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No, Jacob Rees-Mogg's Cabinet role is not a plausible conflict of interest

Updated: Sep 14, 2022

Never in the history of political discourse has one man’s finances been subject to as many fabricated allegations as Jacob Rees-Mogg’s. This article is actually an updated version of an article from when he first took on the Brexit opportunities roles. Let’s go through the classics to kick us off.

Fabricated allegation 1

“Jacob Rees-Mogg’s Company Accounts show c£103M profit over last 5 years, but paid ZERO UK corporation tax as ultimate ownership in Cayman Islands.

Verdict: Nonsense. Somerset Capital Management LLP doesn’t pay corporation tax because it’s not a corporation – it’s treated as a partnership for tax purposes so the partners are liable for the tax. Probably the allegation most often repeated, and entirely incorrect. The Cayman Islands entity results in more UK tax being paid, not less. Debunked comprehensively here.

Fabricated allegation 2

“Jacob Rees-Mogg moved his company to Ireland to avoid UK tax.”

Verdict: Nonsense. Somerset Capital Management launched a couple of funds domiciled in Ireland. There are no employees, offices or revenues belonging to SCM in Ireland. The company is based in London where it has always been based. If these new funds make extra revenue for SCM LLP this, like the Cayman Islands entity, will ultimately result in more UK tax being paid – this is the only potential impact on UK tax receipts. He doesn't have an Irish Passport either!

Fabricated allegation 3

“Jacob Rees-Mogg was awarded a grant of £7.6million to do up Wentworth Woodhouse.”

Verdict: Nonsense. It seems many people on the left didn’t understand what “ancestral home” meant when the FT first reported the story. Rees-Mogg’s in-laws’ family owned the house, and it had been in the family for centuries, but here’s the kicker - they sold the house in 1989. When the grant was made for restoration in 2016 the house hadn’t been in the family for decades and belonged to a preservation charity.

Fabricated allegation 4

“Jacob Rees-Mogg avoiding tax by forgetting to declare cheap directors loans from the Cayman Islands company that he in fact set up to avoid paying tax”, so tweeted Karl Turner MP, with 2000 RTs.

Verdict: Nonsense. He didn’t forget, the loans were not declarable. The idea they were “cheap” came from a miscalculation in an article in the Mail by Anna Mikhailova, debunked here. The idea the loans were from the Cayman Islands was just made up – they were from Saliston Limited, Rees-Mogg’s UK Company. The article led to Angela Rayner writing to the Parliamentary Commissioner for Standards, Kathryn Stone. Not surprisingly, he was cleared, as predicted in the Politax article.

The new "Conflict of Interests" allegations

Back in February 2022 had a corruption allegation levelled against him, “How Jacob Rees-Mogg’s new Brexit post could make him richer” is the headline in the article here, and repeated in City A.M. and the Independent. Then, following his appointment as Secretary of State for Business, Energy and Industrial Strategy in September 2022, Fiona Harvey wrote in the Guardian, that Rees-Mogg was "An investor in oil and coal mining through Somerset Capital Management, the fund management firm he co-founded and still benefits from financially", which provided a link between his business and policy which was leapt upon by social media as a glaring conflict of interests.

Perhaps the run of fabricated allegations will end here? Perhaps there is a genuine, plausible, conflict of interests? As you might guess, no there isn’t. Let’s look at the allegations, starting with Rees-Mogg taking on the Brexit Opportunities role.

“Susan Hawley, executive director of Spotlight on Corruption, told openDemocracy: “Rees-Mogg’s vast investment portfolio in dozens of sectors across several continents could pose a serious conflict of interest with his reported intention of axing a thousand regulations when he could stand to benefit personally from the process.”"

Seth Thevoz, writing for openDemocracy, goes on to claim this “could gain him a huge cash sum”.

Could it? Let’s crunch some numbers.

As Susan Hawley says, Somerset Capital Management has investments in a large number of sectors across several continents. They are an Emerging Markets specialist, so think China, Russia, Brazil, South Africa, Indonesia, India etc. You would expect them to invest in major companies in those markets. Susan Hawley suggests that by “axing a thousand regulations” he could cause those companies to benefit, which will benefit Rees-Mogg himself through a boost to SCM.

Now, I’m going to make an outlandish claim here. By axing a thousand regulations, Rees-Mogg could have increased imports from all these markets by 20%. Utterly ludicrous. If I had said that was possible simply by axing regulations I would have been accused of a Brexit unicorn. But let’s leave it at this utterly ludicrous figure, and see what happens.

