Another day, another whopping regulatory fine slapped on a FTSE 100 company. This is starting to become excessive. In just a few hours, both BP and Smith & Nephew have been forced to hand over a fat chunk of shareholder value.
For banks such as HSBC Holdings, it’s an occupational hazard.
But that still doesn’t stop it being bad news for you and I, the innocent victims in this.
Legal Gulf
Sometimes it seems like FTSE 100 companies are falling victim to a global sting, based in the US. The extra $18bn that BP seems likely to pay out following the Gulf of Mexico oil spill after being found guilty of “gross negligence” looks as dubious as it was inevitable.
BP is like a ship ran aground on foreign shores, ripe for everybody to plunder. Scores of Louisiana companies whose businesses were completely unaffected by the disaster have claimed compensation, even some based many, many miles inland.
At the same time, the two US companies that worked on the Deepwater rig, Transocean and Halliburton, miraculously escaped with only minor penalties.
Drill, Baby, Drill
So the BP share price has shed another 6% to around 460p, still 30% below its pre-blow-up peak of 650p. More worryingly, its recently restored dividend could even be under threat.
You might see that as a buying opportunity, but the recovery will continue to take time, especially if the US justice system find new ways to pump cash out of BP.
Fine Time
The bigger the bank, the harder regulators fall on it. That’s what’s been worrying dividend maestro Neil Woodford, who recently sold out of HSBC as a result.
The $1.9bn HSBC was fined for laundering money from Mexican drug cartels in 2012 looks like a slap on the wrist against the $16.7bn fine Bank of America has just settled, for selling toxic mortgages before the financial crisis.
Woodford sees this as “fine inflation”, which now seems to be based on the bank’s ability to pay, rather than the size of the transgression. Since HSBC is the second largest bank in the world, this makes it particularly vulnerable. So he sold.
HSBC’s historical manipulation of Libor and foreign exchange markets could prove expensive. Again, investors will ultimately be the ones who pay, through a lower share price or reduced dividends.
Smith & Wesson
No sector is safe. In 2012, Smith & Nephew was fined $22 million following a foreign bribery scandal. This week, it incurred another $11.3 million fine to settle allegations that it solely US government devices that it claimed were made in the US, but actually came from Malaysia.
Happily, since I hold the stock, these two penalties have done little to damage its recent stellar performance, with the share price up more than 100% in the last five years.
Cash Cows
But taken together, this is a worrying development. FTSE 100 companies generate around 77% of their earnings overseas, but this increasingly makes them fair game to US regulators.
The US is now the sole regulatory global superpower. It has given itself the right to, say, tell London-listed bank Standard Chartered how to conduct its global business, forcing it to suspend clearing activities for high risk Hong Kong business clients and exit certain client relationships in the United Arab Emirates.
These British stalwarts may have deserved to be penalised, but they’re not there to be milked. And nor are their shareholders.
