the exceptional city of New York, to visit this representation of equality in her new home.

Keywords – ‘fearless girl’; equality; politics; business; bias; gender; @finregmatters

Tuesday, 29 January 2019

The Conflation of Business and Politics: An Update on the RBS Global Restructuring Group

Unsurprisingly, RBS and its now-infamous ‘Global Restructuring Group’ (GRG) have been covered a number of times here in Financial Regulation Matters (most notably here, here, and here). We have also analysed the relationship between the regulators, namely the FCA, and the bank itself on account of the massive bail-out the bank received from British taxpayers at the height of the financial crisis. We have called into question the ability, or capacity of regulators to efficiently regulate and punish the bank owing to this ‘special relationship’ and, in today’s post, we will look at the latest twist in the tale that ‘MPs have referred to as the worst scandal since the financial crash’.

In the previous posts linked above we discussed and analysed how RBS, via its GRG group, failed thousands and thousands of SMEs (the BBC cite 16,000) with a large number of those companies ending up ruined by decisions taken by the GRG unit – the business media state today that ‘many of them were ruined and others lost not only their livelihoods but their marriages and their physical and mental health’. The scale of the issue is massive and discussed in the links above, but today there was a development that is ever-so-slowly being advanced by the business media. Oliver Morley Estates, a warehousing company, is currently engaged in a legal battle with RBS as the founder, Oliver Morley, claims that the bank owes him £100 million for the damage caused to his business whilst under the auspices of the GRG. The case, which is ongoing, is based upon claims that the GRG placed Morley’s business under ‘economic duress’, after which the bank’s property arm – West Register – acquired his assets. As part of Morley’s case, the BBC and The Times have been the first to pick up on the developments that have been advanced by the claimant party. It is being suggested by these media outlets that evidence has been put forward which suggests, rather directly, that it was in fact the Asset Protection Agency (APA), a government agency who we will cover shortly, that was essentially hamstringing the GRG for a number of reasons. The BBC suggest that official APA documents suggest that RBS ‘was prohibited from releasing GRG customers from secured loans without its approval, giving the Treasury an effective veto on any re-financing by business customers wanting to exit GRG’. Clearly, this is quite some claim. It is therefore unsurprising that The Times suggest that Morley will be bringing a case against the Treasury in due course on that very basis, but the issues continue to mount when we analyse the processes involved. It was suggested in documents advanced, namely specific emails detailing the information chain, that RBS wanted to support a re-financing deal that would see Morley’s company exit the GRG and obtain financing from another bank, believing that course of action to be ‘the best option for the bank’ – after all, the £70 million worth of loans that Morley held was substantial, and could be removed from the books of the troubled bank. However, the emails describe how the APA blocked this suggestion and instead wanted the assets of Morley’s business to be transferred to the bank’s property arm. The RBS managers, in the same email trail are clear in their understanding, calling the decision the APA’s ‘craziest decision yet’ but that ‘the APA’s views are clear and unlikely to change’.

It is important to note here two things: this post is reacting to breaking media articles, and the case is still ongoing. However, this is a massive twist in the tale that puts the government, via the Treasury department, right at the heart of what is being referred to as the biggest scandal in the UK since the Financial Crisis. This development, based upon a systemic decision in the late 2000s to use taxpayer money to prop up a failing and negligent and/or criminal banking sector, is a telling one in that there are still conscious decisions being made in the banking institutions’ favour, over SMEs in this case. Governments are theoretically developed to act for citizens, and governments within capitalist societies are, for some, theoretically designed to foster business development and protect those that engage in business – neither of those viewpoints are on display here.

If we take a moment to look at the APA and its role, a number of things come together in this story. The APA has now ceased operations as of October 2012, but when it was in operation it existed from January 2009 to ‘protect banks against further exceptional losses on their assets’. According to the Parliamentary report discussing the Agency, the Treasury made changes to the scheme ‘to better protect the taxpayer’ and that RBS and Lloyds had agreed to meet published targets for ‘lending to households and businesses’. However, the report fails to mention that the relationship between the Treasury and the target banks would be particularly close and, if today’s reports are to be believed, the relationship was one where the Treasury exerted direct control over the business of the target banks. In 2010 it was being reported that the APA were forcing RBS to take on advisors of the Agency’s choosing with regards to the handling of toxic assets, but this current suggestion takes our knowledge of the relationship to a new level. The BBC suggests that the stated goal of the APA was to ‘maximise the value of the assets ion the scheme and reduce the probability of payouts’ – this makes perfect sense for an Agency designated the task of monitoring the massive bailout given to RBS. However, the influence of the APA is now being brought to light. In the BBC’s article, they discuss how the FCA’s lack of investigation into the GRG unit, which eventually saw the Treasury Select Committee release the scathing report itself was based upon the suggested fact that RBS ‘would have been able to point at government involvement’ for many of the issues brought to light via that supposed investigation. This, if proven to be the case, fundamentally changes this story.

