Tuesday, 18 June 2019

Banks Wade in to the Issue of Green Shipping

Environmental issues and big business are, in the current climate, moving towards a point where they are one and the same. However, there is still some way to go and there needs to be a number of developments in order to move towards a greener role for business. We have discussed environmental issues, mostly under the guise of so-called ESG principles (Environmental, Social, and Governance) on a number of occasions – in terms of finance, cars, shareholders, and many others. This author has also written on the role that financial gatekeepers have on making ESG investing the norm. It is this concept of a ‘role’ that is the basis for today’s post, with news coming today that a number of leading Banks are leading the way in encouraging the shipping industry to go green.

The news came this morning that a number of banks – Citi, Societe Generale, DNB, ABN Amro, Amsterdam Trade Bank, Credit Agricole, Danish Ship Finance, Danske Bank, DVB, ING, and Nordea – have signed up to a global framework labelled the ‘Poseidon Principles’ which aims to implement a strategy that will see the shipping industry’s carbon footprint cut by 50% by 2050. This target was widely deemed as ambitious for a number of reasons, mostly because there are a number of competing initiatives like the one that aims to lower the level of sulphur in shipping fuel by 3% by next January. Research into the environmental impact of shipping is growing, with it being stated that ‘one giant container ship can emit almost the same amount of cancer and asthma-causing chemicals as 50 million cars’ and that ‘just 15 of the world’s biggest ships may now emit as much pollution as all the world’s 760 million cars (as of a decade ago)’. The shipping industry alone contributes almost 3% of the world’s total greenhouse gas emissions, and ‘emits the same level of greenhouse gas emissions as Germany’. Clearly then there is a need for action, and whilst the collected banks who signed up to the Poseidon Principles in New York today account for nearly 20% of the $450 billion global shipping market, it is anticipated that a number of Asian banks will join the accord to heap the pressure on the shipping industry to go green. Yet, what does it mean for the industry to ‘go green’?

In responding to the accord, COO of AP Moller-Maersk, Soren Toft, explained that ‘to deliver on ambitious climate targets, zero-emission vessels will need to enter the fleet by 2030’. Whilst efforts to encourage more efficient sailing are well underway, the reality is that zero-emissions sailing must be the way that the industry goes. There have been developments made within the technological side of the equation, with zero-emissions large passenger boats (100 people+) being developed more than ten years ago. However, the goal is to have an economically viable option on the table that does not increase the environmental impact of the industry i.e. just moving the impact ‘upstream’ as it were. A report by Lloyd’s Register entitled Zero-Emission Vessels 2030. How Do We Get There? concluded that ‘advanced biofuels appear the most attractive ZEV solution currently available’. Yet, whilst the report states that biofuels are the most attractive, mostly on an economic basis, there are concerns over its sustainability and availability. The issue seemingly lies between finding a commercially-attractive proposition that can be coupled with technological advancements – one might question whether both can be obtained at exactly the right time.

However, there is another issue and that is the role of the banks. While Citi takes the lead in this current initiative, other banks have been listed as massive financiers of the fossil-fuel industry. JPMorgan Chase has been recognised as the top fossil fuel financier, whilst Wells Fargo increased its support of the sector last year by a staggering 13%. At a time when investing principles are moving towards a greener basis, this reality within the banking industry looks appalling. However, one of the reasons behind this reluctance to move into greener sectors is because they may not believe that the time is right to move – first-mover status only has so many benefits and when weighed against the persistent riches available via fossil fuel production, perhaps that equation is not as balanced as people may think. It is stated within the business press, as just one example, that shipping is about to ‘undertake a rapid technology and fleet change’ and that this exposes the banks to increased risk – the sentiment being that they must seek to move with the times. However, there is only loose optimism on whether the target of zero-emission ships entering the global fleet by 2030 is even achievable, so it appears a number of banks are choosing to ‘stick’ rather than ‘twist’. Many may believe that there will be a penalty in this, in that banks like JPMorgan Chase will be penalised for not entering the market and putting pressure on shipping companies early enough, whilst Citi have. Yet, in reality, there will be no such penalty. The reality is that the Poseidon Principles are a really good start, but that they are just the start. It will serve to bring forth a healthier discussion and perhaps an increased incorporation of environmental principles, but there will be many more stages before this world-leading polluting industry changes course.

Keywords – Shipping, Pollution, Environment, Business, @finregmatters.

