Monday, 31 December 2018

GUEST POST - High Speed Rail 2 and it’s various effects on the Country

Today’s post is a guest post from Teny Kuti, a first-year student in Aston University’s Law School. The post discusses the various effects of the forthcoming HS2 high-speed rail link, as well as some of the potential consequences moving forward. Please follow Teny via Twitter here, and his own blog The Whole Spectrum for an interesting take on a number of different issues, ranging from politics to business.

Frequently described as the most substantial rail project ever built in the UK set to open in 2026, High speed rail 2 will form a high-speed link between Birmingham and London, reducing the travel time to 49 minutes. However, the project has never been shy of controversy. Since the HS2 received Government approval in 2012, it has seen strong opposition from those who would lose their homes on the current plans and indeed, HS2 Ltd has claimed that 1,740 buildings would be destroyed by the rail line, with nearly 900 being homes. Now with the recent developments such as the Chairman of the project resigning and claims that the cost has been vastly underestimated from £56bn to potentially £100bn, it becomes pertinent to discuss whether HS2 will have a positive or negative impact on the country.

The rail line intends to link both London and Birmingham, and then a phase 2 extension is planned to connect Leeds and Manchester to the line. This could address many long running problems such as the high house prices in London caused by a dense population living there. The ability to travel from Birmingham to London in under an hour may allow for people who work in London to seek cheaper housing in Birmingham without having to suffer a 2-hour commute. As living in Birmingham becomes a more viable option, this would reduce demand for homes in London thus causing prices to decline, theoretically. Having an easy connection to London may also result in more Businesses following in the footsteps of HSBC and relocating to Birmingham, or potentially creating smaller satellite offices in the city. However, this could result in Birmingham eventually sharing similar issues currently facing London. As seen when Deutsche Bank moved to Birmingham in 2014 the demand for homes increased by two-thirds. This far exceeded the supply of houses and thus prices went up. Should other high value firms follow Deutsche Bank and make the move to Birmingham, it may just inherit the problems they were trying to escape.

The physical construction of the rail line would result in jobs being created as the Department for Transport claims that construction of the project will create 25,000 jobs in addition to 100,000 people working at the new stations and 3,000 jobs operating the trains themselves. Naturally, these jobs would benefit the country as it allows people to earn a wage and thus spend it in the country, improving the economy. However, the construction of the line would also destroy 985 businesses that are currently on the planned route of the line and thus, the people employed there would lose their jobs. Specifically, HS2 Ltd claimed that 19,590 jobs would need to be relocated but for those who were already earning a lower income in a job that was integral to the location such as a farmhand, finding a new job may be difficult. Although, the project is creating several times more jobs than it is causing to relocate, thusly the rail line would have a positive impact on the job market, as well as the benefits of a better-connected country.

The financial cost of the project has recently been found to be much more than was previously stated, calling into question how cost effective it currently is. The rail line was approved on a budget of £56bn but it has recently been leaked that it may increase to over £100bn due to underestimating how much the contractors would need to be paid to complete the project in a timely manner. This has renewed questions of whether this money could be spent on something more effective. Many have criticised the project as being a way to circumvent the existing problems in the transport network. The money used on HS2 could also be used to fix potholes, upgrade the existing train services, or expand bike and bus services. These projects would not require the compulsory purchase of land, nor would it destroy people’s homes and businesses. HS2 Ltd has also faced numerous claims of undervaluing the land that they need to buy resulting in families and Businesses being forced to move out, but without enough compensation from the Government to relocate. Not only is this damaging to the individuals it directly affects, but it also proliferates an anti-Government sentiment which conflicts with the sense of interconnected national pride they hope to achieve with HS2.
The environmental impact is also worthy of discussion as with any train, the transport is more environmentally friendly if it is replacing transport by car given that one train can take hundreds of people. However, High Speed Rail itself is not significantly better for the Environment than a normal train. Indeed, the methods used to construct the rail line are certainly not environmentally friendly and thusly, it is possible that HS2 may do more damage to the Environment when considering the wildlife disrupted and trees cut down. Given that the primary users of HS2 would likely be using a normal train otherwise, the environmental impact of HS2 is likely to be negative but to a minimal degree, largely due to the harm done during construction.