RBS, and the GRG unit, committed acts that are appalling when we consider the purpose of the unit and those who it affected. Although not exactly the same as the infamous unit with HBoS, driving businesses into the wall and scavenging on the remains is detestable. However, these allegations against the government’s own Agency mean that the decisions taken by the GRG unit were part of a systemic approach to favour banks rather than citizens and SMEs. There is an argument to be advanced that all of this was done in the name of maximising on the injection into RBS and that, eventually, the taxpayer will not be negatively affected by the whole sorry tale. But, that does not stand up under scrutiny. With such a massive bailout, at a time when social spending was slashed massively (and which continues to this day) and the British society continues to suffer from the savage effects of austerity, the reality is that the British society, taxpayers included, have been negatively affected by this situation, and massively so. Whether the government sees a full return on its initial injection is, at this point, bordering upon irrelevant. Perhaps the reality is that the government has showed its hand and, now, that approach is being brought to the public’s attention. Favouring banking elites that brought the world to its knees in the name of short-termism and profiteering is something that cannot go unnoticed nor unchecked. It is said that the FCA will be conducting further investigations into the GRG unit but, if today’s reports and the allegations are true, the conduct of the APA must also be investigated. It is not an acceptable truth that the government can and will intervene in private business for the benefit of private business. If RBS had to fail for that to be the standard, then what would have been the impact? Potentially contagion would have been witnessed at a much larger scale, but arguments that society would be negatively affected by allowing such an institution to fail are hard to hear when we know now, with the benefit of hindsight admittedly, that society has been negatively affected by allowing them to survive despite the actions they wilfully took in the pre-Crisis era. It is important that the government’s role in this debacle is brought to light, analysed thoroughly, and people are held to account. But, the sad truth is that as the country deals with one of the major results of the Crisis – political instability as demonstrated by the Brexit catastrophe – the results will overshadow the cause. The country is primed to focus on the result of the infection and not the origin of the disease itself. The conflation between government and private business is almost tangible and it is likely that this current court case will reveal a number of aspects to that established and thriving relationship.

Keywords – RBS, GRG, Banking, Politics, Regulation, UK, Business, @finregmatters

Friday, 25 January 2019

Mike Ashley: Britain’s “Mr High Street”

Here in Financial Regulation Matters we have discussed the precarious future of the British high street on a number of occasions, ranging from discussing the collapse of BHS, the rise in the number of corporate failures, and the impact that the personal debt crisis is having upon the futures of high street stalwarts. We also looked recently at the case of House of Fraser, both in relation to its near-collapse and then its subsequent rescue. As we speak, another British high-street mainstay – HMV – is in crisis talks over a rescue bid from Sports Direct supremo Mike Ashley and, if Ashley does incorporate HMV into his retail empire, then his imprint on the British high street will be more than considerable. Therefore, in this post, we will ask who is Mike Ashley and question how the British high street will continue to be transformed in the wake of such rapid development.

Starting with HMV – and if reports are to be believed – Mike Ashley has ‘enter[ed] the bidding for HMV’. The Financial Times suggests that Ashley is one of several parties bidding for the struggling retailer, which has entered administration for the second time in just six years and has put more than 2000 jobs at risk. After being purchased by Hilco Capital in 2013, the 125 store group has since struggled with the ever-changing and volatile environment surrounding high street retailers in the current climate. Additionally, The Independent reports that Ashley is considering making a move for another struggling retailer – Debenhams – which is currently seeking to refinance its debt position after a difficult 2018; Ashley’s Sports Direct already owns 30% of the retailer. The newspaper reports that, in relation to HMV, Ashley tabled a bid through the retailer’s administrators KPMG last week although, as of yet, there is no news as to whether this bid has been accepted. It is also being reported that there is some will on behalf of associated suppliers to see HMV continue, as there are fears that losing another major retailer in this sector would see Amazon’s position in the marketplace strengthened even more. If that is the case, then Ashley’s play for HMV may bear fruit. In that eventuality, Ashley will have gained a considerable foothold on the British high street with him acquiring House of Fraser, Evans Cycles, and purchasing large stakes in French Connection and Debenhams in 2018. So, who is this massive presence on the British High Street?