Thursday, 6 June 2019

Another Blow for the UK’s Automotive Industry as Ford Steps Back

We have covered the automotive industry on a number of occasions here in Financial Regulation Matters, ranging from posts on emissions-related scandals and issues with the leadership of some of the industry’s largest companies (via Oluwarotimi Adeniyi-Akintola) to the increased focus on the electrification of the industry. In today’s post however, we shall focus on the current state of the British automotive industry and examine whether the current issues impacting the industry are related to Brexit, as most of the press suggests, or to deeper-rooted issues that may fundamentally affect the future of the industry in the UK.

The subject of the auto industry in the post-Brexit era is a complex one. There are materials that are available, and indeed incredibly useful, in order to gain a solid understanding of the issues – see the excellent Keeping the Wheels on the Road: UK Auto Post-Brexit developed by Prof. David Bailey @dgbailey and others as part of the Bite-Sized Brexit range of materials. Perhaps for us it is worth just putting together a collection of the headlines regarding the auto industry recently. Once synonymous with the auto industry, Britain has redeveloped itself as a hub for auto production for international auto companies. As a result, a number of communities within the UK are now strongly linked to the production plants they house. For example, there is increased anxiety in Sunderland, where Nissan is based. In February it announced that it would not be building one its flagship models – the X-Trail – at the Sunderland plant. Nissan had originally planned to produce the car in Sunderland after receiving Governmental assurances about the developments with Brexit, but two years later considered it better to build the car in Japan instead. Then, a month later, the firm announced that it was ceasing production of its Infinity brand at the plant. This placed 250 of the 7000-strong workforce at risk, but redeployment was thought possible. However, today there was a massive boost for the plant with the news that the new Nissan Juke, set for a 2020 introduction and for the inclusion of Hybrid technology, would be built at the Sunderland plant.

Yet, other plants around the country have not received news as good. In Swindon, Honda announced in May that it would be closing the plant in 2021, with the entire 3,500-strong workforce at risk. Such closures are affecting suppliers further down the chain as well, with car filter supplier Mahle considers closing its Telford plant, whilst Unipres in Sunderland is experiencing reductions in its profitability. However, whilst the news of Juke being made in Sunderland is positive, today’s automotive news is dominated by the news that Ford is set to close its Bridgend engine plant, with 1,700 jobs expected to be lost. The closure is part of a global cost-cutting plan and Ford today stated that loss of contract work for Jaguar Land Rover and a reduction in demand for the Dragon engine produced at the plant were to blame. According to the Financial Times, Ford will instead move production of the Dragon engine to plants in Mexico and India that already produce the model. This is, of course, a massive blow to the region. In terms of reasons, there are many being advanced. The decision by Jaguar Land Rover to take its engine production in-house in its plant in Wolverhampton is a contributing factor, as is Ford’s desire to cut almost $11 billion from its global expenditure and, in the process, losing almost a tenth of its global workforce. Yet, there are inevitably links to Brexit being advanced as the reason for this, and many other negative headlines affecting the British auto industry. However, how important is Brexit to this issue?

Whilst Nigel Farage campaigns on the concept that Brexit is an opportunity for plants like Sunderland’s Nissan plant to ‘go on doing stuff’ and also move into different industries, like ship building and fishing, the reality is that there has been a significant downturn in the fortunes of the British auto industry since the Electorate decided to leave the European Union. Uncertainty over the official leaving date had a clear impact as ‘car production plunged by nearly half in April as factories shut down to prepare for a Brexit date that never came’. In terms of investment, it was reported in January that in 2017 alone investment fell 46.5% to just £588 million, according to the Society of Motor Manufacturers and Traders. The SMMT’s Chief, Mike Hawes, was clear that Brexit uncertainty has ‘done enormous damage’, although he continues by declaring that the impact so far ‘is nothing compared with the permanent devastation caused by severing our frictionless trade links overnight’. Politicians, although not universally, have used such figures as clear proof of the need to avoid a no-deal Brexit, such as Rebecca Long-Bailey, Labour’s Shadow Business Minister. It does not need a massive leap of imagination to understand that, for global car manufacturers, the severing of links with the EU and the uncertainty presented by creating new trade deals with countries like the U.S. are causes for concern. Yet, there are other factors at play.

