UAE Banking: Storm Signals in ADCB's 3Q2016 Financials

AA Has the Full Range of Flags, If Needed

As promised earlier, further thoughts on ADCB’s 3Q16 financial report plus an added bonus--a typical AA “get off my lawn” rant on financial reporting and regulatory environment.  The latter in a separate section at the end.

Introductory Comments

If you know your nautical flags, you will immediately see that the “storm signals” warning is at a modest level. In other words, I am not predicting an imminent serious crisis for ADCB.

The bank has reasonably robust stand-alone financials, though note the reporting  “lapses” discussed below. 

If by some low probability event, the bank were to develop life-threatening problems, it would almost certainly receive official support as it and other UAE banks have in the past, e.g., after the Great Financial Crisis of 2008.    The Abu Dhabi Government owns more than 60% of ADCB’s equity and has a special “incentive” to step up and has the resources to do so.  ADCB is a systemically important bank. Thus, the Central Bank is also likely to provide support.

If there is no imminent danger of collapse, why this analysis and why the use of the term “storm signals”? 

Free float is generally low in GCC equities (ADCB somewhere around 30%) and generally this free float is primarily in the hands of retail and not institutional investors, the latter presumed to be less susceptible to market panic.  Note I said “less susceptible” not “not susceptible”.  

In such “markets”, the price impact of investor actions—sales or purchases--is outsized relative to other markets.  A change in market sentiment and one’s return on ADCB stock could decline.  A large enough market decline and one might lose some of the initial investment, depending on one’s entry price. 

These characteristics increase risk.  If risk is higher, then the utility of a warning is greater.  

In addition as is the case here, when an issuer’s financials are deliberately opaque, the utility of a warning increases.   

“Storm signals” like the picture of the flag above provide warnings about potential problems. 

If there is a gale force typhoon in progress, one hopefully doesn’t need to see a flag to decide to keep one’s boat in port.  But if the storm is not yet fully apparent, a warning flag can prevent the sailing of boat, a change in its planned course, or alert the crew to be on the watch for the storm if they decide to leave port on the original course. 

Financial storm signals serve the same function for investors.  Warnings can be used to trigger action to prevent losses or in some cases to gain profit. 

One final note:  warnings about potential problems are not infallible.  Sometimes no storm appears. Sometimes the storm is much different from that predicted. 

Some Technical “Notes”

I used NBAD and FGB to provide some comparisons to ADCB’s financial reporting.  NBAD’s business is different from ADCB’s in many respects so I acknowledge there are limitations to that comparison.  

Abbreviations:   3Q16 = Third Quarter 2016.  FYE15 = Fiscal Year End 31 December 2015.

Financials: 

1. ADCB:  3Q16, 2Q16, 1Q16, FYE15  
2. FGB Annual Financial Reports Access Page,  FGB Quarterly Financial Reports Access Page
3. NBAD Financial Reports Access Page

Summary

During my review of ADCB’s 3Q16 financials I noticed two significant developments which occurred primarily in a single quarter—3Q16— and which may be signs of distress in the loan portfolio. 

1. Accrued Interest Receivable (AIR) jumped some 50% from FYE15 (31 December 2015) with more than 70% of the increase during 3Q16. 
2. Overdrafts increased some 84% from FYE15 with all the change occurring in 3Q16.    

My concerns were exacerbated by a major deficiency in ADCB’s financials – a failure to report renegotiated loans.  The absence of this rather critical piece of information prevents a deeper analysis of the bank’s condition and raises questions why it isn’t provided.      

Are these 2016 “developments” and the reporting deficiency signs of problems in the loan portfolio?  Does the failure to disclose renegotiated loans indicate that the bank is “actively managing” (AA euphemism of the post) non-performing loans (NPLs)?   That is, hiding problems?  Or are there other more “innocent” explanations?  

There isn’t enough information to make a conclusive call.  On the one hand, it’s hard to build a case for a trend based on a single data point (3Q16 financials).  But the failure (which predates 2016) to disclose required information, the significant “divergence” from past financials, and the fact that these apparently occurred in a single quarter suggest that not everything is “right”.

We won’t get more financial information until FYE16 financials are released and more likely than not the same reporting or non-reporting standards will be used.  A lot can happen until then.

ADCB isn’t “going down” but its share price can.  That’s important for equity investors because by their nature share prices are more volatile than debt prices.  The limited free float and the composition of the investor base for ADCB stock exacerbate that natural characteristic for this stock.