Michael James Wallace Ashley is 54 years old, and was born in Burnham. Ashley is renowned for his reclusive nature, so very little is known about his early years. It is suggested that after graduating from Grammar School at 16, he played squash at the county level until an injury cut short his playing career. In 1982, after relying on a £10,000 loan from his family, Ashley opened a sports and ski shop and then, subsequently, opened a number of other stores across London – by 1990, he had ‘opened 100 stores across the UK’. Towards the end of the 1990s, Ashley rebranded these stores as ‘Sports Soccer’, which would eventually become the ‘Sports Direct’ brand we know today. Ashley’s pathway was not typical, and there are a number of anecdotes which exist to supplement this narrative of Ashley becoming the business powerhouse we know today his own way. The Guardian details a story how, when meeting with retailing powerhouses in the early 2000s to discuss the pricing of football replica kits, Dave Whelan – the owner of former high street retailer JJB Sports – mistook Ashley for a gardener and told the young entrepreneur ‘there’s a club in the north son, and you’re not part of it’. The newspaper then questions whether that interaction was the motivation, but Ashley then went on to turn into a whistleblower and reported his rivals to the Office of Fair Trading for fixing the price of football kits – the result was a devastating blow to the industry and saw a number of retailers investigated and ultimately fined.

It was commented that the ‘club in the north’ had been smashed by a ‘canny and aggressive operator’, and that canny and aggressive operator embarked upon a massive M&A spree not long after this period. Since then, Ashley has acquired a myriad of brands including Dunlop, Slazenger, Karrimor, Kangol, and many others. These acquisitions allowed Ashley to stock his stores with low-value products that would be devoured by the British public. During this period of expansion, Ashley would suffer personally, with the well-publicised divorce from his then-wife Linda Jerlmyr in 2003 resulting in a then-record divorce settlement of £50 million. Yet, in 2007, Ashley embarked on his most public business venture yet when he purchased Newcastle United Football Club for an initial £55 million, rising to £133 million. This decision has been one that has had mixed results for Ashley. The move has propelled him into the British public like no other, such is the appetite for Football in Britain, and has forced him to be more public than one assumes he would like to be. However, only yesterday it was announced that Newcastle United are, based on 2017/18 revenue, the 19th richest football club in the world. Whilst Ashley is embroiled in public discourse over his ownership of the club, and is technically looking to sell the club, it is proving to be particularly lucrative.

Yet, this story of a self-made British billionaire contains controversy too. His lifestyle is something that has filled many column inches, with stories of excessive drinking, large gambling ventures, and an overall difficult personality surrounded by a very close circle being chief amongst that coverage. However, it has also been noted that Ashley is courteous, professional, and forward-thinking by a number of people who have worked with him in the past. However, perhaps one of the most damaging controversies emanated from a series of reports into working conditions at Sports Direct’s massive warehouse in Derby. The Guardian, in producing a series of investigative reports, likened the warehouse to a ‘gulag’ and observed a number of work practices that it described as ‘workhouse’ not a ‘warehouse’. The details of the investigation can be found here, but the impact upon public perception should not be underestimated.

As is the way with media cycles, however, the dust soon settled after those investigative reports in 2015. Now, the focus is on both the tycoon’s handling of Newcastle United, and his approach to purchasing a number of high street brands at discounted prices, on account of their struggles. There has been opinion in the press that this HMV deal will be a deal too far for Ashley, and that ‘he has his hands full with House of Fraser’. This may be the case, but analysing Ashley’s development suggests a different eventuality.

Ashley is in the process of reforming Debenhams, and with his takeover of House of Fraser now complete, it is likely the British high street will some amalgamation of the two brands. Additionally, if he can purchase HMV, there is a natural amalgamation between that brand and the Game brand which he already owns. It appears that Ashley exists on the principle of economies of scale which, although it is a rather simplistic understanding of what is a very complicated business, provides a model for both why Ashley has been successful and also what will likely protect him from the American powerhouse, Amazon. Though retail figures fluctuate wildly, it is not being suggested that the high street will cease to exist – people are continuing to shop on the high street. What is changing, however, is the methods with which retailers can operate in such an inhospitable climate – perhaps Ashley’s model is the only one which can survive such an environment.