HS2 is going to have a profound far reaching effect on the UK ranging from the country wide economy to a family of farmers in Buckinghamshire. The rail line seems to have a net positive impact on the economy if it produces the amount of jobs they expect, this should offset the amount of people who have lost their jobs or need to relocate. The rail may also relieve some of the pressure on London as the hub of the largest service firms. Should these firms choose to move to Birmingham and eventually to Leeds and Manchester, this would benefit the economies of these individual cities while decreasing the price of housing in London, but also increasing the price in these various cities. When the UK gains the benefit of this economic increase is dependent on whether the project remains on budget, though this seems unlikely and the potential for it to go over budget is supported by the resignation of its Chairman in early December. Ultimately, HS2 should have a positive effect on the economy, but a negative effect on individuals and small business owners who are an obstruction to the most substantial rail project ever built.

Keywords – HS2, Travel, Railways, UK, Business, Politics, @finregmatters

Tuesday, 11 December 2018

Interserve on the Ropes, or a Model on the Ropes?

Back in August 2017 we looked at the concept of the ‘private finance initiative’, and also the differences between ‘public private partnerships’ and ‘private finance initiatives’, which has also been dissected in the literature. We looked at the issue of Carillion and the aspects that underpinned its high-profile collapse. However, for this post, the question will be whether the recent developments at Interserve, the massive provider of public services in the UK, is part of a general trend or an indication of a fundamental flaw within the model that is being adopted currently.

Interserve began as London and Tilbury Lighterage Company Limited in the late 1800s, and through a number of phases of expansion over the century and more that followed, the company was renamed Interserve Plc in 2001. The company has a global reach, but for this post our focus will be on its role within the UK, where its function is particularly vital. According to Interserve itself, it has reported revenues of £3.7 billion and, when the website was constructed, the sentiment of the narrative was progressive and expansionary. However, it was announced recently that the company was in rescue talks with creditors for the second time in nine months, as it also being reported that the company is in debt to the tune of more than £500 million. The effect of this news on a company so large is inevitable, with news that the company’s shares are operating at around 12p, which is a dramatic fall from the 2014, when shares were valued at over 700p a share, and even a year ago when they stood at 100p a share. The Financial Times opines that even though the deal to refinance sees shareholders face ‘material dilutions’ of a number of their shares, banks do not think that Interserve is to become ‘Carillion Mark Two’, on account of a variety of influencing aspects, with the primary reason being a different environment and attitude towards rescuing such societally-interwoven companies. The British Government perhaps personifies this approach – essentially a too-interwoven-too-fail approach – with news that it will continue to award contracts to the company, despite its financial difficulties. It has been noted in the media that the Government are playing a dangerous game in that they are currently facing criticism for awarding £1.3 billion’s worth of contracts to Carillion when it knew the company was in distress, but perhaps there is a reason for the Government adopted such a risky strategy.