Accrued Interest Receivable (AIR)

Problems in the loan portfolio often show up in increases in AIR before NPLs are formally acknowledged in the financials.  AIR on NPLs often turns out to be as substantial as the air we breathe.

ADCB’s AIR (included in Other Assets) was AED 1.6 billion at 3Q16, AED 1.2 billion at 2Q16, AED 1.3 billion at 1Q16, AED 1.1 billion at FYE15, and AED 1 billion at FYE14.

A couple of things jump out of those numbers.

1. The increase from FYE15 to 3Q16 was approximately 50%.  That’s larger than the 11% growth in loans. 
2. More than 70% the increase from FYE15 occurred in a single quarter--the third quarter. 

If ADCB is accruing interest on a time proportion basis, then it would seem that increase would be gradual unless loans ballooned between 2Q16 and 3Q16. 

That doesn’t appear to be the case. Net loan outstandings were AED 162 billion (3Q16), AED 155 billion (2Q16), AED 157 billion (1Q16) and AED 146 billion (FYE15).  An increase of only 11% since the beginning of the year.

If volume isn’t driving the increase, then it could be pricing.  A higher rate on newly extended loan(s) in 3Q16.  If we assume rates were higher just on the AED 7 billion increase in loans between 2Q16 and 3Q16, the rate would have to be around 23%.  That doesn’t seem likely.

It might also be an overall rate increase on the total portfolio or at least an increase on those loans that reprice quarterly. In such a case, it’s more likely that an increase of this sort would come from an increase in the base rate not an overall increase in credit margins. 

Assuming that were the case, an approximate 1% increase on the entire portfolio for three months would be required to boost AIR by AED 0.4 billion. Looking at FYE 15 Financials Note 44 “Interest Rate Risk, some 70% of ADCB’s loans are priced off base interest rates three months or less.  That would make the required base rate increase about 1.45%, assuming that the other 30% could not be repriced.   According to CBUAE data, EIBOR has not risen by that amount during this period. 

But we don’t have to look at external rates.  We can look at ADCB’s financials where an increase in the rate on loans would have to show up in gross interest revenue.  A back of the envelope analysis of quarterly interest revenue on loans to customers divided by the average of the total balance of customer loans and advances (computed using beginning and end of the period totals divided by two) shows an average 4.3% annualized yield on the loan portfolio for the three quarters of 2016 roughly consistent with full year 2015's annualized yield, though on an individual quarter basis the yield is declining:  4.44% (1Q16), 4.27% (2Q16) and 4.22% (3Q16).  2016 gross interest income on customer loans is roughly AED 1.9 billion a quarter which would put it AED 0.4 billion over 2015 but for the entire year.  However, if interest repayments are quarterly as argued above, AIR shouldn’t increase this much because clients should be paying roughly quarterly.   

A cursory inspection of other components of interest income doesn’t show any other asset types likely to be responsible for the increase –these are much more modest in amount and are fairly consistent across 2016 and comparable to the 2015 total performance (divided by four).   

So it seems an interest rate increase is unlikely for the AIR jump as well.

What are other explanations? 

1. A “catch-up” accrual – correcting a mistake(s) made earlier in 2016.  Would have been a whale of a mistake, though as we know “whales” are not that uncommon even in the Thames.  
2. A write back of previously “uncollectable” interest.  Both 1 and 2 should appear in the financials.  I didn’t see anything to indicate this. 
3. A failure by a borrower or borrowers to make an interest payment.  As noted above, Note 44 states that more than 70% of the bank’s loans were priced off interest rates three months or less at FYE15.  This probably hasn’t changed much in 2016, though we won’t know until FYE16 financials are released and then we’ll only have end of period information. Standard banking convention would be that interest is due at each repricing.  So it is possible (but not conclusively proven) that non-payment could explain a spike in the AIR.  If you’re wondering, details like those in Note 44 are not mandatory for interim financials.

Overdrafts

Increases in overdrafts are often a sign of problems. 

[AA side comment:  Another reason for looking here is historical not necessarily analytical.  Those who know their UAE banking history know that the UAE banking system floundered on “perpetual” overdrafts with capitalization of interest (to add insult to injury). ADCB was formed from the wreckage of Emirates Commercial, Federal Commercial, and Khalij Commercial Banks back some 30 or so years ago.]