The self-made billionaire is constantly being questioned, and having his business decisions queried. Yet, if we look at his progression, he is extraordinarily successful. Critics of his move into football, and there are many, need only look at the recent financial figures from the footballing world to see why he was attracted to the marketplace in the first place. For Ashley, the goal is to develop and expand, and as a result he is a very rich man. His methods are often questioned, and examples such as the working conditions in Derby make his story one of massive public interest, but it is unlikely the trajectory of his story will change any time soon. In following the pathway Ashley has followed – ruthless expansion – there will often be many controversies (we can think of Apple using sweatshop labour where many commit suicide as a prime example), but he will continue his success. That success will likely be typified by a different high street than what the British public are used to. The new high street will be characterised by lower cost items, and a lot of cross-pollination between the stores – expect to see a number of the same brands available in very different stores. The British public will adapt to the changes, and Ashley will more-than-likely rewarded for having the foresight to capitalise on the misfortune of a number of his rivals, just as he did in the sporting retail arena.

Keywords – Business, Mike Ashley, Retail, UK, @finregmatters

Monday, 7 January 2019

The Post-Crisis Debt Cycle

In today’s post, we will look at something which we have covered a number of times here in Financial Regulation Matters, and that is the personal debt arena which continues to increase. After official figures were released recently, we can continue to chart this dangerous phenomena. However, we will examine this issue in relation to a number of connected issues, like consumer spending, to examine what is, in effect, a massively systemic cycle.

It was reported recently that, in November alone, more than £400 million was added to the total personal debt owed in the UK alone, which now stands at £72.5 billion. In the UK, the average household debt now stands at £15,385 and this figure is in relation to a number of sources of credit including credit cards, banks, and the auto-sector. In the US, the total household debt stood at just over $13 trillion as of August last year, whilst Chinese debt is continuing to rise. Although we are talking about personal debt in this post, it is also interesting to note that global debt is on the rise as well, with that figure now standing at incomprehensible $184 trillion. Going back to the UK, this latest figure ‘stands 24 per cent higher than it did on the eve of the financial crash, while consumers are paying off their cards at a higher average level of interest than in 2008’. Before we look at the associated economic issues in the larger sense, the business media have bene quick to focus on the individual impact, and for good reason. Associated charities have mentioned how people with low incomes or living in poverty are turning to credit cards because of their heavy marketing and easy availability, whilst the Money Advice Service has stated that whilst 8.3 million people are over-indebted in the UK, 22% of adults in the UK have less than £100 in savings. The fear is that this precarious position is precisely the opposite of what is required if the system is to experience another shock, even if it is not on the scale of the financial crisis. Individually, such people are susceptible to a number of personal shocks, like job losses or unexpected bills, which would then lead to a number of financial difficulties on top. The General Secretary of the Trades Union Congress (TUC) said recently that ‘household debt is at crisis level. Years of austerity and wage stagnation has pushed millions of families deep into the red. The government is skating on thin ice by relying on household debt to drive growth. A strong economy needs people spending wages, not credit cards and loans’. This raises an important point about the linkages between debt and economic growth, as a number of recent stories show us.

We looked at the issue of growth on the British high street on a number of occasions last year, and only last week it was reported that the British retailer Next had recorded an increase in revenue over the Christmas period, against its own expectations. Whilst the company is rightly anxious over making any financial predictions with the year that the UK has in front it, the news has been well received by Next, its investors, and the High Street moreover. However, in other news, ‘a “perfect storm” of factors’ has resulted in new cars sales in the UK falling to their lowest since 2013, which has caused relative shockwaves. A provisional figure of 2.36 million ‘units’ sold in 2018 represents a 7% drop on 2017. The Society of Motor Manufacturers and Traders said there is a confidence problem in the UK, based upon aspects such as Brexit and a shortage of some vehicles due to a new emissions testing scheme, although analysts are suggesting that a much bigger ‘storm’ lays ahead. We will, no doubt, cover this issue in more detail as the year progresses, but what of the connection between rising personal debt and these larger economic issues?

