Wednesday, 29 May 2019

Barclays Makes its Move into Familiar Places

We discussed recently here in Financial Regulation Matters that Edward Bramson, the activist investor attempting to change the direction within the British bank Barclays, was attempting to have his fellow shareholders approve his ascension to the Board of the Bank on account of wanting to stem the continued development of the investment arm of the bank. In this post, we will look at what happened and assess the latest news which shines a light on his reasoning.

As was widely expected, Bramson lost his bid to join the Board. Only 13% of the votes cast were for Bramson’s resolution although, as stated above, this was widely expected. Whilst there was an unexpected development in the AGM – 30% of shareholders voted against its remuneration report – the focus on Bramson is important. The Guardian reports how opinion was split concerning Bramson’s motives, with some investors agreeing that there was a need to ‘wake this board of directors up’, but others stating that ‘bear in mind he’s making money for himself and his investors’. Outgoing chair John McFarlane said of Bramson that he did not support his appointment to the board ‘particularly as we have just recovered from a turbulent past’. This casts an aspersion on Bramson, but if we reverse it and assess today’s news, many more questions are raised.

The Guardian’s Nils Pratley asked, after the Barclay’s AGM, ‘Barclays wins battle with Bramson, but why did he bother with it?’ Perhaps there are many reasons, but today’s news that Barclays are about to make an assault on the US residential mortgage-backed securities market raises a number of alarms. Just as McFarlane declared that the troubled past is behind them, and particularly seems as the Qatar-based investigation has essentially come to a close and more than £2 billion has been paid in fines, it is rather surprising that the bank would delve head first into the market that brought it into so much disrepute. Perhaps it is not such a surprise. The bank have assembled a team of 140 securitisation bankers and traders, working under former Bear Sterns and RBS securitisation supremo Scott Eichel, and their rhetoric is very familiar. The bank’s head of global markets, Stephen Dainton, said recently that ‘this was a £500 million business for Barclays in terms of revenues last year, when global peers are making £1 billion a year, so for us to get to £500 million additional revenue over 3 years… should be achievable’. This was, naturally, adjoined to the sentiment that it is for society, and will not be the same as the pre-Crisis hubris that brought the system to its knees. Reuters, in its reporting of the move, suggested that Barclays believe the money will be made from the ‘the intended purpose of securitisations – providing companies and homeowners improved access to credit by pooling the risk of lending to them – rather than making bets on the markets’. Yet, the reality is as clear as day. Under President Trump, the sentiment of deregulation being the key to moving forward is being advanced to all market participants, with Barclays being ‘hopeful signs of softening U.S. regulations underpinning the securitisation industry could help to consolidate and expand its burgeoning market share’. Eichel, for his part, continues this narrative by declaring that ‘we’re doing what regulators want banks to do, which is help customers to get financing so businesses can grow, and help investors who buy these bonds to get the liquidity they need’. This noble pursuit is right in line with the preparatory sentiment that precedes a systemic assault on the marketplace – essentially, it will be the regulators’ fault, not the banks. The fact that Jes Staley is under increasing pressure for the investment arm to come good on the back of his consistent support in the face of opposition will not be mentioned. It will be very unlikely that, if the move pays off as Eichel hopes (and probably knows) that it will, Barclays will be happy with measured growth in comparison to its competitors; this will not be mentioned. Also, if Barclays can find an extra £500 million in revenues from the marketplace within 3 years, why would JPMorgan Chase, Credit Suisse, and the others not seek to find an extra £500 million a year? This is how a bubble is developed, with a fervent clamour for the riches on offer. If we take a moment and look at this story closer, perhaps the answer to ‘why did Bramson bother’ is abundantly clear. Or perhaps not. Nevertheless, the entrance of Barclays into an increasingly-deregulated marketplace is a warning sign of things to come. The same sentiment as has been displayed many times in this blog potentially rings true again – is the world ready for another financial onslaught just 10, 11, or 12 years after that last onslaught?