At 3Q16 OD’s stood at AED 8.3 billion compared to AED 4.5 billion (FYE15) and AED 3.7 billion (FYE14), roughly an 84% increase since FYE15 and 124% since FYE14.  Note that even with the increase ODs are roughly 5% of the loan portfolio, not a large amount unless you compare them to total equity at 30 September 2016.  In that case the figure is 28%. 

OD’s increased rather dramatically in 3Q.  ODs were AED 8.3 billion (3Q16), AED 4.5 billion (2Q16), and AED 5.0 billion (1Q16).  Like AIR, the increase was concentrated in 3Q16.  Unlike AIR, the entire increase took place in the third quarter.   

By contrast NBAD’s comparative figures are AED 10 billion (3Q16), AED 12 billion (FYE15), and AED 14 billion (FYE14).   A 17% decrease since FYE15 and 29% since FYE14.   

FGB doesn’t provide this information, probably based on “materiality” compared to the aggregate amount of the loan portfolio.  ODs at both NBAD and ADCB were about 5% of total loans well under the traditional 10% materiality standard.  A similar level is likely at FGB.

So why is AA making a “federal” case (pun intended) on this issue? 

ODs are one of the trickier forms of credit for banks to manage. 

When extending loans with a defined drawdown period and defined repayments (triggered off the end of that drawdown period and specified by date and amount), banks perform a detailed analysis or should. Monitoring of the status of the loan has well defined milestones in the form of amount and date certain contractual repayments. 

Overdrafts don’t have the same clearly defined signposts as these other loans do.  Typically, the test for non-performance of an OD is an absence of adequate turnover (drawdown and repayment transactions) which has led to a persistent level of debt.  This test is based on the concept that ODs are revolving facilities that should track the borrower’s business/cashflow cycle, increasing when expenditures exceed cash collections and then reversing as collections exceed expenditures. 

This test makes monitoring more difficult and allows more discretion in the timing of classifying a loan as non-performing.  What is an adequate “turnover” of transactions in the account?  What time period should be used to determine that a persistent level of debt has been reached? Does a slowdown in economic activity justify new norms and how should these be calibrated?  Beyond conceptual issues like these, there is also the practical matter of conducting effective monitoring, keeping one’s eye on the ball.

Non-Disclosure of Renegotiated Loans

ADCB does NOT disclose data on renegotiated loans.

AA understands that IFRS #7 (I believe paras 36 and 44, though I am not a hafiz of IFRS) require that this information be disclosed.  Both FGB and NBAD disclose this information. NBAD takes the prize for disclosure.  Let’s hope the merged entity follows NBAD reporting standards. 

NBAD’s FYE 2015 Annual Report Note 4a provides aggregate totals and a reconciliation of the movement in renegotiated loans.  As per that information, during 2015 NBAD’s renegotiated loans doubled to AED 2.6 billion.

By contrast ADCB has a “bland”  “philosophical rumination” defining renegotiated loans but no numbers.  Not really of much analytic utility.  

But it could be worse, here’s a quote from ENBD’s 2015 Annual Report.

Loans with renegotiated terms are loans, the repayment plan of which have been revised as part of ongoing customer relationship to align with the changed cash flows of the borrower with no other concessions by way of reduction in the amount or interest, but in some instances with improved security. These loans are treated as standard loans and continue to be reported as normal loans.

ADCB almost certainly has renegotiated loans.  See the Fitch quote below. 

The bank also has a concentrated portfolio with large individual and aggregate exposures to government related enterprises (GREs) and “private” companies connected to the shaykhly but hopefully not shaky elite.  By some estimates (see Fitch report linked to below) the latter is twice the GRE related exposure.  Ample “opportunities” for problem loans.   

Failure to disclose renegotiated loan data--amounts and other IFRS required information--indicate to AA  that the bank thinks it needs to hide this information.  Why?  Presumably not because it has so few but rather because it has so many.  IFRS-required disclosures would enable a reader to determine when renegotiation took place –giving an indication of whether NPL problems were increasing or decreasing.  That is precisely one of the reasons that IFRS #7 imposes this requirement.

What could be another reason for not reporting this information?

Renegotiating loans typically gives the borrower less onerous terms – lower interest rates, a revised repayment schedule, a longer average life of the loan.  In some cases payments can be reprofiled to push substantial amounts of principal payments well into the future – “ballooning” as one banker I know calls it. 