The reality is that economic growth is now, fundamentally, tied to consumer borrowing. Gone are the days when the spending of wages constitutes growth because, quite simply, there would be very little growth to speak of. As we live in a world where consecutive and consistent growth is the staple of the modern economy, and where any shocks (such as that caused by Apple’s relatively poor performance recently) are front-page news, relying on something which has taken the biggest blow since the Crisis is not an option. The effect of this is that personal credit is not only easily available, but systemically encouraged to continue to feed economic growth forecasts. That economic growth is something separate to the real world is the reason why this current era is being referred to as a ‘personal debt bubble’ because, quite frankly, something has to give. Yet, the political arena is now consumed with the notion of the ‘here and now’, and focusing on making any change that would affect the economic ‘here and now’ is not only not considered, but actively discouraged. The result, therefore, will be the same as always. The growth in personal debt is a massive indicator that lessons from the financial crisis were not learned. Perhaps lessons were learned with respect to RMBS, derivatives, CDOs and CDSs (although this is highly debatable), but the lessons that needed to be learned about short-termism and cyclical behaviour clearly have not been learned. We can expect to see more news about the debt levels rising, people living in a consistently precarious position, and associated markets suffering as a result. Small ‘wins’ like that experienced by Next are not to be considered the norm, as it is more likely the experiences of the auto industry in the UK will become the standard moving forward. Each jurisdiction is different and therefore will have different indicators, but the message is the same – cyclical thinking is here to stay.

Keywords – Finance, Debt, Borrowing, UK, Global Debt, Politics, Business, @finregmatters

Tuesday, 1 January 2019

2018: A Regulatory Year in Review

As 2019 begins and we look back on 2018, it has been, as always, a busy year for the world of business and the regulators tasked with controlling it. In this review post, we will look back over the year by sector, and discuss some of the flashpoints to analyse whether there are any themes that can help us foresee what 2019 has in store. Before that, I would like to thank everybody for their continued support of the blog, and also all of those kind contributors who have provided guest posts throughout the year. Also, in a bit of shameless promotion, my first two books are now available for purchase and I would like to thank everybody at Routledge for bringing Regulation and the Credit Rating Agencies: Restraining Ancillary Services to life, as well as everybody at Palgrave Macmillan for bringing The Role of Credit Rating Agencies in Responsible Finance to life.

A Year of Failure

There were a number of high-profile failures this year, and many were socially impactful. In 2016 we witnessed the collapse of BHS with thousands of employees left stranded and at the mercy of the Pension Protection Fund, but this year we watched as Carillion, the contractor intertwined with the Government via a ‘private public partnership’, struggle and ultimately fail. The impact of the failure was far-reaching, with key hospitals (amongst other socially vital institutions) left unbuilt. The fear was that ‘contagion’ would set in and cause a number of other vital providers to fail, and at the end of the year we witnessed that fear become a reality with the news that Interserve was also struggling. Right at the end of the year the news was that Interserve had managed to agree upon a rescue plan, despite the collapse of their share price, but in reality the provider teeters on the edge of collapse just as Carillion did at the start of the year. This led us to discuss the fragility of the ‘PPP’ model, and the importance of a governmental safety-net, despite the reluctance of certain political parties to accept that reality. Yet, other producers struggled as austerity, despite the claims of some that ‘austerity is over’ continued to take hold. The famous toy brand ‘Toys “R” Us’ failed earlier this year, bringing an end to a high-street icon in the UK and taking thousands of jobs with it. Whilst we also saw a number of firms disappear including Maplin, Conviviality, and Poundworld disappear. Furthermore, only the introduction of Mike Ashley, who strengthened his grip on the British High Street as a result, saw House of Fraser saved in the final minutes of its existence. If we align this to the fact that many families are still struggling in this post-Crisis world, it is clear to see that austerity is not over. In fact, it is very much still alive and so are the consequences. Consistent increases in food bank usage, a persistent attack on the benefit system, and also a continued assault of the plight of children from poorer families means that, for many, 2019 will be a similar story to that of 2018: struggle and hardship.


