Category: Laws & Regulations

The Causes of IT Meltdown

In the last couple of days, many IT systems have been down due to the release of a new version of the Crowdstrike security software. I don’t personally use that software so the impact on me has been minimal but it is widely used in the NHS, in a few banks, by airlines (one of my neighbours had their holiday flights cancelled) by some retailers and others. It affected those running Windows software. For example it affected the EMIS software that my GP practice and many others use for appointment booking.

As a former IT manager, these are the questions I would be asking: 1) Was the new software version adequately tested on all the common environments before release? 2) Was a staged release done so that only a few organisations were affected before the fault was discovered? (It seems it was not). 3) Was there a roll-back plan in place to recover quickly when the fault was discovered? Apparently not! 4) Did all users of the software have disaster recovery plans to enable them to revert to back-up manual systems or alternative IT systems?

In essence this failure is due to incompetence by Crowdstrike and among their customers. This kind of failure arising from a new software release simply should not happen.

As a member of the British Computer Society, the professional body for IT staff, I think it is unfortunate that they have not taken a lead on establishing standards to avoid this kind of failure.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Mike Lynch Acquitted

Dr Mike Lynch has been acquitted of fraud in a California Court over the alleged misleading accounts of Autonomy. This has been a long running legal case after the acquisition of Autonomy by HP who alleged Mr Lynch and his co-defendants illegally inflating revenues by backdating some of Autonomy’s contracts, using “round trip” deals to compensate customers for making purchases, and hiding the fact that some of its high-margin software revenue was really coming from unprofitable hardware sales (software revenue is typically valued higher than hardware revenue).

I have made negative comments on Autonomy’s accounts in the past but it would not be appropriate to discuss why the jury reached the latest verdict. Without studying all the evidence presented in court it is very easy to jump to the wrong conclusions based on media reports.

But after 13 years that this saga has been running, it will certainly be the case that directors of software companies operating in the USA will be a lot more careful about their revenue recognition practices which is surely a good thing.

For more information on the background to this legal case see:  https://www.ft.com/content/62b6af38-ff48-43a9-9403-2a18a1ddca3d?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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High Court Rejects Climate Action Plan

Last week the High Court ruled that the Governments climate action plan is unlawful. On several grounds they argued that the Government will not meet its net zero emission targets in a judicial review brought by environmental groups. This is despite the fact that the net zero target has never been put to a popular vote and many people consider it to be both unnecessary and unachievable.

The Government will need to amend its plans.

As a shareholder in oil/gas companies I object very strongly to the law interfering in the sensible policies of companies who are already making strenuous efforts to control emissions. But in reality we need oil/gas production for many years to come otherwise we will all be impoverished for no good reason.

More info: https://www.ft.com/content/f57e608b-f230-44c9-97f8-44c5c60f3ccb

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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They Do Things Differently in the USA

The sentence of 25 years in prison by a New York court on Sam Bankman-Fried for the fraud he orchestrated at crypto exchange FTX should be compared to the weak handling of financial fraud cases in the UK. In England it takes years to get them into court, if they ever are, and any penalties are feeble in comparison.

The FTX case was perhaps an obvious case of fraud – using client’s money to prop up the business – but the legal system in England is clearly defective in comparison. The amount that disappeared was about $9 billion and it shows how far a glib talker can go.

The speed of the prosecution is also a lesson. From the collapse of FTX to conviction is only 2 years. The English legal system needs wholesale reform to make it more expeditious and more effective as a deterrent to financial crime. The English legal system is designed more to benefit lawyers, both in civil and criminal cases, rather than ensure justice is obtained swiftly.

Previous comments: https://roliscon.blog/2023/11/03/sam-bankman-fried-found-guilty

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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UK ISA Consulation and Investing in ISAs

The Chancellor of the Exchequer said in his budget speech that he was proposing to implement a “UK ISA” into which and additional £5,000 could be subscribed. Only UK companies would qualify for such investments. This is subject to consultation and you can read my response to the consultation here: https://www.roliscon.com/_files/ugd/8ec181_36b8502e9836413492f124ebc3ee9b4c.pdf

If you wish to submit your own response go here for the details and how to respond: https://assets.publishing.service.gov.uk/media/65e734d62f2b3bd5107cd8c5/UK_ISA_Consultation.pdf

My summary comments were as follows: “As relatively few investors probably contribute the maximum amount to ISAs each year I can see little attraction in being able to contribute an additional £5,000 to a UK ISA. Even those who do contribute the maximum amount each year will simply see it as a small increase in their ISA contributions and a complication to their portfolios. In general, I see little benefit in the establishment of a UK ISA and I doubt it will significantly increase funding for UK companies. This will just be an unnecessary complication of the ISA regime.