Keywords – Banking, Barclays, Mortgages, securitisation, @finregmatters

The Impact of HS2 Continues to Grow

Today’s post focuses on the HS2 rail system that is being developed in the UK, with the aim of linking some its major cities together more than ever before. We have discussed the HS2 project before here in Financial Regulation Matters, with a guest post from Teny Kuti here and an earlier post here. However, whilst the title of the post suggests that the impact of the project continues to ‘grow’, it is this concept of ‘growth’ that is the focus of the post – the environmental damage of the project is continuing to develop at an alarming pace and as recent news suggests, this project will leave a lasting mark on the British environment. This will lead us to question whether there is anything that can outrank money and its creation, as the project continues to demonstrate everything that is negative about that concept.

Speaking in October last year, a spokesperson for the HS2 Ltd Company, which is government-owned, stated that ‘we’re designing a railway that will reshape the economic geography of the whole country, as well as transforming the way we choose to travel for work and leisure… local authorities and businesses are putting plans in place… that will see hundreds of thousands of jobs created’. However, the reality presents a different picture, even if we consider the lens with which the HS2 Company insists on using i.e. a purely economic lens.

The Company, in a report at the end of last year, stated that there would be a number of impacts, both in terms of economic and environmental-related issues. Economically, the report states that there would be an estimated 19,590 jobs relocated as part of the project, with 2,380 jobs lost permanently. The Company attempt to offset this against the stated figure concerning job creation, which the Report suggests would be 2,340 permanent jobs created. Only last week the Company reported that they are currently supporting over 9000 jobs associated with the project, which is no doubt a pleasing statistic for the Company and its job-creation mantra. Yet, there are other statistics that present the hugely impactful nature of such a project.

The report stated that there would be 1740 buildings demolished by the end of the project, including 888 homes, 985 businesses, and 27 community facilities. Additionally, the report concedes that there will be a number of ‘adverse’ health effects for those affected by the development, including increased levels of anxiety and stress from “uncertainty and lack of control”. However, whilst those figures suggest that the impact would be incredibly impactful in a negative manner, the environmental impact is remarkable. This truly remarkable admission is made even worse when we consider the wider environmental effects of the project. It is reported that the project will produce 58 million tonnes of landfill – four times the total waste sent to landfill in the UK annually – and will lead to the diversion of 9 rivers, creating a massive impact on the biodiversity of those rivers. This is bad enough of course, but it was also reported last year that 16.7 hectares of ancient woodland would be lost, almost double the estimate of environmental groups prior to the project starting. Yet, last week, the sentiment of the project was further demonstrated when it was revealed that the 89,000 trees that were planted in response to the projected loss had suffered a 38% loss rate – the Company blamed the drought in the summer of 2018 for the high rate of loss. The reasoning behind planting new trees and not preserving older trees was that ‘putting in new plants was cheaper than keeping the old ones alive’. Ecologists have stated that ‘no amount of tree planting can ever make up for the loss of this precious habitat’, whilst the Wildlife Trust stated that the project ‘will result in an unacceptable level of damage to wildlife along the route’. Considering that wildlife in Britain is under an ever-increasing threat, with the appalling usage of netting over hedgerows and trees being just one callous example, the impact of the project is already in the category of inexcusable.

Interestingly, the excuse given is one based upon economics, and this has been noted. The pressure group Stop HS2 stated that the project’s developers (and by proxy the Government) do not care about people, employment, or the environment, but that ‘it is absolutely clear HS2 Ltd has gone for the most destructive, least cost option’. This is confirmed by the commissioning of investigations into how to reduce the costs of the project, and also concessions by the project’s leaders that HS2 may have to run fewer trains that projected, and at a slower speed. Not only does this negate the whole purpose of the project, but the fact that the project is right on course for being the ‘most expensive railway on Earth at £403 million a mile’ means that all this destruction associated with the project is coming at a massive economic cost, not just a social and environmental one. Given that the sole justification for the project was economic benefit, the lack of justice with this project is palpable.

There are a number of gallant pressure groups and protestors working diligently against this project, and whilst it will not be stopped they deserve support in their efforts to mitigate the disaster that the project is. It can be put in the category of failed garden bridges and bogus ferry contracts, but whilst those ludicrous Governmental displays of apathy cost the taxpayer £100 million combined (or thereabouts), HS2’s cost to the British society is incomparable. Not only will the project cost more than any other railway on the planet, and not only will it have a very limited effect upon the efficiency of rail travel in the UK (and also probably not even connect the North to the South properly), but it will fundamentally change the British environment, and that is unacceptable. To fail economically is remarkable given that economics was the project’s saving grace, but to fail environmentally is a stain on the project’s legacy, even before it is completed. It is too late to stop the project of course, but it is hoped that the environmental and social damage the project will cause may be capped somehow – however, the chances of that happening are not great at all. It is just another example of money-first politics irrespective of the damage caused.