In this blog, there is a purposeful focus on regulators and, in the UK, it is difficult to look further than the FCA. The FCA has taken on a prominent role in the wake of the restructuring that took place after the Crisis, and as such sees itself involved in a number of key societal issues. Arguably, the biggest story this year was that of RBS and the performance of its ‘GRG’ unit which despite having the remit to help SMEs actually drove a number into the wall. Akin to the same issue at HBoS, the GRG unit was widely criticised for its performance and, as such, the FCA was looked upon to regulate efficiently and protect those who had dealt with the particular unit. However, the FCA chose to restrict information to the public and withhold a key report that detailed a number of systemic issues that made the GRG’s negative effect possible. This was discussed in February when the Treasury Select Committee, and not the FCA, published the full report for the public. Whilst not absolute in its condemnation for the GRG unit, the report was damning for RBS and its role, which led us to discuss in March ‘has the FCA “gone soft”, or are its hands tied?’. The reason we asked this is because the regulator was more than forthcoming with punishments for certain people and firms (the Co-operative’s Paul Flowers was cited) but were less forthcoming with punishing RBS. We asked why, and struggled to look past the fact that RBS, as a result of the Crisis and the tax-payer rescue of it, is societally important for the future of the UK, particularly as it faces such a tumultuous period as a result of Brexit. Though the regulator is independent, it cannot be overlooked that they take the political, and also geo-political realm into consideration when deciding the ferocity with which they will punish.

This theme was repeated with other regulators, like the FRC and the SFO specifically. The two regulators had difficult years, with the FRC facing a massive re-structure after years of tame regulation, and the SFO coming into consistent conflict with the Government after a productive 2017 (as evidenced by its victory when pursuing Rolls Royce for corruption). The SFO, which as we have discussed is in line for a re-structuring and merging into the National Crime Agency, suffered a humiliation in its pursuit of Tesco executives at the end of the year, which leaves its new leader, Lisa Osofsky, with a difficult task ahead of her in 2019 as she battles to keep the SFO sailing in the right direction. It is clear that regulators have to balance a number of competing issues, and that often those issues are things they cannot really cite when making decisions. The impact of Brexit, and the inevitable upheaval it has and will continue to produce, is a constant factor for British regulators. Moving forward, it is almost impossible that the same theme will not be repeated, with the focus needing to be on the interest of the country as it moves into its post-Brexit phase.


As if often the case, banks remained under the spotlight throughout the past year. A number of stories stand out, chief amongst which is the continuing issues with RBS. With its former leaders facing court cases in 2017 (which eventually did not come to fruition), the bank would be catapulted into the spotlight via its notorious ‘Global Restructuring Group’ division (GRG). In February we discussed how this was an emerging issue for the bank, and as mentioned above we would witness the bank and the FCA come under massive scrutiny for a report on the processes at the GRG which, thanks to the FCA, would be published but heavily redacted. At the same time, it emerged that the Treasury had asked the US DoJ to bring forward punishment for the bank which eventually resulted in the bank being fined $4.9 billion for its role in the financial crisis. This development accompanied the Governmental sale of more than 900 million shares in June, with the British taxpayer suffering a second consecutive loss on the sale of RBS shares (the first sale of RBS shares cost the taxpayer more than £1 billion, and the second tranche were sold at just over half the 500p-per-share price the Government paid in the wake of the crisis). The following months would see the bank haggle on the compensation offered to affected clients of the GRG division, which would in turn see it face more criticism (which has now faded somewhat). Lloyds, having acquired HBoS which was also guilty of similar transgressions, attempted to approach the issue in the same way and haggle over the compensation due to victims (leading to very public battles with Television personality Noel Edmonds). Elsewhere in the UK, Barclays won a crucial decision in the courts against the SFO, who were pursuing the bank on account of suspected fraud regarding their Crisis-era bailout by Qatari financiers; in June two actions were dismissed by the British courts. We discussed, in February, the original claims of the SFO but ultimately, in October, the SFO suffered another serious blow when its attempts to reinstate charges against the bank were dismissed by the High Court, which now just leaves a separate case against four Barclays bankers as a result of the same capital raising which is due to be heard in early 2019.

Away from the UK, it has been another difficult year for a number of high-profile banks. In the EU, Deutsche Bank continued to suffer from what has been an incredibly challenging period for the banking giant. In 2017 it had agreed to settle with the DoJ for just over $7 billion for crisis-era related activities, and then in 2018 it had its credit rating slashed by S&P. It was also suggested in June that Australian officials were preparing a case against the bank, and others, for ‘cartel charges’ over a A$2.3 billion issue. To further cement this troubling period, S&P confirmed that the bank would remain in a negative position for some time. In May, in the US, Wells Fargo continued to suffer over its decision to create a raft of ‘fake accounts’, with even more penalties coming its way in the shape of $1 billion from the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. Adding to this was a class-action lawsuit totalling nearly $500 million, which led to the suggestion that the bank would need to find another $2.6 billion to cover the costs of the penalties in addition to what it had originally budgeted for. Whilst there were a number of penalties levied against the banking giants of the world in 2018, the effect was minimal at best. The result is one that cannot be overlooked, with that result being that penalties are not designed to seriously impact banks and that the banks are far too big to be punished by financial means alone. We discussed ‘deferred prosecution agreements’ in 2017 and, whilst they do have shortcomings, the ability to directly affect the practice within these large corporate entities is a potential regulatory tool for the future, particularly in this too-big-to-fail era.


