Unlock Editor's Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
Kim Kardashian has been in the news in recent days for the usual reasons, including gossip about other celebrities and changes in her appearance. But 18 months ago, the influencer queen, with an estimated net worth of $1.7 billion, agreed to a $1.26 million settlement with U.S. regulators over her promotion of cryptocurrencies on social media without admitting wrongdoing. , was met with even more harrowing headlines. Since then, many other celebrities have been tracked down. What are the charges against them? Failure to fully disclose that compensation was being paid to promote cryptocurrency securities.
Last week, the UK's Financial Conduct Authority took another step forward. It has threatened to use new consumer duty powers to prosecute so-called financial influencers (or “finfluencers”) who flout laws around advertising financial products. The penalty is up to two years' imprisonment or an unlimited fine. According to McCann Relationship Marketing, three-quarters of 18 to 29-year-olds trust the advice of finfluencers, even though much of it may be disguised marketing. That's what it means.
Both developments reflect how quickly enforcers must move to adapt to changes in technology, advertising, and conflicts of interest (not to mention the ever-increasing power of celebrity endorsements). . But the underlying motivation is ancient. Misselling scandals involving purported professional financial advisors are common, especially when incentives are skewed. Consider the £50bn PPI scandal that led to millions of Brits buying expensive but completely unnecessary insurance policies.
Everyday finance is one thing. But such conflicts of interest also occur in and around high finance networks. Nowhere is this more true than in the ecosystems surrounding burgeoning industries of private capital. This $13 trillion sector flourished in the little more than a decade after the global financial crisis, as ultra-low interest rates encouraged aggressive acquisitions, often resulting in superior investment returns.
Management teams of private equity firms are actively encouraged to co-invest in the funds they manage, with the rationale of aligning the interests of management and institutional limited partners. , even mandated.
This dynamic is further expanded by Goldman Sachs and others. Staff in the company's private capital department are similarly encouraged to invest their own funds. It will also be easier to access for bankers across the group.
This practice has spread to the legal profession and is controversial. Some U.S. firms, particularly Kirkland & Ellis, a leading private equity legal advisor, allow partners to invest hundreds of millions of dollars in funds managed by buyout groups they advise. . Critics point out that having a personal financial interest in a particular outcome from an advised investment can undermine the legal obligation to give unbiased advice. Accountants in the US and UK are prohibited by professional rules from investing in audit clients for this very reason.
McKinsey has shown elsewhere how such conflicts of interest can get out of control. In 2021, the consultancy was cited by the SEC for failing to put in place adequate controls against the potential misuse of “material non-public information” against clients by the group's confidential internal wealth fund, McKinsey Investment Office Partners. was fined $18 million. In 2016, the Financial Times revealed details of the $9.5 billion fund's operations, but assured that the fund maintains “strict policies to avoid conflicts of interest.”
Of course, the dilemma about how best to motivate people with financial rewards extends beyond the financial sector to wider business, particularly corporate boards. There is no perfect answer as to how best to align management and investor incentives without encouraging excessive reckless short-termism on the one hand or conservatism on the other. But what is more certain is that share-based arrangements for non-executive directors (currently the norm in the US) may distort their vision. Certainly, a well-designed scheme may align personal financial interests with the long-term wealth of the company, but too much alignment with management is definitely a bad thing. The best NEDs challenge management and give independent advice regardless of their own opinions. economic benefit.
Those providing advice, whether directors, accountants, lawyers or consultants, need to stay above the fray, avoid gray areas of conflicts of interest, and of course worry about keeping up with the Kardashians. No need to.
patrick.jenkins@ft.com