The electrification of the sector is, perhaps, of bigger concern. The Financial Times discusses how fresh investment is ‘dwindling’ in Britain’s development of new technology – i.e. to be able to meet the manufacturing demand of this increased focus on the electrification of cars – as manufacturers ‘prioritise their home markets’ – this is certainly an argument that Honda made when announcing the closure of the plant in Swindon. Politicians like Business Secretary Greg Clarke argue that Britain’s recent successes in the sector – after investment from companies like BMW, Nissan, Honda, and others – will not be replicated if the ability to manufacture in the new era is not developed via investment. The FT continues by stating that there are some grounds for hope, as the UK is already playing a significant role in the development of battery-based technology, whilst the Sunderland plant already makes the Nissan Leaf, the best-selling electric car in Europe. While there are conflicting stories about the appetite for electric cars in the UK, with some claiming such cars are not an attractive prospect for the British motorist but others confirming that this is due to governmental policy that is making such vehicles more expensive, the reality is that the British manufacturing arena has very little choice but to adapt – the question is then will the Government play a role in increasing the appetite for such vehicles to fulfil the demand-part of the cycle.

Whilst there has been some discussion on other elements impacting upon the electrification of the sector, like The Times suggesting that the UK risks being held to ransom on the basis that rare materials that are required for the production of electric cars are held by a ‘small number of unstable countries [that] control the supply’ (something which the ongoing trade war between Donald Trump and China is likely to envelop), there are more pressing concerns for the British auto industry. Arguments that skilled workers in this sector should turn their hand to fishing can be dismissed, but in reality it all comes down to a question of investment. At a time where there are global uncertainties facing the largest auto manufacturers, Britain has decided to cut its seamless trade connections to the EU and put its auto industry at risk. When we consider that the largest firms are actually scrambling to restructure and/or merge to survive the uncertain environment (Fiat Chrysler’s withdrawn €33 billion merger with Renault is still a sign of the times), the timing could not have been worse. The reason is that it is abundantly clear that the UK needs the recent successes of the auto industry to continue, and the global firms understand this. There is no sentiment in this field and, as such, the Government will have to sweeten the deal for all of the manufacturers in order to revolutionise the manufacturing hubs in anticipation of the electrification of the sector. Yet, the Government’s £60-£80 million promise to Nissan to build the X-Trail in Sunderland did not convince. It is not surprising given the advantages to the companies of building new manufacturing hubs in their own regions. The inference is, then, that the Government will have to inject much more money to entice these global manufacturers into the British sector, but at a time when the country is undergoing its most uncertain period, economically speaking, in generations. The reality of Brexit continues to stalk the headlines, and the British public.

Keywords – automotive, cars, Nissan, Ford, Business, Brexit, @finregmatters(

Wednesday, 5 June 2019

The Run on Neil Woodford and the Position of the ‘Retail’ Investor

The business press has been awash with articles concerning the fallen investment star Neil Woodford, who suspended withdrawals from his Equity Income Fund on Monday. As part of these reports, a number of issues have been raised ranging from the protection afforded by the regulator – The Financial Conduct Authority – to the role of so-called investment ‘supermarkets’ like Hargreaves Lansdown. In this post we will look at these issues but focus mainly on the conceptual role, or identity, of the so-called ‘retail investor’.

Neil Woodford, best known for his time at Invesco Perpetual, started the Equity Income Fund five years ago and, even upon its launch, was placed in Hargreaves Lansdown’s ‘Wealth 50’ list. Hargreaves Lansdown, which ‘issues recommendations about which managers to back to an army of retail investors’ has since suffered the consequence for maintaining Woodford’s place on that list, even up until the fund had been suspended, as its shares dropped 4% on news of its support for the fund. However, Hargreaves Lansdown has ‘always said its Wealth 50 is not a list of the most popular investments, but simply its “preferred” funds based on “management and low charges”’, to which Head of Investment Emma Wall added that the group advocates for long-term investing and had backed Woodford for his ‘compelling’ track record. The FCA supports this model of investment advice, with a report earlier this year declaring that investment advisors such as Hargreaves Lansdown tended to ‘help investors’. Yet, this does not mean the 4% dive will be the end of the story for Hargreaves Lansdown, with the company updating its clientele only last month with the declaration that ‘we retain our conviction in him to deliver excellent long-term performance’. The business press, and the Financial Times in particular, have been particularly direct with their criticism of the connection between the two entities, stating that Hargreaves’ clients once held up to 38% of Woodford’s fund, and even when problems started to arise this did not drop to less than 28% - the inference being that Hargreaves Lansdown was essentially Woodford’s ‘agent’ and was far too invested in the fund to be impartial and objective. Commentators have suggested, as a result, that the reputational hit that Hargreaves Lansdown will take may be substantial.