My method here is to look at MI Somerset Global Emerging Markets Fund see which countries it has exposure to, and extrapolate that across the SCM suite of funds using the overall Assets Under Management. For Assets Under Management, SCM reported this to the SEC as $7.425bn as at August 2021, so I’ve used that. What it actually is, to the dollar, isn’t important. There are other funds, such as MI Somerset Emerging Markets Dividend Growth Fund, which will invest in similar companies and countries, but biased towards those which are expected to grow their dividend.

As above, I am going to assume this utterly ludicrous 20% increase in trade with these countries, look at the impact that will have on those countries GDP, and assume it will have the same impact on the companies. It’s not perfect, I’m extrapolating quite a few things, so this will only be a ballpark. You’re about to see that it doesn’t really matter that it’s not perfect.

MI Somerset Global Emerging Markets Fund invested in 39 companies as at the report I’m looking at which you can find here. It covers 16 sectors and 17 countries.

So I’ve looked at each country the fund invests in, looked at how much each exports to the UK, assumed Rees-Mogg could have single-handedly increased these exports by 20%, and the increase in GDP I’ve applied uniformly across the companies to arrive at a new price.

For example, China exports $75.8bn to the UK each year (according to trading economics which I’ve used throughout for consistency). Rees-Mogg will increase this to $90.96bn. Chinese exports to the UK account for 0.2288% of Chinese GDP. The increase in Chinese GDP will be 0.098%, which I’ve applied to the value of every Chinese company the fund invests in. I’ve repeated this for every country/company combination. I know, it’s not perfect – the increase in exports will be felt in the turnover of these companies, which will be different to the value but, to reiterate, I’m aiming for a ballpark figure.

Performing this analysis the 20% increase in exports to the UK will make the total value of SCM’s Assets under management rise to $7.438bn – an increase of $13million.

There you go, there’s the gotcha, Rees-Mogg’s firm makes $13million. QED.

No. These funds don’t belong to SCM – they belong to investors. SCM manage these funds and deduct a small fee from the funds for doing so, and that fee represents the turnover of the funds which you can find in the accounts on Companies House here.

So that $7.425bn AUM led to turnover of £27.7million. Assuming a pro-rata increase from AUM to revenues, a $13million increase in AUM will cause revenues to rise by £48,924 and the profits by £17,106. The openDemocracy article begins by asserting Rees-Mogg has a 12% stake.

So, yep, they’ve got him. Rees-Mogg is going to increase the revenues of these companies in Emerging Markets because of his own self-interest. Rees-Mogg, estimated by some to be worth £100million+, with hundreds of thousands in income even in a lean year, stands to make £2,053.

Angela Rayner leapt into action again though, linking Rees-Mogg to specific investments, “From Vladimir Putin’s puppets to private Chinese health corporations, Rees-Mogg’s investments raise serious questions about security.

“Ministers cannot be allowed to influence policy decisions they have financial interests in and any conflicts should always be properly notified."

The Daily Mirror goes on to say, "Somerset invests £6.5million on behalf of its clients in the Chinese pharmaceutical and healthcare company WuXi AppTec which stands to benefit as medicines are deregulated following the UK’s EU exit... ...and also invests £5.7million on behalf of clients in Russia’s largest privately owned gas company Novatek PJSC-GDR chaired by Vladimir Putin crony Leonid Mikhelson."

Let's take WuXi AppTec. A company worth $45bn - the only UK link I can find is that it owns a UK based subsidiary, OXGENE, which it acquired last year for $135million. Nonetheless, I'm going to make another outlandishly ambitious assumption of Rees-Mogg's handiwork and he's going to increase the value of this international pharmaceutical company by 10% simply by easing UK regulations.

SCM's holding is now worth £7.15million. As I say, and as the Mirror says, these shares are held "on behalf of its clients". The firm simply takes a fee. Based on this price increase SCM will increase its revenues by about £3250, and it's profits by £1250.

So the logic of the Daily Mirror article is that Rees-Mogg will use his influence to help WuXi AppTec increase their UK sales, risking his job and, if there's an insider trading angle, a prison sentence, for the sake of him earning a whopping £100.

The Emerging Markets Funds have no material exposure to the UK, there’s nothing Rees-Mogg can plausibly do to make the values of those funds rise by a perceptible figure by axing UK regulations. Even if he could, the gain doesn't belong to SCM, it belongs to their clients - SCM's turnover is roughly 0.5% of their AUM. Their profit is about 30-40% of that. Rees-Mogg's interest is, say, 10-12% of that.

I clearly don't have the investigative resources of the Daily Mirror, the Independent or City A.M. so you do wonder why none of them have bothered to run some rough numbers.