Take an extreme example: a loan maturity is extended from 5 to 20 years with 80% of principal due during the last three years.  For the first 17 years of the renegotiated loan period, maintaining a “performing” status is much easier than if the loan were extended for a shorter tenor with equal semi-annual principal installments.    

If a bank takes pre-emptive action (before a loan has missed a payment) it can avoid declaring the loan non-performing, thus, “hiding” NPLs and making the bank’s loan portfolio look more robust than it actually is.   If it doesn’t report renegotiated loan data, pre-emptive NPL management might not be noticed by the market.

However, there is no evidence in ADCB’s financials of a massive increase in loan maturity as per Note 45 “Liquidity Risk” in FYE15 financials.  The relative percentages in less than one year and the other two maturity “buckets” for 2015 are almost spot on with 2014. 

But the bank’s reporting is also opaque here as well.  

ADCB uses a maximum maturity “bucket” of “over three years”.  FGB and NBAD use maximum maturity “buckets” of periods of “over five years”.    ADCB therefore has more room to maneuver. If a loan with a three year maturity were extended two years, this would not show up in the Maturity Risk note at ADCB.  It would at FGB or NBAD.    

Dramatically lengthening maturities is one but not the only way to avoid NPL status.  One could back end principal payments (making later repayments higher than nearer repayments) with much shorter extensions of maturity.  If a bank were pro-actively managing problem loans to prevent the appearance of NPLs and did not disclose renegotiations, it could use future renegotiations to manage the problem on a rolling basis. 

But we can’t tell from ADCB’s financials what , if anything, might be going on.

With no evidence in the financials, let’s turn to a quote from Fitch’s August 2016 ratings report (which by the way confirmed an A+ rating for the bank).  Boldface courtesy of AA.

ADCB does not disclose the volume of renegotiated loans, but Fitch understands that it has done a lot of corporate loan renegotiations since the crisis and has reclassified most of these exposures back to performing over this time as they demonstrated normal performance.  ADCB renegotiated some of its 20 largest exposures during 2015.  Fitch understands that these loans would be overdue if they had not been renegotiated.

We don’t know for certain if ADCB is pre-emptively renegotiating troubled loans to avoid having to declare them non-performing, but that’s clearly one way to read the Fitch quote.  Non-disclosure of renegotiated loan information certainly provides cover for such activities, if they are occurring.  AA can’t think of a single “benign” reason why ADCB would withhold this information. One final comment on the Fitch quote: if the terms of the renegotiated loan are generous enough, the bar for “normal performance” may be set low indeed.

AA was also troubled by ADCB’s new external auditor signing off on the financials as being in compliance with IFRS.   As AA understands it, IFRS compliance is all or nothing.  One can’t be partially compliant.

Troubled as well by the CBUAE’s apparent acquiescence.  That being said, though there is both historic precedent elsewhere in the GCC, what wags refer to as IRS (Investcorp Reporting Standards), and closer to home and time, CBUAE “Dubai Inc” renegotiated loan treatment rules.   

Another Warning But This Time About Something That Definitely Will Happen

Accounting and Regulatory “Rant”

Cashflow Statements: 

Accrued but uncollected interest is not a “use of funds” that “increases” Other Assets as seems to be common reporting practice for ADCB, FGB, and NBAD.  Until interest is paid by the borrower, it is uncollected revenue and not cash. 

There are two consequences. 

1. Since it wasn't collected, it is properly a deduction from net income on the cashflow statement. 
2. Since it isn't cash, it can't be used to fund an increase in Other Assets. 

If one insists on treating AIR as a “use” of funds, then the statement issuer and its auditor have the duty to disclose the components of Other Assets so that financial statement users can determine what is happening with collection of AIR.  Financial statement users should not have to wait for annual reports to get this information.

Investors/Creditors: 

When issuers shy away from disclosure, it’s usually because they have or think they have something to hide. 

1. Lack of disclosure limits an investor’s ability to monitor and thus protect its investment. 
2. More importantly it offers an important insight into the business ethics of an issuer. 

Should you invest with an issuer that withholds basic information from you? And may be withholding that information so it can “manage” its financials?  

Standard financial theory holds that when risk is higher, investors should demand a higher risk premium.  But a key wrinkle to the successful implementation of this theory is that realized returns are often much lower than earlier anticipated or promised returns.  A problem more acute with equity than debt because with equity there are no contractual “promises” and equity prices are more volatile.  