However, if we look closer at the reports then there is an underlying theme that is promoted time and time again. One external analyst fears that ‘retail investors who followed the Wealth 50 recommendations and invested money with Mr Woodford would react angrily’, whilst The Independent confirms that Woodford was feted as ‘someone who could consistently deliver big returns for large numbers of retail investors’. Others have chosen to focus on the FCA and ask whether its regulations are ‘fit for purpose’ given that its regulations ‘facilitate the sale of risky funds to people needing to withdraw cash’. The theme is that it is ‘retail investors’ who will lose out here and who are, by conception, vulnerable. There are a number of difficulties when attempting to categorise a ‘sophisticated’ investor and an ‘unsophisticated’ investor, because in some senses it is subjective and in other senses enshrined in various laws and regulations in order to govern the investment capabilities of said entities. As an aside, it has been noted that the ‘golden ticket’ in the Financial Crisis was to sell the most sophisticated of financial products to the least sophisticated of investors, which again hints at this inherent vulnerability of unsophisticated, or as they are better known, ‘retail investors’. Regulators are purposefully created to protect retail investors, as demonstrated by the FCA’s recent capping on the amount of money retail investors can put into the peer-to-peer lending system. So, whilst not universal, retail investors are to be protected because they do not, by conception, have the resources, knowledge, or perhaps wherewithal to protect themselves from the iniquities of the marketplace, or at least against massive losses. It was therefore very interesting to see that Kent County Council, who hold more than a quarter of a billion pounds (£263 billion) in the fund, are now trapped in the fund and have gone public with their attempts to be granted an exemption by Woodford to have their funds returned. This should lead to the question of whether Kent County Council are ‘retail investors’, or whether they should have the resources (which is the main argument) or the capacity to protect themselves more. Furthermore, why should they be given priority over other shareholders? If it is the case that they represent members of the public, then the question is raised whether such institutions should be allowed to invest in such investment vehicles. It has been noted in the press that the Bank of England is monitoring the situation closely regarding fears over contagion, which leads us back to a number of posts regarding the concept of ‘too big to fail’ – or in this case, perhaps it is ‘too public to fail’. This is a real issue and one that is demonstrative of inherent contradictions within the modern marketplace. When Councils are allowed to invest their resources on the open market, for which leading councillors, and associated financiers, are rewarded heavily but then there is the prospect of a public bailout (or at the least a public intervention), the parameters are fundamentally distorted. More broadly, is it unfair to suggest that ‘retail investors’ invest their money willingly and should be made to pay the ultimate price for their decision? If it is the case that people do this in order to chase higher returns than what is available via the depositor-insured banks – Woodford’s fund started by offering returns much greater than any savings account – then should they be protected? Perhaps this is the demonstration that we live in an era defined by socialist capitalism, whereby risks are absorbed by the public and not those initiating that risk-based process.  

Keywords – investing, Neil Woodford, Business, society, @finregmatters

Tuesday, 4 June 2019

The European Banking Authority Makes its Move to Paris, But at What Cost?

Today’s post discusses the recent, and very much expected move of the European Banking Authority from London to Paris. Very much in response to Brexit, the EBA now sits at the junction of a new phase in its development in terms of forming a central component of a new direction for European financial service provision. This post will discuss this move and also assess an interesting and thought-provoking article by Frances Coppola (@Frances_Coppola) in a recent issue of Forbes.

In November of 2017, Paris and Dublin were tied in the race to be the new home of the European Banking Authority. After the decision of the British electorate to leave the European Union was confirmed, it was deemed essential by the EU that the EBA, and the European Medicines Agency, would both be relocated from London. Whilst the EMA were relocated to Amsterdam, it would be Paris that would emerge victorious in the race to secure the presence of the EBA, in a move that would see the EBA sit in the same City as the European Securities and Markets Authority (ESMA). Despite there being some issues over delays and preferential locations for the EBA a year later, the EBA did finally move to Paris on the 30th May. As Coppola mentions in her article, there was very little fanfare regarding this move, with a simple change of address on the website being all that evidenced this massive shift for the City of London.

