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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Kim Kardashian has been in the news these past few days for the usual reasons: gossiping about other celebrities, changing her look. But 18 months ago the queen of influencers — estimated net worth $1.7bn — was suffering more painful headlines, after having agreed, without admission of wrongdoing, a settlement of $1.26mn with US regulators over her social media promotion of a crypto coin. Plenty of other celebrities have been pursued since. The accusations against them? Not fully disclosing that they had been paid to promote crypto securities.
Last week, the UK’s Financial Conduct Authority went a step further. Using its new consumer duty powers, it warned that it would prosecute so-called financial influencers (or “finfluencers”) who flout the law on the advertising of financial products. The penalty will be up to two years in jail or an unlimited fine. The potential for abuse is vast — three-quarters of 18 to 29-year-olds trust the advice of finfluencers, according to McCann Relationship Marketing, even though much of it may be disguised marketing.
Both developments reflect how enforcers are having to move fast to keep up with the changing nature of technology, advertising and conflicts of interest (not to mention the ever-growing power of celebrity endorsement). The root motivations, though, are age-old. Mis-selling scandals by supposedly professional financial advisers abound, especially when the incentives are distortive — just think of the £50bn PPI scandal that led to millions of Britons buying high-commission, but wholly unnecessary insurance policies.
Everyday finance is one thing. But such conflicts of interest are also appearing in and around the networks of high finance. Nowhere is this more true than in the ecosystem surrounding the boom industry of private capital. This $13tn sector thrived in the decade and a bit that followed the global financial crisis, as ultra-low interest rates drove aggressive buyouts and in many cases superior investment returns.
Private equity firms’ own management teams are actively encouraged, obliged even, to co-invest in the funds they run, on the logical grounds that this aligns a manager with the interests of those institutional limited partners.
The dynamic is extended another degree by the likes of Goldman Sachs. Staff in its own private capital division are similarly encouraged to invest in their own funds. Access is also facilitated for bankers from across the group.
Controversially the practice has even been stretched into the legal fraternity. Some US firms, most notably Kirkland & Ellis (the dominant legal adviser to the private equity industry), have allowed partners to invest hundreds of millions of their own dollars in the funds managed by the buyout groups they advise. Critics point out that having a personal financial interest in a certain outcome from an investment you have advised on could compromise your legal duty to give impartial advice. Accountants in the US and UK are barred by professional rules from investing in audit clients for just this reason.
Elsewhere, McKinsey has shown how such conflicts of interest can run amok. In 2021 the consultancy firm was fined $18mn by the SEC for failing to put in place adequate controls over the potential misuse of “material non-public information” on clients by the group’s secretive internal wealth fund, McKinsey Investment Office Partners. In 2016 the Financial Times had revealed details of the $9.5bn fund’s operations but was assured by the group that it maintained “a rigorous policy to avoid conflicts of interest”.
Of course, the dilemma about how best to motivate people with monetary rewards extends beyond the financial sector and into broader business, particularly the corporate boardroom. There is no perfect answer for how best to align the motivations of management and investors without incentivising too much reckless short-termism on the one hand or conservatism on the other. But what is more certain is that share-based schemes for non-executive directors (now the norm in the US) can skew their vision. Yes, a well designed scheme might match up their personal financial interest with the long-term fortunes of the company, but too much alignment with executives is surely a bad thing: the best NEDs will challenge executives and give independent advice without regard to their own financial gain.
Those providing counsel, be they directors, accountants, lawyers or consultants, should stand above the fray and avoid grey-area conflicts of interest — and certainly not worry about keeping up with the Kardashians.
