While the British regulator’s warnings over ringfenced assets and money laundering go unheeded, US agencies have hit FTSE 100 companies with more than £6bn in fines
The FTSE 100 index looks to be ending the year with gains of about 7%, but it has been an annus horribilis for Britain’s top companies in America. And the catalogue of misdeeds for which the UK’s top firms have been brought to book makes for shocking reading.
Four FTSE 100 companies alone agreed to record fines and settlements with US civil and criminal authorities totalling $10.4bn, or £6.4bn, in 2012. That is the equivalent of 40% of the construction cost of Crossrail, and more than two-thirds of the £9bn ministers say was the taxpayer’s bill for the London Olympics.
The picture started to sour in June, when Barclays was forced to pay $360m to settle probes in the US into the manipulation of Libor. A month later, GlaxoSmithKline announced it had been fined $3bn by the Food and Drug Administration for a string of abuses, including selling antidepressants for unapproved uses on children and offering inappropriately lavish hospitality to doctors willing to promote the company’s medicines.
Then last month BP received a $4.5bn penalty for criminal damage and regulatory failings for its part in the fatal explosion and oil spill in the Gulf of Mexico in 2010.
Finally, last week, it was the turn of HSBC, fined $1.9bn for a “blatant failure” to implement money-laundering controls and for flouting sanctions. These penalties echoed two settlements, also during 2012, totalling $667m agreed by Standard Chartered over breaches in sanction laws and other failings.
So can we now draw a line under all this and move on in 2013? Not likely. The market is already braced for Royal Bank of Scotland to be hit with a telephone-number-sized fine from the US regulator if, as expected, it too is found to have played a role in the alleged Libor-fixing scandal.
Meanwhile, we learned this month that the US authorities may even have Rolls-Royce – until now a paragon of good corporate citizenship – in its sights. American investigators are tracking early-stage inquiries by the Serious Fraud Office into alleged bribes paid by intermediaries for the aircraft engine manufacturer in Indonesia, China and elsewhere.
In many cases US investigators can, and do, co-operate with parallel agencies in Britain. But the contrast in outcomes is stark. When, for example, Barclays agreed a $200m civil penalty as well as a $160m US justice department settlement over Libor, the bank at the same time announced that a lesser deal in the UK would see it pay just £59.5m ($96m) to the Financial Services Authority.
For the FSA, this counted as a triumph – the largest fine it had ever imposed. But to many outside Canary Wharf, it still looked feeble by comparison with penalties elsewhere.
To be fair, the regulator has gone some way to toughening up its approach to financial sanctions, announcing guidelines two years ago which it promised “could see enforcement fines treble in size”. The first of these tougher tariffs was imposed last month on UBS, obliging it to pay £29.7m for a failure to limit or detect the activities of rogue trader Kweku Adoboli.
However, many signs still suggest that penalties at this level do not truly worry directors or shareholders at Britain’s largest businesses, and cannot be said to act as a deterrent. This year, the overall value of fines imposed by the FSA on companies found to have fallen short of required standards more than doubled – but have still only reached £140m.
The biggest repeat offender, with four fines totalling £70m in less than three years, was Barclays. And one can only hope the surprise recruitment of former FSA chief executive Hector Sants as its head of compliance can improve the bank’s track record here.
A hint at the alarming nonchalance shown by many firms in the face of FSA scrutiny came as the regulator – soon to evolve into part of the Financial Conduct Authority – sought to address several investment banks’ failure to properly ringfence billions of pounds of assets held for hedge fund clients.
This issue has become a top priority in recent years: the failures of Lehman Brothers and MF Global led to pandemonium as creditors and clients fought over assets. But even in the wake of such chaos, the response from several banks to entreaties from the FSA to get their houses in order was worryingly sluggish.
The same insouciance was on display when it came to the FSA’s anti-money-laundering initiatives last year. The regulator warned that many banks, large and small, were repeatedly ignoring the rulebook – though it refused to name and shame them.
“It is not a pretty picture,” said Tracey McDermott, then acting head of financial crime. “The banks are just not taking the rules seriously enough.” If only they had been listening. Or if only the FSA had shouted louder, and got tougher.
The music – and the profit – fades for HMV
When Band Aid released Do They Know it’s Christmas? in 1984, music fans dashed to Woolies, Our Price or HMV to get their hands on a copy. The song has been covered twice since, but it’s fair to say that, should there be a third act, purchasers are more likely to buy the song with one click on iTunes than trek to their local music store – if it still exists.
Indeed, the cause for which we need to rattle the tin is HMV itself, which is again in a precarious position after sales of CDs, DVDs and games slumped over the summer. On Thursday, new chief executive Trevor Moore, on his maiden outing for the retailer’s half-year results, dropped the bombshell that there were “material uncertainties facing the business” and that it was on course to breach banking covenants early in the new year.
Moore says he has ideas, but his options are limited: his predecessor, Simon Fox, sold almost everything HMV had, including bookseller Waterstones and the live music venues that were supposed to be the group’s saviour. The sell-off did not even put a dent in HMV’s debt pile which stands at £176m, compared with its lowly stock market value of around £10m.
A supplier-backed bailout brokered in January, which saw Universal Music, EMI, Warner Brothers and Disney accept a small equity stake in return for better commercial terms, was supposed to have put the retailer on a solid footing. The music moguls and film studios, whose profit margins are under siege from Amazon, need HMV to survive more than its battle-weary investors. But retailers are supposed to serve customers, and the latest data from HMV’s core markets suggests shoppers are buying its wares with less frequency. In the six months to the end of October, music and games sales by value were down by nearly a quarter; DVD sales slid 16%.
The people who hold the power at HMV – its banks and suppliers – have shown restraint in recent years, but with the coffers full after the Christmas trading peak they might decide it’s time to stop the music.