Before we finish on this section, let's return to Fiona Harvey's Guardian article, remember he's "An investor in oil and coal mining through Somerset Capital Management". Marina Purkiss (@marinapurkiss) tweeted, "Hey there MASSIVE conflict of interest...How YOU doing?" before quoting the Guardian article. The tweet was liked 30k times, and retweeted 8K times.

Of course, as ever it then takes a life of its own with different people including their own version. Evolve Politics (@evolvepolitics) tweeted,

"Jacob Rees-Mogg has been appointed Energy Secretary.

Rees-Mogg is a founding partner of investment firm Somerset Capital, who hold millions of pounds worth of investments in oil & gas firms.

Now I wonder whether Rees-Mogg will implement a windfall tax on their excess profits…"

First of all, it would help if we knew the extent of the Oil and Gas investments. Looking through the reports of various Somerset funds I can only find CNOOC in the Asia Income Fund (value £1,482,063) and Emerging Markets Dividend Growth Fund (value £4,768,055), and also a holding in Petro Rio (value £15million) There was an £8m+ holding in Russia's Novatek but this, not surprisingly, is no longer part of the portfolio. [If anyone knows of any holdings I have missed I'd be happy to add them].

Let's call it a £6.5million investment in CNOOC. What's CNOOC? China National Offshore Oil Corporation. It's a large Chinese Gas producing company which has some drilling operations in the North Sea via a subsidiary, CNOOC Petroleum Europe Limited. Looking at their latest accounts, they derive $770m from these operations, but the year before that figure was $1.4bn, so we'll go with that figure. CNOOC's total revenue for 2021 was RMB246billion, or a little over US$35bn. So, 4% of CNOOC's income is derived from the UK. If Rees-Mogg could quadruple CNOOC's UK income and create a 16% increase in the share price Rees-Mogg's income would rise by around £300. Likewise a windfall tax which absolutely wiped out CNOOC's UK contribution would cost Rees-Mogg £75. This £75% is presumable what @evolvepolitics believes drives his windfall tax scepticism.

What could Rees-Mogg do as a UK Minister to help CNOOC? Currently the UK obtains no Oil and Gas from China at all (Source: Statista). Already the links between Rees-Mogg's ministerial position and the company are looking a little flimsy. Basically, all that Rees-Mogg could do, which would look a little odd, would be to start buying fossil fuels from China - which is clearly not where he has been going from a policy perspective - the idea is to create self-reliance in the UK not to from jump from the Russian frying pan into the Chinese fire!

But let's be outlandish again. Rees-Mogg decides to to a deal, or help a UK company to do a deal, with CNOOC to buy Chinese Gas. Let that deal add 50% to the value of CNOOC (completely absurd). Don't forget, SCM's turnover is roughly 0.5% of this extra £3m AUM, their profit is about 30-40% of that. Rees-Mogg's interest 10-12% of that. Rees-Mogg's theoretical pre-tax gain is somewhere in the region of £600. This is from an outlandish hypothesis that is almost certainly not going to happen any time soon.

By all means try yourself. Try to consider what Rees-Mogg could possibly do to increase the value of CNOOC. With only 4% of the company with UK exposure it's unlikely you're going to find a means to materially alter Rees-Mogg's income from the North Sea. Could the UK influence global energy prices enough to create a perceptible change in the value of a Chinese company?

No. Clearly the whole thing is ludicrous. There isn't any plausible way Rees-Mogg can increase his wealth via Somerset Capital Management by influencing policy in favour of its underlying holdings. I cannot find any connection between Petro Rio and the UK - the UK's total oil imports from Brazil are negligible and I cannot see that it has any drilling operations anywhere in the UK.

Strangely, what isn't mentioned anywhere is Somerset's £6m holding of Longi Green Energy Technology - one of the World's leading manufacturers of solar technology. Will Rees-Mogg favour solar panels rather than fossil fuels - the man has conflicts within his conflicts!

Remember this: Any increase in the share price of a particular company will always be a small fraction of Somerset's overall assets under management. The increase in SCM's income will be circa 0.5-0.75% of the increase in share price. The profit will be about 35% of that. Rees-Mogg's interest will be 12% of that. For a £1m increase in a share price, Rees-Mogg's income will rise by about £250-£350. He receives upwards of £600K per year even in a lean year. He isn't going to risk his job, or worse, for 300 quid.

“Jacob Rees-Mogg’s Cabinet position could make him richer” is fabricated allegation 5.

These allegations are nothing new, in Byline Times Adam Bienkov recalls, "In 2014, Rees-Mogg was referred to the Parliamentary Standards regime after he repeatedly spoke in the House of Commons chamber in support of the oil and gas, tobacco and mining industries without first declaring that he was the founder and director of Somerset Capital Management, which then held millions of pounds worth of investments in those sectors."