One reason why they may have done this is because, for the Government, it is not a ‘risk’ at all. Perhaps, for this Government in particular, it is an ideological necessity that Interserve is supported, and that Carillion was supported even in the face of negative financial declarations. In the literature it has been identified that such partnerships between Government and Business are essentially a ‘brand for how governments want their interaction with business and society viewed, or, alternatively, how they want the role of government in the economy viewed’, which clearly hints at an ideological approach. The development of this form of societal investment is, seemingly closely tied to the development of globalisation, with this approach being witnessed around the world and with companies spreading their reach to meet that demand (Interserve is a good example of this). Yet, we have spoken here in Financial Regulation Matters many times about viewing global developments in a cyclical manner, so with that being said what may be the message from this uptake of public and private partnerships? The first thing to note is that the symbiotic relationship that exists between certain political outlooks and big business creates results, but that it is difficult to see how they are long-term in nature. The appalling lack of oversight on instances such as Carillion show us that the maintaining such a relationship, for the benefit of the public, is not really a concern – the real concern is developing tangible and public examples of development in order to provide support for the model; for example, pictures in the media of half-built hospitals do no good whatsoever to the development of the partnership, which as we know is underpinned by public money. The second thing to note is that this narrative of needing big business to flourish has become so entrenched, it is difficult to foresee any other model taking hold. It is not suggested here that another model should be adopted, nor that it would be any better necessarily, but it is clear that this current model of cartelisation on the back of public funds does not work, and is societally damaging – so, what does this mean?

One thing that it may mean, thinking of the UK in particular, is that suggestions that a number of key infrastructure areas will be nationalised once Labour get into power, if they do, is easier said than done. Nationalisation has taken place before, but this current era is dominated by the entrenchment of a narrative (aided by the development of the internet and social media etc.), which means change would have to be incremental if it were to be successful. It also means that the Conservative Party, for however long they remain in power, must continue to support companies like Interserve, because it is their ideological position that is on the line. The relationship between big business and government must work if the Conservative Party is to remain in power and relevant, and as such it is anticipated that only an absolute and sudden collapse would see Interserve vanish. The concept of ‘too big to fail’ is commonplace, but the connection of certain fields to politics must not be ignored. In a sense, Interserve is too politically important to fail, as it represents an ideology that has taken years to construct and implement. Yet, we are in an era where continuing corporate failures are being contextualised by societal instability, so the question may be how long will the public sit by and allow their money to be utilised as a fundamental safety net, especially when they do not directly see the financial benefit of doing so?

Keywords – Public Private Partnerships, Interserve, Politics, Business, UK, @finregmatters

Friday, 7 December 2018

Regulators Under Fire: The Serious Fraud Office and the Financial Conduct Authority Face Consequences

As is the remit of Financial Regulation Matters, it should not be surprising that analysing financial regulators is of key concern for this blog. In doing that, however, we get to see the diverging experiences of a financial regulator, and how differing approaches yield very different results. We have examined a number of regulators throughout the years in this blog, and two have factored heavily in our analyses. Today, we revisit the two particular stories which have evolved recently and left the respective regulators facing a number of criticisms.

The SFO’s Pursuit of Tesco Directors Fails

We examined the case of the Serious Fraud Office (SFO) launching proceedings against three Tesco Executives back in February. Then we discussed how the SFO were alleging that fraud by abuse of position, and false accounting were the crimes of Carl Rogberg, John Scouler, and Christopher Bush. That post asked whether the SFO would continue in their pursuit, and shortly afterwards it was confirmed that they would be. For the past two months the trial against Scouler and Bush had been ongoing until this week when, at the behest of Sir John Royce, the trial was dismissed on account of the Court of Appeal agreeing with Sir Royce that there was no case to answer. Whereas a regulator cannot be expected to succeed in every regulatory action it takes, the views of Sir Royce were scathing: ‘I conclude in certain areas – one in particular – the prosecution case was so weak it should not be left for a Jury’s consideration’. According to Sir Royce, the major weakness was of the failure to prove knowledge on the part of the defendants, whom he said were of ‘impeccable character’. The Financial Times reports that the SFO are now considering whether to push ahead with their prosecution of the remaining defendant Carl Rogberg.