Happy Day

Not AA's hometown but a place that will always be special.  World's Greatest City - well, at least one of them in AA's carefully "reasoned" emotions.

Does this mean that AA's football wish will come true this year?  

Name of Premier League club omitted to avoid triggering AA's apparent ability to curse their chances by watching a live match or even mentioning their name. 

Responding to a Direct Challenge AA Corrects The President of the Russian Federation

The Incredibly "Scary" Vladimir Putin (TISVP)

On 27 October Bloomberg reported that the President of the Russian Federation had dismissed charges of attempting to influence the US Presidential election in remarks at the Valdai International Discussion Club. 

One particular quote attributed to TISVP caught AA's sharp eye.

Is America some kind of banana republic? America is a great power. If I’m wrong, correct me.

If you've been following the news of late, you of course know that Mr. Putin is one incredibly scary individual with seemingly unbounded powers and a will of steel.   Not a man to be trifled with or provoked.  The media is in total agreement on this.

Yet, on the other hand, according to Bloomberg, he did ask to be corrected if he was wrong.

AA thought long and hard on this issue and decided to take Mr. Putin at his word. What better day to reply to TISVP than Halloween?

Here is AA's considered response  to the banana republic question.

While you are correct that the USA is a great power and that banana republics have typically been small rather weak countries (economically and militarily), I'd like you to consider that a good argument can be made that a key, perhaps the key, distinguishing characteristic of a banana republic is the nature and quality of its politics and politicians.

Singapore is a small country, yet no one would call it a banana republic (BR). 

AA can think of a couple nuclear armed states (outside the G-8) whose politics definitely qualify them for BR status. 

And would offer this recent blogpost for your consideration. 

Exclusive to Suq Al Mal -- Photo of H.E. A.F. Al Sissi's Refrigerator

Before Drinking Always Remove the Cap Yourself to Avoid Getting a Bottle Filled with Tap Water

AlSissi  Essebsi an easy mistake to make even for a fellow Arab.  Names sound alike.  They both wear Western suits.

In any case hopefully this exclusive photograph of the President of Egypt's refrigerator will put this matter to rest.

Like me I hope you notice the frugality of the President. 

No fancy imported water.

Hopefully not Baraka Vintage 1996. 

كشف المستور.. ببغاء يفضح خيانة رجل كويتي لزوجته مع الخادمة

It is said that falcons are more discreet.

From Arab Times

KUWAIT CITY, Oct 18: In a new method devised to detect matrimonial infidelity, a Kuwaiti woman actually used a parrot to expose her husband suspected of having intimate affair with a housemaid, as the parrot mimicked flirtatious exchange of words between the man and the housemaid, reports Al-Shahed daily. 

The woman lodged a complaint with officers at Hawalli Police Station and accused the husband of cheating, noting she had been suspecting the man for a while before the parrot started mimicking flirtatious words in the apartment. 

She added the husband was surprised when he saw her returning from the office before time and became nervous. However, the prosecution officer said the case could not be regarded as crime based on lack of credible evidence.

See the link at Al-Shahed for the Arabic version.

If you're looking for a parrot or perhaps have a sudden need to sell one, look no further.

US Presidential Election 2016: Continuing Coverage of the Candidate Polling Third

"Altered" Statesman

Don't care for either of the two main candidates?  Don't despair there is an alternative.

He is definitely a "choice not an echo".

A completely unrelated public service message from AA and the staff at Suq Al Mal.

Abu Dhabi Commercial Bank 3Q2016 Results: A Tale of Two Newspapers

Where Would We Be Without Ambition?

On 23 October Abu Dhabi Commercial Bank issued its interim unaudited financial statements. 

1. Net profit for the first nine months of the year was AED 3.2 billion versus AED 3.7 billion for the comparable period last year (a decline of 14%). 
2. Net profit for 3Q16 was AED 1.0 billion versus AED 1.2 billion for 3Q16 (a decline of roughly 17%). 
3. The major factor impacting net income was impairment provisions which increased from AED 391 million in the first nine months of 2015  to AED 1.083 for the first nine months of 2016 (an increase of 77% percent) and from AED 66 million in 3Q15 to AED 380 million for 3Q16 (an increase of 475%).

How did UAE’s two flagship English language newspapers cover this story?

The National’s 23 October headline was ADCB Net Profit Falls 17% in Third Quarter

Abu Dhabi Commercial Bank said its third-quarter profit slid by 17 per cent as provisions for bad loans jumped almost six-fold.