What Adam Bienkov seemingly fails to recall was that he was subsequently cleared. MPs are specifically not required to report Collective Investments as shareholdings - their diversity making conflicts relatively implausible. When the MP doesn't even have an interest in the fund, but the fund manager taking a 0.5% or 0.75% fee, implausible becomes entirely absurd.

Perhaps Private Eye did run some numbers because they too have stated there is a conflict of interest, but have come from an entirely different angle - they believed that he will be looking to ease some EU derived regulations which impact SCM themselves, rather than their investments. From the Feb 18th edition, "Up for grabs is an arcane set of European rules known as Solvency II. These exist to protect savers but are a pain in the neck for insurance companies and the fund managers who work with them."

On the face of it, this angle is far more sensible than the openDemocracy/Marina Purkiss angle, which is just nonsensical. Rees-Mogg's role was indeed to look for EU Directives retained in UK law which, he thought, we could do without. But Solvency II, whilst undoubtedly eminently reformable, as a conflict? Somerset Capital Management wouldn't be in the scope of Solvency II, it applies to insurance companies - basically to ensure they have sufficient capital to meet any liabilities they face, and the risks they take with their investments are factored into that analysis.

Fund Managers, whilst not directly in scope of Solvency II, may have some indirect impact as their insurance company clients may require reporting from the Fund Managers they use, to assist with their compliance. Ideally this is done by what is known as the "look through" approach, whereby the insurance company understands the risks inherent in the fund's underlying investments. This might be an issue where the insurance company invests in hedge funds using derivatives or taking short positions, holds vehicles with contingent liabilities, or uses complex structured products. For everything you may hear about how complicated Rees-Mogg's finances are, Somerset Capital Management take "long-only" positions in Emerging Markets equities, and that's about it. You could argue that relaxing Solvency II may free up more capital to invest in SCM's funds, but it's a little far-fetched, referring the reader to some of the financial gains Rees-Mogg could look forward to above.

The Government has indeed taken steps to reform Solvency II but the support form that was from people other than Jacob Rees-Mogg. David Otudeko, head of prudential regulation at the Association of British Insurers, has said "Brexit provides an important opportunity to review Solvency II, particularly to seize the chance to enable our sector to provide further investment in the UK’s economic growth and transition to net zero." Shadow Business Secretary Jonathan Reynolds said: "When I was ever asked ‘what do you think a potential benefit of Brexit might be’, I would often cite Solvency II as something we could have done better."

If I was as cynical as Private Eye, it may cross my mind that they concluded that Solvency II is one regulation that is likely to be reformed, and so they've found a (tenuous, verging on non-existent) link to Rees-Mogg so that they can now print a "we told you so" column. I'll watch that particular space.

Giving them the benefit of that doubt, Private Eye's approach is indeed more sensible than the openDemocracy/Marina Purkiss etc approach. If there is a conflict of interest it would materialise where SCM have issues with EU Directives which it believes its UK business could benefit from removing. The UK played a key role in the European Securities and Markets Association (ESMA), and many of the EU regulations impacting the investment management industry came from UK regulators, so it's unlikely there will be wholesale changes in this area since the UK already thought they were largely proportionate.

Any conflict of interest is a serious cause for concern. The ones purported to exist by openDemocracy, Marina Purkiss and Evolve Politics can, and should, be dismissed out of hand - it doesn't seem to me that they've given any consideration to how little Jacob Rees-Mogg can realistically make. Jacob Rees-Mogg could have dictatorial powers over every aspect of UK regulations or Energy Policy and the money he could make from investments in Emerging Markets would still make no perceptible difference to his wealth. Private Eye at least recognise that it would be regulations that impact SCM, not their investments, which would provide a theoretical conflict, but the fact they have chosen to focus on Solvency II suggests they, likewise, haven't actually found anything material. Whilst Solvency II reform is a reality, the benefits to SCM are indirect, secondary benefits which are unlikely to be material.

If one was really pushed, one could possibly make a MIFID II reform conflict sound plausible which he was the Brexit Minister. Once you have already gone to the expense of complying with these regulations, however, it's difficult to see there would be a significant saving in removing them. Transaction reporting is a technology build which has already been built. London will still have Best Execution requirements whatever happens etc - just as Singapore and New York do.

Jacob Rees-Mogg's detractors are clearly going to extraordinary lengths in order to find any kind of financial peccadillo. Tax avoidance, Government grants, undeclared loans and now conflicts of interest - every allegation has so far failed when it met the hurdle of fact. Not a single investigative journalist, despite all their efforts, has laid a genuine glove. As I say, if they keep adding to the easily-debunked list of fabricated allegations, eventually the allegations won't need to be debunked - people will just stop listening.

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