Keywords – HS2, Railways, environment, politics, business, @finregmatters

Monday, 20 May 2019

European Auditing Regulations Begin to Take Effect

In 2016, a number of new rules regarding the auditing of large financial institutions within Europe were established. The regulations had a number of aims and we will discuss them in today’s post, but one of the major aims was to ensure further transparency when it came to the auditing of PIEs, or ‘Public-Interest Entities’. Interestingly, this designation allows the EU to capture financial institutions that hail from outside of the EU, and in today’s news the first test of those regulations was passed when Goldman Sachs announced that its new auditor from 2021, in complying with the rotational elements of the regulation, would be Mazars, marking the Bank’s first move outside the so-called ‘Big Four’ auditors in its history.

The regulations that came into force in 2016 have a number of aims including: ensuring further transparency; providing statutory auditors with a strong mandate to be independent; develop a more dynamic audit market; and to improve the supervision of auditors within the EU. There are, as one would imagine, a number of elements to the reforms, but we shall focus on one in particular and that is that PIEs need to change their statutory auditors every 10 years. The EU maintain that there are obvious risks with PIEs having links to the same auditors for 50 or 100 years, and that ‘mandatory rotation will hence contribute to a better audit quality’. There are variations that the EU allow for, like the ability for member states to reduce this period to 7 or 8 years, and allow for a maximum of an additional 10 years with the same auditor. The EU pair this with increased restrictions on the non-audit services an auditor can offer to a PIE whilst simultaneously performing auditory services. Quite rightly, these include aspects such as tax, consultancy, or advisory services, decisions that lead to the auditor playing any part in the management of the PIE, and also services linked to structuring, allocation, financing, and investment strategies. It was accepted that there would be a delay before we saw the actual effect of these reforms given that PIE-auditing contracts were due to be renewed on individual bases, and today we saw the first instance of these regulations taking effect.

One would assume that if a PIE would have to move away from the Big Four, then they would just filter down the accepted hierarchy within the industry. In the UK, the fifth player within the industry was, until recently, Grant Thornton. It has therefore caused huge interest within today’s business press that rather than acquire the services of Grant Thornton, Goldman Sachs has decided that its next contract for the auditing of its European Business will be with Mazars, not with Grant Thornton or BDO – now recognised as the fifth largest player - who many had imagined would be in the running. It has been suggested that this decision was not altogether voluntary, with it being reported that the Prudential Regulation Authority questioned Grant Thornton’s ability to conduct the audit, in what will be a massive blow to the company if this is true. Nevertheless, the Financial Times discusses how, via Professor Gordon of the University of Michigan, ‘it is a step forward… Mazars has the opportunity to dispel the myth that only the Big Four are capable of auditing the largest, most complex companies’. The business press have been clear that this is a massive coup for Mazars, who whilst recording revenues of €1 billion+, have still struggled to break the stranglehold of the Big Four.

For Goldman Sachs, the picture is arguably quite clear. It cannot select another member of the Big Four after PwC – with whom they have a historic connection – because all of the other members of the oligopoly currently provide a number of ancillary services. Yet, in moving down the list to Mazars – recognised as being the eighth largest firm – the Bank has potentially done something that it will fundamentally benefit from. All eyes will be on Mazars now to see how it performs, so its audits and the auditing process should be remarkably clean and above board. Goldman will also receive favour for engaging with the spirit of the regulation and leading the way for something which the EU has injected a lot of capital. Whether Mazars will step up to the plate and ‘dispel the myth’ only time will tell, but one imagines they will do. The question then will be how will the Big Four respond, because it has been reported that EY have already taken legal action against the EU in order to change, or postpone the reforms. History tells us they will not go down without a fight.