Net profit declined to Dh1 billion in the three months to the end of September versus Dh1.2bn in the same period last year, the bank said. Impairment allowances shot up to Dh380 million from Dh66m in the third quarter last year

Two days later Dubai’s Gulf News took a slightly more optimistic view:  ADCB Reports Dh999m in Q3 Profits Figure brings profit for first nine months to Dh3.14 billion.

Abu Dhabi: Abu Dhabi Commercial Bank (ADCB) continued to register growth in net loans and customer deposits in the first nine months of this year despite increased challenges in the banking industry.

“The bank delivered strong financial results for the nine month period of 2016, reporting a net profit Dh3.153 billion and an industry leading return on equity of 16 per cent.   

While the challenging operating environment and the turbulent markets have impacted the industry, our underlying performance and fundamentals remain strong and we continue to grow our businesses. Our balance sheet remains resilient and registered a healthy growth in net loans and customer deposits year to date, 10 per cent and 7 per cent respectively,” said Alaa Eraiqat, ADCB’s group chief executive officer.

In a statement, the CEO reiterated his confidence in the long-term growth of the UAE’s economy, stressing the bank’s strong fundamentals and outlook of delivering value to shareholders.

In the first nine months of this year, the bank’s assets grew 12 per cent to Dh255 billion, while net loans and advances to customers increased 10 per cent to Dh162 billion compared to December 31, 2015.”

Technical notes: 

1. AA’s calculations are based on net change not simply a division of this year’s results divided by last year’s. 
2. Gulf News appears to be using net income attributable to controlling equity holders in the bank not total net income.

What a difference a point of view makes. 

One comes away with two very different conclusions from reading these two articles.

1. Everything sounds just fine from the account in Gulf News. 
2. The National the “hometown” newspaper of ADCB with perhaps more at stake to  paint a rosy picture does not.  In AA’s view it presents a more accurate picture by providing comparatives to prior periods and discussing negatives as well as positives.

Another post to follow soon with comments on things to watch in ADCB's financials. 

Here's a link to the earlier promised post.

ذكرى ناظم الغزالي

الفقيد 

1963 23 October

 

SEC to Rely on FINRA to Monitor Brokerages

"Daddy, read me the story of the self-regulating market again"

If your daddy didn't read you this fairy tale when you were young, maybe your "Uncle" Milton told it to you at university.  Or a kindly professor relayed the Uncle's wisdom to you. 

If this didn't happen, here's a quick recap. 

Even if each businessman single-mindedly pursues his or her own profit to the exclusion of all other concerns, where there is intense competition of the "free" market (note that requirement) salutary outcomes result:

1. individual or overall market excesses are magically curbed 
2. firms offer the best service and prices, eventually competing profits away to zero unless, of course, they make improvements to products.  [Because profits never go to zero (except in bankruptcy) this no doubt proves the creative power of free markets to constantly improve products.]
3. those firms that do not lower their prices or improve their products are forced out of business

Since by definition, the market in the USA is not only "free" but "intensely" competitive, then with such miraculous powers there is little if any need for government regulation.  In fact by interfering with the market, governments are liable to do more harm then good as this quote attributed to Mitt Romney demonstrates. 

The invisible hand of the market always moves faster and better than the heavy hand of government.

This theory seems to be the rationale for this recent SEC decision reported this Monday by Reuters.

The Securities and Exchange Commission is leaning more heavily on partner regulator the Financial Industry Regulatory Authority to monitor brokerages as it devotes extra staff to oversee the rapid growth of independent financial advisers, a top regulator said Monday

What could possibly be a reasonable objection to FINRA taking over SEC duties?

Simply put, FINRA is an industry group and therefore has an inherent conflict of interest. 

Does this mean that it is certain that they will fail to do a proper job or that they have failed in the past?  No.  What it does mean is that a conflict could cause them to fail.

What are some of the potential trouble "spots"?