The AIC have just published an interesting note on the top performing investment trust ISAs over the last 25 years which you can read here:  https://www.theaic.co.uk/aic/news/press-releases/top-performing-investment-trust-isas-over-the-last-25-years . Many have done remarkably well with the best generating more than £250,000 from the maximum permissible investment of £7,000 in 1999. But the best tend to be sector specialists so choosing what to invest in is still important.

There was an interesting discussion between David Stredder and Chris Boxall at the Mello event on Monday. They both bemoaned the lack of good small/mid cap listed shares in which to invest and this has certainly affected trusts and funds of late. AIM listings are declining with few new IPOs. The dross is leaving and new listings are fewer partly because funding from private equity investors is now more readily available. To revive the UK stock market we need more vigorous action than inventing “UK ISAs”. The costs of listing and corporate governance thereafter are too high for smaller companies.

But it is not all doom and gloom. One successful recent listing was Fonix Mobile (FNX) who announced good results yesterday and today we had results from 4Imprint (FOUR) who are doing well in conquering the US market for promotional items. I hold both those companies so the message is that it is still possible to find good UK listed companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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FCA Announces Major Reforms

I have criticised the Financial Conduct Authority (FCA) in the past for its slow response to complaints about companies and its general secretiveness. They won’t traditionally disclose if they are investigating a company or what activity has taken place on a complaint. Complaints often take years to reach any conclusion and meanwhile complainants often lose interest or even die.

But it seems this may be about to change with the announcement of a new policy document – see CP24/2: https://www.fca.org.uk/publication/consultation/cp24-2.pdf

It includes these statements under the title: “Our Enforcement Guide and publicising enforcement investigations–a new approach”:

  • The deterrent effect of enforcement action is greater the closer it is to misconduct occurring. The longer it takes for outcomes to be determined, the longer it takes for us to send important signals to the markets we oversee about what we consider serious misconduct to be. That is why we want to speed up investigations. We will do so with a streamlined caseload of investigations better aligned to our strategic priorities of putting consumers’ needs first, delivering assertive action on market abuse and reducing and preventing financial crime.
  • More broadly, and subject to consultation, we are simplifying our Enforcement Guide (EG). We intend for this to be a more useful and focussed document going forwards, and are moving key information to our website where it’s more easily accessible. We know these proposed changes to what we will tell the public about our work are different to the approach we have taken previously, and we are keen to hear feedback on our proposals.
  • We currently publish very little information about the investigations we have opened that lead to those actions. Public concern about whether we are taking appropriate steps can develop in this gap, which can also undermine the educational value and deterrent impact of those outcomes.
  • The focus of this CP is a proposal to be more transparent around what enforcement activity we are doing. Proposed revisions to the rest of EG aim to improve the accessibility of information about how we carry out our investigations. We want the information we provide to be concise, relevant and, ultimately, more useful.
  • In future, we want to proactively publish more information about our enforcement investigations including their opening and progress. This includes publishing the identity of the subject of the investigation, if we assess that it is in the public interest to do so and if there are no compelling legal or other reasons not to. It will also include publishing updates on our investigations and announcing that we have closed cases where our investigations have not led to regulatory or other action.

The FCA says “We have been transforming to become a more innovative, adaptive, assertive and proactive regulator”. This is all to the good although changing the culture of an organisation is always difficult so it may be some time before we see any substantive change in how disclosures are handled and whether investigations are pursued more rapidly.

These are the answers to the questions posed in the consultation which I submitted:

Question 1: Do you agree with our proposal to announce our investigations, including the names of the subjects, and publish updates on those investigations, when in the public interest? Please give reasons for your answer. Answer: Yes I agree. It is important to announce investigations in the public interest and keep people informed on the progress of investigations.  

Question 2: Do you agree with the structure and content of our proposed new public interest framework, including the factors proposed, and the other features of our proposed new policy described in paragraphs 3.5 to 3.12 above? Please give reasons for your answer if you do not agree. Answer: Yes I agree.