As this author focuses exclusively on the Credit Rating Agencies, it is worth leaving the subject of ‘gatekeepers’ until last. Starting with the audit industry first however, 2018 was a particularly challenging time for the leading audit firms. Right out of the gate in January, KPMG had to recuse itself from the Grenfell Tower inquiry on account of perceived conflicts of interest in its advising on the organisation of the inquiry – KPMG audited the company that produced the insulation for the tower. Then, in February, KPMG were again in the headlines for its connection, and poor performance, when auditing Carillion. In April, the same firm was banned by South African officials from auditing in the country on account of its connection to the Gupta Scandal that was engulfing the country. Yet, it was not just KPMG making the headlines. In July PricewaterhouseCoopers was ordered to pay $625 million, on top of an earlier punishment of $5.5 billion in 2016, for ‘negligence’ regarding its audit of Colonial Bank in the US. At the same time, although paltry in comparison, the British regulator the FRC had set its own record when fining PwC £6.5 million for the poor performance when auditing the failed high-street icon British Home Stores. The FRC were highly critical of PwC in August regarding their auditing of BHS, although the FRC were themselves criticised heavily for altering the report in favour of Green and PwC, with MPs venting their fury at the conduct of the regulator. As a result of these transgressions, a number of parliamentary figures suggested that the ‘big four’ be broken up, although in May we questioned here in Financial Regulation Matters whether such calls were a demonstration of a misaligned focus that maintains the audit firms oligopolistic superiority. Whilst the FRC attempted to fight its corner, 2018 was a difficult year for the regulator. The year ended with an independent review calling for its dissolution, and with it being labelled in the business press as a ‘hangover from a different era’. Towards the end of the year, KPMG’s claim that it would cease providing consultancy services to those that they audit seemed to be a desperate response to the growing pressure against the oligopoly, although we discussed that this tactic was used after Enron to great effect and that, importantly, such a move should not be left to the firms themselves to implement.

For the Credit Rating Agencies, the year was actually positive. This author produced a number of articles on the CRAs (available here, here, here, and here) but, in terms of business stories, the CRAs had a good year (for them). In June China opened its doors to the CRAs after suspending Dagong for its performance. As China seeks to implement its massive ‘Belt and Road’ initiative, the business for the CRAs will be lucrative as the massive initiative seeks financing for a vast number of different operations. Then, in October, it was decided in the UK that the FCA would be the regulator charged with regulating the CRAs after the UK leaves the EU, which is the best option for the CRAs by far on account of a smooth transition (the FCA is currently the ‘competent authority’ within the EU regulations so that changeover should not be disruptive). With the penalties for the CRAs’ involvement in the Financial Crisis beginning to fade after the two large fines in 2015 and 2017, it seems that the industry is about to experience another phase of concerted growth. If we add that all three of the Big Three are now aligned to the Principles for Responsible Investing initiative, the future looks bright for the CRAs at least – although this author cautions against that expansion in the most recent book which is linked at the top of the post.


Ultimately, the year was tumultuous but not devastating. Bearing in mind the political distortions in the western world, the feared devastation that aspects such as the Trump administration and Brexit would bring were not realised. Yet, in 2019, it is apparent that those fears are replicated and, in some instances, heightened. March sees the UK leave the EU, and the mid-terms in the US revealed a resurgence for the Democrat party that will surely impact upon the Trump administration’s ability. 2019 promises to be an interesting year for the world of business, with plenty of opportunity for growth but continued failure. The demise of the British high street continues to be of interest as the country continues to battle with the effects of austerity, and the US continues to gear up to the 2020 election which will, no doubt, have a global effect. In Europe President Macron is facing domestic disorder which puts into question the health of the EU, particularly considering that Angela Merkel will soon be stepping down from her role as chancellor, and in China the country continues to strive to be a global superpower, with the Belt and Road initiative being central to that economic objective. Regulation will be key in managing those particular aspects, but the question remains as it does every year – will regulators be given the tools to effectively regulate?