1. Setting professional qualification standards too low.  FINRA doesn't report the pass rates on its qualification exams (Series 7, etc).  The pass rates for the CFA, CFP, FRM are all reported and suggest these certifications are difficult to obtain.  Why is that?   
2. Restricting information on actions against brokers.  If you'll recall a while back, FINRA was criticized for failing to provide enough information in its Broker Check (BC) tool to allow investors to determine whether to work with a particular broker.  FINRA announced some improvements but just recently the  Public Investors Arbitration Bar Association found those improvements lacking and criticized FINRA because BC doesn't include reasons for a broker's termination by a firm, information about bankruptcies, tax liens and scores on relevant industry examinations.  PIABA noted that some of this information is provided by state security regulators (government agencies) which suggests (but does not prove) that legal liability issues did not motivate these omissions.  
3. Applying a light touch on penalties when perhaps a heavier one is justified.  In the past the maximum fine was $15,000 per "offense" in the NASD days. (FINRA is the combination of the "old" NASD and NYSE separate self-regulatory bodies).   This has changed. Fee levels have increased.   In 2016 FINRA is set for a record year of estimated fines of some $160 million due to some "supersized" fines.  ("Supersized" is defined as a fine $1 million or more).  The estimated 2016 total fines is less than the fines levied against Wells Fargo by government regulators for the "fake accounts" scandal. The last time I looked FINRA's largest 2016 fine was some $25 million against Met Life (2015 revenues $70 billion net income $5 billion).  See the analysis of these "ginormous" fines by Sutherland Asbill and Brennan here.  And here for K&L Gates' analysis of 2015 fines in which it's noted that most FINRA actions are resolved for less than $50,000.  It should be noted that FINRA fines individuals as well as firms and that many of the firms in the industry are minnows alongside the major brokerage firms so $50,000 could be a firm threatening fee. 

Just to be clear, I am not accusing FINRA of improper behavior.  I am merely pointing out a conflict of interest.

During his illustrious career, AA has seen a lot of conflicts of interest turn into conflicts of action. 

Here's one "sweet" story - not witnessed by AA.

Early warning signals of the coronary heart disease (CHD) risk of sugar (sucrose) emerged in the 1950s. We examined Sugar Research Foundation (SRF) internal documents, historical reports, and statements relevant to early debates about the dietary causes of CHD and assembled findings chronologically into a narrative case study. The SRF sponsored its first CHD research project in 1965, a literature review published in the New England Journal of Medicine, which singled out fat and cholesterol as the dietary causes of CHD and downplayed evidence that sucrose consumption was also a risk factor. The SRF set the review’s objective, contributed articles for inclusion, and received drafts. The SRF’s funding and role was not disclosed. Together with other recent analyses of sugar industry documents, our findings suggest the industry sponsored a research program in the 1960s and 1970s that successfully cast doubt about the hazards of sucrose while promoting fat as the dietary culprit in CHD. Policymaking committees should consider giving less weight to food industry–funded studies and include mechanistic and animal studies as well as studies appraising the effect of added sugars on multiple CHD biomarkers and disease development

Why take a risk with this conflict of interest? 

FINRA has a role to play.  

But should the SEC cede what is properly a government responsibility?

US Presidential Election 2016: AA Ahead of the Trend

"Shovel Ready"

Regardless of the outcome of the election, Bayt Abu Arqala will be prepared. 

These beauties will go right above our Category 3 B-7 already in progress.  

Third US Presidential Debate: A Lonely Nation Turns Its Eyes to You

Where Have You Gone?

Given the state of US politics, Disneyland might have been more appropriate, though there is precedent for Las Vegas where the "house" and not the customer generally wins "anyway you look at it." 

Tip of AA's enormous tarbush to his departed father who shared this and other of his music with me.

Major US Presidential Candidates Ask Muslims to Report Stuff: Are You Doing Your Part?

It's Easy.  It's Fun.  It's Patriotic!

At the "debate" earlier this week the candidates of the Republican and Democratic parties called on Muslims to report suspicious activity.   No other group was asked to report.

Apparently, only Muslims know what's going on.  Or perhaps they are the only ones who can be trusted to file accurate and complete reports.  In any case, the ball is in your court.

Ms. Clinton: 

We need American Muslims to be part of our eyes and ears on our front lines.

Mr. Trump:

In San Bernardino, many people saw the bombs all over the apartment of the two people that killed 14 and wounded many, many people. Horribly wounded. They’ll never be the same. Muslims have to report the problems when they see them.

Within moments, patriotic Muslims sprang into action by establishing a real-time forum for the relay of suspicious activity. 

You'll find it here.   Or you can use this forum.  File your own report.

If you have an Arabic origin name or look "Middle Eastern", but are not a Muslim, you can file a report too.  No one in the USA will ever figure it out. 

A public service message from Abu Arqala and the staff at Suq al-Mal blogspot.