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No, Rees-Mogg's new Brexit role is not a plausible conflict of interest.

Updated: Mar 18

Politax Guarantee


Never in the history of political discourse has one man’s finances been subject to as many fabricated allegations as Jacob Rees-Mogg’s. Let’s go through the classics:


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. 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 will ultimately result in more UK tax being paid – this is the only potential impact on UK tax receipts.


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.

So now we have a new allegation, “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. Perhaps the run of fabricated allegations will end here? Perhaps there is a genuine, plausible, conflict of interest? As you might guess, no there isn’t. Let’s look at the allegation.


“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 is going to increase 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 can single-handedly increase 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+, stands to make £2,053.


Angela Rayner has 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.


It’s clearly utter dross. 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.


“Jacob Rees-Mogg’s new Brexit Post could make him richer” is fabricated allegation 5.


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.


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 believe 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 angle, which is just nonsensical. Rees-Mogg's role is indeed to look for EU Directives retained in UK law which, he thinks, we can 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.


As I indicate, this is not to say Jacob Rees-Mogg won't suggest Solvency II should be reformed or even repealed. He would have plenty of support in doing so, 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 have 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 in a future edition they can 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/Daily Mirror 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 one purported to exist by openDemocracy 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 - 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 a reform is very plausible, 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. 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. Given his background it wouldn't be surprising to see some movement on the financial regulation front, and we should watch this space and look at changes cautiously for any conflict, but it would be preferable if the advocacy groups don't end up crying wolf and highlighting conflicts which don't exist.


The Cabinet Office reportedly responded to potential conflicts saying, "Policy related to the financial services sector is the sole responsibility of the Treasury, and as Brexit opportunities minister Jacob Rees-Mogg will not be involved in decision-making in respect of financial services." It's not clear exactly which regulations Jacob Rees-Mogg will be able to amend, if any at all. Whatever the regulation is will presumably fall in the responsibility of a departmental minister, just as financial services falls under the treasury. It could be his role is a consultative role, to highlight opportunities presented to him, requiring the department to respond. Rees-Mogg has described his role as "a collaborative effort", which suggests, when you reconcile it with the Cabinet Office statement, ministers may still retain the role of decision maker. So we don't yet know how Rees-Mogg's role will play out, what authority he will have to change anything, so the idea we are in a position to make specific allegations/observations of conflicts is absurd.


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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