News from the Regulators: Blink and You Will Miss It

Today’s post acts as a small review of two specific news pieces that broke today concerning two financial regulators in the U.K. Whilst one would have had to have been quick to spot these stories, with both falling down the list of financial news stories rather quickly, each has particularly strong knock-on effects, but for differing reasons. So, in this post, a little more detail will be added as both of those stories represent the latest iterations of themes that have formed the basis of a number of posts here in Financial Regulation Matters.

The first story is concerned with the infamous report conducted by the FCA regarding the actions of RBS and its ‘Global Restructuring Group’ (GRG). We have covered this issue on a number of occasions, and heard most recently that whilst the FCA has been busy investigating and punishing a number of firms of their failures, firms like BrightHouse and Equifax, their hesitancy to take any serious action against RBS has garnered plenty of justified criticism – although it is worth noting that, in general, the rate of fines being imposed by the FCA is steadily reducing (it is not suggested here, of course, that this is because of increased standards in the marketplace [!]). Even in response to Governmental pressure via the Treasury Select Committee and its new Chair Nicky Morgan, the FCA refused to bow to the pressure and released just a summary of their report on the investigation; yet, today, we were given a reason as to why this was. The official story being developed is that the FCA could not reveal the report in full because of fears over counter-litigation from those involved – a process known as ‘Maxwellisation’ which is the process whereby those accused in an official report have to be notified and consulted first. Internal Board minutes reveal that the ‘external counsel’s advice led [the FCA] to the conclusion that publication of the final report would expose the FCA to an unacceptable risk of successful legal action by current/former RBS managers’. So, what does this mean? Well, it essentially means that the process will be incredibly long-winded and, likely, will be downplayed as much as humanly possible to reduce the exposure of RBS, a majoritively state-owned business, from major investigation. However, it denotes something much more important – if Maxwellisation prevents these reports from being publically aired, which as a process is justifiable in theory (i.e. what if those accused were themselves not guilty?), then maybe we should be asking a different question – maybe, rather than looking to air an investigation, the FCA seeks to criminally prosecute those responsible for breaching a multitude of duties that they owe to connected parties; then, the issue of Maxwellisation goes away, because those accused would have to answer for their alleged wrongdoing in a court of law. Obviously, that is a fanciful suggestion in this arena, but the principle still stands; we are being faced with the prospect that those in the financial arena are, almost, immune to punishment. So, as we move on to the second story, a question that links the two may be ‘how may we protect against Executive excesses and misdeeds? One answer may be to have employee representatives on Boards of companies to provide for more balance, representation, and diversity in the decision-making organ of a company.

That idea is not based upon a speech from Jeremy Corbyn, or anyone else fundamentally associated with ‘the left’, but from the leader of the Conservative Party and Prime Minister, Theresa May. Speaking in May of 2016, the then Home Secretary was developing her pitch to take over the Conservative Party on a number of political platforms; one of which was her pitch to make the Country ‘work for all’, and in turn to increase social mobility – whilst it is obvious to anyone who cares to notice the widespread usage of foodbanks under her premiership, the abdication of the Government’s ‘Social Mobility Tsar’ and his entire team on the basis of his perception of ‘indecision, dysfunctionality and lack of leadership’ in number 10 should come as absolutely no surprise. Another of her key platforms was to ‘completely, absolutely, unequivocally’ put the Conservatives ‘at the service of working people’ and one way in which she planned to achieve that was to instil workers on company boards and mandate that shareholder votes on executive pay were to become binding, rather than advisory. Unless one has been living under a rock, or is an ardent Conservative, it should come as no surprise once more to hear that ‘Theresa May has backed away from plans set out in her Tory leadership campaign to put workers on company boards’. However, this is to be expected because, quite simply, why would she keep her promise? There is no consequence, politically, to breaking promises (think of the Big Red Bus). Yet, today, the Financial Reporting Council (FRC) waded into the minefield by seemingly confirming Theresa May’s U-turn by declaring that the revised UK Corporate Governance Code will have three options for companies to heed the advice of employee representatives, with all being based upon the comply-or-explain principle (the consultation phase continues up until February 2018). Those three options include assigning a specified non-Executive Director to represent employees, creating an employee advisory council, or to nominate a Director from the pool of employees; these sound good in theory, but the backing-down away from May’s pledge is the real headline here. Whilst the FRC discusses how it may go about encouraging this behaviour, and increasing the intake and representativeness of under-represented peoples within companies, the sheer ineffectiveness of the FRC is likely to garner any serious results in this regard.

Ultimately, these regulatory developments signal the position of the regulator – they are fundamentally constrained; to say that these regulators are hamstrung is to downplay their position. On many occasions this author has called for regulators to be braver, more direct, and more honest about their efforts to make a serious impact upon these dynamics that cause so much harm, but in reality it is worth asking what is it they can actually do? Do they have the systemic support to put RBS Executives in the dock? No. Do they have the support to enforce that workers are sat on every board in the country? No. Do they have the support to provide for anything more than token penalties in the forms of fines that companies write off in a matter of hours/days/weeks? No. So, whilst it is right that regulators are critically examined for their role with respect to these corporate failings, it is worthwhile remembering that with a systemic support network based upon justified, proportionate, and righteous punishment, these regulators will never be much more than official wrist-slappers, regrettably.

Keywords – Financial Regulators, RBS, FCA, FRC, Board diversity, employees, representation, SMEs, Fraud, @finregmatters