Question 3: Do you agree with our approach to announcements and updates where the subject is an individual? Please give reasons for your answer if you do not agree. Answer: I suggest the approach is muddled and is totally unclear. It will lead to disputes as to what is permitted and what is not as regards disclosure of individuals involved in a case. I would like to see a more open approach.

Question 4: Do you agree with the proposed content of our announcements? Please give reasons for your answer if you do not agree. Answer: Yes I agree.

Question 5: Do you agree with our proposed methods of publicising an announcement and updates? Please give reasons for your answer if you do not agree. Answer: Yes I agree.

Question 6: Do you agree with our proposed approach to publicising investigation updates, outcomes and closures? Please give reasons for your answer if you do not agree. Answer: Yes I agree.

Question 7: Do you agree with our proposal that moving our strategic policy information to the website will make information more accessible? Please give reasons if you do not agree. Answer: Yes I agree.

I have no comments in response to Questions 8 to 16.

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You can submit your own response to the public consultation here: https://www.fca.org.uk/cp24-2-response-form

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Beware of Greeks Bearing Gifts

“Beware of Greeks bearing gifts” is a saying from Virgil’s Aeneid based on the story of the ruse used by the Athenians to gain access to Troy. It is a saying used ever since to beware of the sharp practices of Greeks or anyone appearing to offer something that is too good to be true. Globo was a company registered in the UK but with Greek management (both the CEO and CFO were Greek nationals). It was listed on AIM in the UK. Globo looked highly profitable but collapsed in 2015 as the cash on the alleged balance sheet was simply not there and revenue was clearly imaginary.

In my last blog post on the subject of Globo (see https://roliscon.blog/2024/02/17/globo-a-final-report/ ) I said “Do not trust the accounts of companies particularly those with Greek associations”. This comment has been attacked by a certain person, who shall remain nameless as I do not wish to promote his intemperate views. He has said “should we tar all Greeks with the same brush?” Despite the fact that he points out other Greek company frauds (InternetQ/Akazoo and Foli Follie) he thinks I have made a slur on an entire nation. But he admits to being a Hellenophile and having a house in Greece.

Let me be more specific as to why you should avoid Greek companies and their management.

Globo and its management should clearly have been pursued by legal criminal actions for fraud in the UK targeting the CEO and CFO but that was impractical because in extradition proceedings, in general Greece does not extradite a person who was a Greek citizen when the offence was committed or is a Greek citizen when the request is made. Neither does Greece accept enforcement of a European Arrest Warrant with some exceptions. See  https://globalinvestigationsreview.com/insight/know-how/extradition/report/greece#:~:text=In%20extradition%20proceedings%2C%20in%20general,when%20the%20request%20is%20made  

So in summary there was little deterrent to stop a Greek national from defrauding investors so long as they stayed in Greece and that is what happened.

In addition Greece is well known to be a country where accounting practices are dubious. To quote: “Creative accounting and profit management practices are well documented in the bibliography (Spathis, 2002; Spathis et al., 2002; Leuz et al., 2003; Baralexis, 2004; Caramanis and Spathis, 2006; Burgstahler et al., 2006). In fact, Leuz et al. (2003) rank Greece (along with Austria), as the country (out of a total of 31) with the highest rank in profit management” – see https://thescipub.com/pdf/ajassp.2019.327.335.pdf

I am sure most investors in the shares of Globo were not aware of these facts and the same problem applies to other Greek companies who might list in the UK. So I think my previous comments were very justified.

But the person who criticised them has been making snide comments about my views on Globo ever since he had to withdraw many of his allegations against me after I pursued a legal claim for libel against him some years ago. This was eventually settled by agreement of both parties but like any bad loser he keeps on raising the subject again and again.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Horizon Debacle and the Lesson to be Learnt

Last night I watched the ITV drama documentary on the Post Office Horizon scandal. It was a rather long-winded presentation of the miscarriage of justice that arose from a defective computer system installed in sub-post offices. People were convicted and sent to prison on false evidence that they had stolen money. Many lost their livelihoods, were made bankrupt and lost their homes. Post Office management avoided accepting responsibility or failed to disclose all the facts until a legal case led by Alan Bates (see the Justice For Sub-postmasters Alliance web site) enabled full disclosure.