The SFO is a regulator that is constantly in the political crosshairs, and this failure, when conjoined with their recent failure to bring charges against Barclays over their Qatar-based financial crisis-era funding, is a particularly dreadful start for the new head of the SFO, Lisa Osofsky. However, the failures raise a number of important issues that are worth addressing. Those issues revolve around the standard of proof required for prosecution, which is central to the failure of the Tesco case. Osofsky herself noted this year that the current standard of identifying a ‘controlling mind’ when prosecuting was too high of a standard in relation to corporate forms. Instead, she argued that an introduction of the concept of a ‘failure to prevent’ would be more suitable i.e. a person or company being held to account if it could not prove that it [they] had not done enough to prevent a crime. Here, then, is where it becomes very difficult to foresee any meaningful change, and it is questionable whether that change should occur. If the three executives are guilty, then the need to identify a controlling mind is fundamentally in the favour of the corporate form, which can protect individuals (despite of the measures available to ‘lift the corporate veil’). If the three are guilty, then the £10 million spent by the SFO will have been nowhere near enough to obtain information that surpasses such a high burden of proof. However, if the opposing model was adopted, and a failure to prevent model was in place, then there is the likelihood that three people who boast clean track records would have been indicted. It is difficult to foresee any change in this arena anyway, as we currently reside in an incredibly pro-business environment that will naturally require only the very highest standard of proof in order to prosecute corporate individuals. For the SFO, the issue remains that whilst their successes are notable (their DPA prosecution of Rolls Royce for corruption and fraud stands out), their failures are mounting and are incredibly visible. Osofsky has a decision to make as to what form the SFO adopts on her watch, as her predecessor’s approach garnered results but ultimately could not save the regulator from sitting directly within the political crosshairs of the Conservative Party. The future of the SFO will likely be dictated by her decision in the coming months.

The FCA Faces Legal Action over RBS Decision

This perhaps just serves as an update, as RBS and the FCA’s handling of this troublesome bank have occupied a number of posts here in Financial Regulation Matters. We know that RBS came in for incredible criticism regarding the actions of their ‘GRG’ unit which was established to ‘assist’ SMEs – with a number of SMEs failing under their watch. We have examined this case from its inception, and discussed how the FCA initially held back a damning report before the Treasury Select Committee, alongside a number of leaks, forced the report into the open. Yet, there has been a development recently that brings this issue sharply back into the spotlight. A former Executive of a company that failed under the GRG unit has applied for a judicial review of the FCA and its decision to drop an investigation into the GRG unit, which at the time saw the regulator declare that its options were ‘limited’. As part of the application, Neil Mitchell, claims that the FCA has been ‘unlawfully refusing or failing’ to fulfil its obligations as the chief financial regulator, and that as a result of this the decision to terminate the investigation should be changed. The FCA’s response was that the GRG, as an area of finance, ‘was largely unregulated and the FCA’s powers to take action in such circumstances, even were the mistreatment of customers has been identified and accepted, are very limited’. Yet, Mitchell is asserting that the FCA does have a role to play, mostly in terms of ruling whether former GRG managers were ‘fit and proper persons’, and whether the controls and systems within GRG were adequate.

It will be interesting to see what the decision is for this particular application. Mitchell is related to the group that recently won a settlement from RBS, rumoured to be around £200 million, and as such demonstrates the understanding that a settlement was always unlikely to be the end of the matter. Whilst it is difficult to predict the outcome of the application, a successful outcome will likely spell trouble for Andrew Bailey, the current Head of the FCA. It has already been stated in the business media that ‘Andrew Bailey must pay the price for FCA failures’, and if this application is successful then those calls will grow even louder. If the Review then finds that the FCA did have options available to them, the obvious of question will be ‘why were they not used?’ Potentially, and unfortunately for Bailey, if that question is officially asked there cannot be many other responses than a captured, or at least subservient regulator when it comes to the very elite in the business world. We have discussed before the national importance of RBS and its ‘too big to fail’ characteristic, and regrettably regulatory capture often forms part of that dynamic. This judicial review application could have massive consequences for the regulatory framework in the UK, just as it is tasked with regulating a marketplace that is entering particularly volatile waters.

Keywords – Regulators, Business, Banking, Tesco, RBS, SFO, FCA, @finregmatters