Keywords – audit, Goldman Sachs, Banking, Mazars, business, @finregmatters

Wednesday, 15 May 2019

Barclays and the Too-Big-to-Jail Myth

We have examined Barclays on a number of occasions here in Financial Regulation Matters, with a number of posts focusing on the Bank’s dealings with Qatar at the height of the Crisis. The approach taken by Barclays – to deal with Qatar for emergency funding during the height of the Crisis rather than seek Governmental support – has been the subject of a number of investigations since and has brought a number of regulatory bodies into the picture. In today’s post we will examine the interconnecting dynamic that exists between a number of British regulators and the economic, political, and societal factors that affect their ability to effectively regulate. We will not revisit the developments between Barclays and Qatar in any great detail here, as it has been covered before in the blog and by the business media. Rather, we will focus on developments detailed in today’s business press that suggest that the Bank of England, via its Prudential Regulation Authority body, argued to prosecutors at the Serious Fraud Office that criminal charges brought against the Bank ‘could destabilise Barclays’.

The obvious question to ask on the back of this news is whether intervening in such a manner is appropriate. A number of prominent onlookers (including Professors Prem Sikka and Emilios Avgouleas) have commented today that today’s revelations demonstrate regulatory ineffectiveness, ultimately suggesting that such dynamics only serve to continue such destructive practices (referring to too-big-to-jail). According to the Financial Times, the BoE’s top banking supervisor spoke with David Green, the then-Director of the SFO, and warned that a criminal prosecution would result in ‘unpredictable consequences’ for the bank and, therefore, the sector. It is important to note that the source of this revelation has not been identified and that all parties concerned are refusing to comment as of yet, but the implications are extraordinary. The Financial Times continue by making the point that Barclays was charged by the SFO anyway, with there being very little effect to the position of the Bank as a result. This then brings into question the concept of using fear to lobby on the behalf of the regulated entities.

Admittedly, that concept sounds conspiratorial. The official understanding of the concept is much more subtle, with then-Deputy of the Bank of England Andrew Bailey – now in charge of the Financial Conduct Authority – explaining in 2014 that regulators around the world (meaning US regulators mainly) need to put their ‘cards on the table’ before penalising regulated entities so as not to cause systemic risks. This was the reasoning behind George Osborne, then-Chancellor of the Exchequer, writing to the US Federal Reserve to ‘express concern’ over the impact of charges against British-based Banks like HSBC. There are perhaps two schools of thought in this instance. One may suggest that regulators need to be concerned with systemic issues to avoid a repeat of the Financial Crisis and are justified, therefore, in considering the impact of large penalties against important entities within a given sector. This makes sense. However, there is an issue with the application of that approach.

If we consider the actions of the FCA regarding the release of an investigative report into the conduct of RBS (a majoritively state-owned Bank), then the intervention of the regulator to stop the publication of that report takes on a different meaning in light of today’s suggestions. The implications of understanding decisions from within this too-big-to-jail lens means that systemically-important financial entities can transgress without damaging consequences. Regulators, wary of systemic repercussions, will intervene on the regulated entities’ behalf. Whilst the case of Barclays may not necessarily be directly applicable, it is telling that there was very little effect to its position as a result of the prosecution (which has since been scrubbed). In reality, RBS has continued on pace through the GRG scandal. HSBC is surviving just fine irrespective of massive fines. There is enough evidence to suggest that penalties can be exacted (let us just stick with financial penalties for the time being) without there being a systemic risk. If we accept that to be true, then a reality comes to light which is a difficult one to accept, perhaps. That reality is that financial regulators protect the regulated entities, not the victims of their crimes. The rationale for that position is complicated however. Who is to say what the dominating factor is in a regulator’s decision-making process, but the pattern is certainly one of perpetrator-first, rather than victim-first. Perhaps, the rationale is irrelevant. The impact remains the same, and that impact permeates the economic cycle so that in good times the perpetrator is prioritised, and in bad times the perpetrator is prioritised. Perhaps that is a systemic reality that explains the majority of decisions that take place – the system is the most important aspect. That understanding fundamentally changes the concept of ‘systemic importance’.