The IT system was developed by Fujitsu and I ought to now declare that I was on the payroll of ICL Fujitsu in the 1970s for work on the VAT system, a more successful contract, but I never had any contact with the Horizon project.

One of the key revelations was that although sub-postmasters were responsible under their contracts for any losses, Post Office staff could manually “correct” transactions without the knowledge of the sub-postmasters by remotely accessing the branch records.

What are the lessons to be learned from this case? There are several:

  1. Never sign a contract without reading the small print and understanding it fully. Clearly many postmasters did and the contracts they signed were in essence one-sided and unfair.
  2. Never trust big organisations to treat you fairly. The Post Office was so keen to protect their brand reputation that management hid all the bad news.
  3. The English legal system may ultimately provide justice but at enormous expense. The legal fight went on for years and is still on-going with litigation funding being used to finance the case. Justice was poorly served in essence and the legal battles were quite one-sided in terms of funding. The Post Office, despite being Government owned, used every tactic to defeat the complaints of those wrongly targeted as a result of a defective computer system. The legal system needs reform to reduce costs and enable justice to be pursued without needing someone like Alan Bates to dedicate his life to it.  

The Post Office should have admitted the problems with the Horizon system much earlier and compensation should be comprehensive. It was a gross miscarriage of justice and also reflected poorly on the professionalism of the IT world that such a defective computer system could be developed without adequate testing and controls.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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FCA Challenges Cash Interest Charges

The Financial Conduct Authority (FCA) has published a letter sent to platform operators that manage ISA and SIPP funds. They say: “The amount of interest earned by some firms has increased as rates have risen. The FCA recently surveyed 42 firms and found the majority retain some of the interest earned on these cash balances, which may not reasonably reflect the cost to firms of managing the cash. Many also charge a fee to customers for the cash they hold, known as “double dipping”.

As both a customer of a well-known SIPP manager (AJ Bell) and a shareholder in the company that is hardly news to me. Interest on client cash holdings has been a major positive contributor to the profits of investment platforms as they typically pay less interest to the clients than they can obtain from depositing the cash in a bank.

At least that may be true now but a year or two back they were getting minimal interest on deposits and paying little or nothing to clients on their cash holdings.

The FCA seem to be saying that this source of profit is unreasonable and should not be used to cover more than basic operating costs but I am not sure that is entirely sensible. There are a lot of costs involved in operating an investment platform which have to be covered somehow. If not from the “cash margin” then what from?

The key issue is whether the charges applied are fair and apparent to customers, i.e. are they transparent and easily comparable across platforms? They certainly are not at present.

See the FCA announcement here:  https://www.fca.org.uk/news/press-releases/fca-writes-firms-about-treatment-retained-interest-customers-cash-balances

The AJ Bell share price has fallen by over 8% today at the time of writing.

Postscript: No doubt in response to the FCA announcement but probably under consideration for some time, AJ Bell have announced a reduction in charges and higher interest on cash deposits. See https://www.londonstockexchange.com/news-article/AJB/statement-re-pricing-changes/16249079

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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Regulating Cryptoassets

The FCA has published a consultation document on the regulation of cryptoassets – particularly stablecoins in the first instance. It should be of interest to anyone investing in cryptocurrencies or considering doing so. To quote from it:

5.9 If a cryptoasset custodian were to fail today, the lack of a clear regulatory framework could result in uncertainty that would likely cause harm to clients through delays in the return of assets, extra costs or, worst of all, loss of their assets. Without clear regulatory standards to which cryptoasset custodians are required to adhere, cryptoassets may not be safeguarded adequately, which may lead to losses should the cryptoasset custodian enter insolvency (whether due to being treated as assets of the custodian, or through operational errors). In addition to the harm to clients, an outcome that results in uncertainty in insolvency may impact confidence in the overall regulatory regime.

5.10 This was shown in the recent failures of Celsius Network LLC and the FTX group, both of which provided cryptoasset custody services. According to its recent bankruptcy filing, Celsius had misappropriated client assets and at the time of its insolvency owed $4.7bn to customers. In the case of FTX, at least $8bn of client assets were reported to be missing. According to filings in the US bankruptcy court for Delaware on FTX Trading, FTX’s practices included ‘potential commingling of digital assets…use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data…’ and ‘an absence of lasting records of decision-making.’

See https://www.fca.org.uk/publications/discussion-papers/dp23-4-regulating-cryptoassets-phase-1-stablecoins for details.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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