Keywords – financial regulation; banking; UK; Business; @finregmatters

Monday, 6 May 2019

Kraft Heinz and its SEC Investigation Threatens to Impact Others

In February Kraft Heinz announced that the Securities and Exchange Commission was opening an investigation into its accounting practices. In this post, we will examine the potential scope and ramifications of that investigation as, although Kraft Heinz have not found any irregularities internally, there are a number of associated organisations who will potentially be embroiled in the scandal if it is found to exist.

We have discussed Kraft Heinz as a company before here in Financial Regulation Matters, mostly on account of its failed attempt to take over Unilever in 2017. Whilst the subpoena was announced in February of this year, it was actually received in October and the subpoena related to the firm’s ‘accounting policies, procedures, and internal controls’. The company then, in February, took a $15.4 billion impairment charge, or a ‘writedown’, and that is now believed to be something the SEC are also investigating. The company stated that the writedown reflected ‘lower margin expectations’, but this also ties into a concerted strategy to divest across the company on account of its growing $30.9 billion debt pile. This somewhat justifies the views taken in the previous blog posts regarding the differing styles of capitalism adopted by 3G and Berkshire Hathaway, and that of Unilever. Since that failed attempt and the rapturous attention Wall Street have given the company, 3G’s notorious approach for slashing the company to pieces has inevitably backfired, with the firm losing $75 billion from its value in just 2 years and the $15.4 billion writedown concluding that period. The exact same trend can be witnessed in 3G’s other businesses, like Anheuser-Busch InBev NV, the world’s largest brewer of alcohol.

Another potential aspect is that PricewaterhouseCoopers, Kraft Heinz’s auditor, may become embroiled in the firm’s troubles. There has been very little suggestion of this in the business media, but the issue of accounting malpractice, if not uncovered by PwC in its auditing of the firm, will surely become an issue if the SEC find malpractice as part of their investigation. This would be particularly unwelcome for PwC, given that it has only just received a ‘record’ fine from British regulators (£6.5 million over it auditing of BHS), and much larger fines from US regulators ($335 million regarding the collapse of Colonial Bank). When we consider that there is a growing call to reform the industry and, essentially, dismantle the hegemony of the Big Four, yet another scandal could have massive effects for the future of the auditing industry (although it likely will not, given the power dynamics within that particular oligopolistic industry).

Kraft Heinz represents a particular mode of capitalism that is pure in its intention. It does not tolerate what it deems as inefficient (workers were recently denied ‘perks’ such as free cheesestring products whilst on duty), and its owners (3G in particular) are incredibly renowned for its brutal cost-slashing policy. However, even though the businessman who can do no wrong – Warren Buffet – chose to back 3G in a number of its endeavours, there are troubles ahead for that mode of capitalism. This is troubling for Buffet too as Berkshire Hathaway, his investment vehicle, starts readying itself for life without Buffet at the helm – it is almost certain that this will be a tumultuous time for the vehicle as investors cast scrutiny on the real company without its famous leader. The impact of this current investigation into Kraft Heinz could be far reaching indeed.

Keywords – Kraft Heinz, Capitalism, PwC, Business, Audit, Warren Buffet, @finregmatters

Thursday, 2 May 2019

An Update on Scope Ratings

In February of last year we looked at Scope Ratings, a new entrant to the credit rating marketplace, on the back of an article by this author in European Company Law. Since that date, there have been a number of positive developments for Scope so in today’s short post we will be updated on those developments.

Scope Ratings is a German-based rating outfit that has ambitions to challenge the hegemony of the Big Three – S&P, Moody’s, and Fitch Ratings. So far, since its inception in 2011, it is certainly not backing away from the challenge. Currently, the firm is Europe’s largest Credit Rating Agency (European-based, at least), and employs more than 200 staff across seven offices (Berlin, Frankfurt, London, Madrid, Milan, Oslo, and Paris). Recent successes, especially within the Structured Finance department, recently saw Guillaume Jolivet appointed to the agency’s Board, which founder Florian Schoeller suggested is an ideal fit as he is ‘ideally positioned to help the group become a leading provider of credit intelligence and Europe’s champion credit rating agency’. Additionally, Scope has recently appointed Ralf Garrn as Head of its Digital Development, with Garrn coming from Euler Hermes rating which he founded in 2001 (which is now co-owned by Moody’s). So, internally the agency is performing well and is on course to reach its aim of attempting to challenge the Big Three. Externally, they have received news recently that is a massive boon.

Two major German insurance companies have joined the growing list of investors who are supporting the firm. HDI, and Signal Iduna, are two of the major players within the German pension-fund marketplace and their joining of Scope now takes its investor base to nearly 70, which is impressive given this particular marketplace. To accentuate this recent growth spurt, the agency has been awarded its licence to perform rating services within Switzerland, which it sees as an area of growth following recent investments there. This is all incredibly positive. However, and only time will tell if this is true or not, the ‘tipping point’ has not been reached yet. That point refers to the moment when the agency truly comes into the Big Three’s (and in reality, it is the Big Two) sphere of influence and the leading oligopolistic agencies have the decision to make of whether to attempt a takeover, to directly challenge, or to allow the oligopoly to grow to four members. Oligopolies, of course, have no set number but there is usually a natural equilibrium and for the credit rating oligopoly it appears that three is the magic number. Therefore, Scope’s growth, whilst fantastic news for the sector and for investors, is charting a path that almost all other non-Big Three agencies take, and the results are always the same – be taken over, stop growing, or cease to exist. Hopefully Scope can buck this trend, but the theory of oligopolistic organisation, and also history, tells us that this may be a difficult task.


Keywords – Business, credit rating agencies, Scope Ratings, @finregmatters

Wednesday, 1 May 2019

Edward Bramson Shines a Spotlight on the Concept of the Free Market

We have examined the potential reconfiguration at Barclays before in Financial Regulation Matters, and in today’s post we will pick up on some comments made in today’s business media ahead of Barclays’ AGM on Thursday. The focus and speculation surrounds that of Edward Bramson, a so-called activist investor who many believe is aiming to cause substantial change within the massive bank. In this post we will look at Bramson more closely, and then discuss a concept that is being advanced as a ‘norm’ but which calls into question the very nature of the marketplace.

Edward Bramson has held many positions as one might expect of a serious investor, but it is through his investment vehicle Sherborne and Company that he is making headlines at the moment. Through that vehicle he has amassed a 5.5% stake in the bank and it is being reported across the business media that, tomorrow (Thursday), he will ask shareholders to elect him to the Board of the bank. His stated reason for this is that he wants to scale back the Bank’s investment arm and force it to focus on areas of stability (and growth in part) in their commercial and credit card departments. However, whilst sections of the business press suggest that he is unlikely to be elected to the Board, it has been discussed that there are concerns around the performance of the investment arm and that his suggestions may carry more favour than people expect. It is indeed a battle for the ideology of the bank, with current CEO Jes Staley priming the bank to take on the Wall Street elite, and Bramson wanting to change the focus inwards. Yet, whilst the Financial Times made the interesting comparison between Bramson and the ‘Night King’ from HBO’s Game of Thrones, there is an underlying issue that has been brought into the limelight that forces us to ask what the economic reality is in today’s society.

Writing for the Financial Times, John Gapper states that, since the Crisis, ‘regulators are rightly cautious about how banks are run, and would look sceptically on an abrupt change of strategy pushed through by a maverick’. This declaration is interesting for a number of reasons. Firstly, yes it is right that regulators be cautious, but on the same day that regulators have allowed Lloyds to reduce their capital buffer, it is difficult to see complete consistency in this cautious approach. Yes, the two are very different, but the issue is that regulators are not necessarily equipped to run a multinational bank, so is it correct that they may have the opportunity to define the approach taken by one of those banks? Regular readers will know that the approach taken here in the blog is certainly not one of brazen free-market capitalism, but the suggestion made by Gapper is not insignificant. This is a leading financial media outlet supporting Staley’s view of taking Barclays further into Wall Street – but, is he right in doing so? The performance of the investment arm suggests not, but this is counteracted by the widely held belief that a diversified bank is better equipped to deal with storms. That may be widely believed, but that does not make it the only approach. It is unlikely that Bramson will be successful in the AGM, but the media coverage of this issue demonstrates a wider problem whereby massively impactful decisions are being guided by journalists and potentially rubber-stamped by regulators who may not, necessarily, have the expertise to make such decisions in the private bank’s business.


Keywords – Edward Bramson, Barclays, Banking, Business, @finregmatters