Coppola’s article raises a number of important questions and, although at least one European reporter takes aim at the article, the questions are very much legitimate (the critical report is not particularly formal nor substantial). The article begins by examining the position taken immediately after the referendum result was confirmed, with the UK being optimistic over its chances to keep the EBA in London as it was believed its status was ‘a matter for negotiation’. Coppola discusses how, more than two years later, the development of Brexit negotiations and the lack of agreement on aspects such as so-called ‘passporting rights’ to the EU marketplace have essentially destroyed the ability of the UK to host such a systematically-important financial institution for the EU. Coppola continues by assessing the plans in the EU to develop the European Banking Union, which the EU describes as the forming of a ‘single rulebook’ for all financial actors in the 28 EU countries. Coppola rightly notes that, in light of this unitary aim, the relocation of the EBA to one of the pillars of the European project is particularly well timed. Coppola then goes on to discuss the position of the UK within this current phase. In discussing the view that the British public is losing patience with the hegemony of the financial services sector – a concept derived from Shaxon’s The Finance Curse, as cited by Coppola – the suggestion is formed that, potentially, the forcing of the British financial sector to become an offshore financial centre, may not be excessively negative. The suggestion is that the EU would not be keen on allowing such an influential offshore centre to exist on its doorstep, and that if that was indeed the case then being such an offshore financial centre could be particularly lucrative. Coppola does admit to being amazed that she is writing such a sentiment, as her conclusion is that a new international role for London may not be what many Leave voters wanted but is what they will get. The issue is whether that vision is something positive or negative.

Regular readers will not be surprised to hear that this author believes it will not be overly positive. The reasons for this are many, but there are two that stand out. The prospect of London becoming an offshore financial centre leads one to believe that there will be a small number of people, relatively speaking, who will do very well from that arrangement, but that the general public certainly will not. The very politicians who advocate for such a role for London have stakes in such a scenario, with some even leading investment vehicles that will stand to make fortunes from an offshore status. The second is that this offshore status sounds exotic and exciting, but may be seen as a euphemism for a regulatory race-to-the-bottom. In reducing the regulatory restraints imposed on the market, as would surely be the case in the name of maximising the potential of this offshore status, the very fabric of this market-centric society becomes extraordinarily vulnerable. London is already regarded as one of the centres for money laundering and financial misdeeds, and this degeneration in standards will only make things worse. It is important that this is remembered and that hubris, based upon riches the vast majority will never see, is not allowed to triumph.

Keywords – European Banking Authority, UK, EU, Brexit, @finregmatters

Monday, 3 June 2019

Morningstar Seeks to Affect the Ratings Oligopoly, or Does It?

With the Credit Rating Agencies being the exclusive research concern of this author, it is unsurprising that they, as an industry, have featured heavily here in Financial Regulation Matters. As such, we tend to keep abreast of developments within this industry as well as other key financial areas, and in this post we will continue this approach by examining the latest ‘move’ in this particular marketplace. We recently looked at developments within Scope Ratings, the European entity seeking to provide a pan-European alternative, whilst we also looked at recent mergers that potentially concern the so-called ‘Big Three’ (in relation to sale of Acuris). To complement these analyses we looked closer at the concept of an ‘oligopoly’ and its application onto the credit rating industry, which allows us to understand the dynamics between the Big Three and their relationship with the rest of the marketplace. We will soon be analysing a new entrant into the marketplace in the coming weeks, but in this blog we will look at a major move in the lower end of the credit rating marketplace.

The so-called ‘Big Three’ – Standard & Poor’s, Moody’s, and Fitch – account for a combined 96% of the credit rating marketplace. As such, there is very little space at the lower end of the market. In terms of outstanding ratings within the marketplace as of December 2017, the Financial Times (via the Securities and Exchange Commission) confirm that no rating agency even came close to breaching the 100,000 mark – S&P stands way out in front with more than a million ratings outstanding. Of those remaining agencies, only DBRS and Egan-Jones Ratings stand out, with A.M. Best standing out because of their expertise within the insurance marketplace. Towards the very bottom of that list is Morningstar, that has traditionally only been a very small player within the market. However, on the back of recent news, this picture has changed.

Known originally as Dominion Bond Rating Services, DBRS has come a long way since its creation in 1976. The Toronto-based company was acquired by the influential Carlyle Group in 2014 and, in Stephen Joynt, have a former Fitch Ratings CEO as their own CEO. Yet, in keeping with the recent phase of movement within the CRA industry, Morningstar has essentially ‘traded-up’ to acquire DBRS in a deal worth $669 million. Morningstar, founded in 1984 by Joe Mansueto and made public in 2005, has been developing gradually and as of 2018 reported revenue totalling just over $1 billion. Specifically, over the last two years, Morningstar has seen double-digit increases in its revenue for the first time since 2011. It is for this reason that it is interesting to hear Morningstar’s CEO Kunal Kapoor proclaim that the aim is to build a ‘fintech’ rating agency to counter the hegemony of the Big Three – it is clear the aim is to distinguish in order to compete, which in theory is a wise move. However, the marketplace is well versed in this approach and, regrettably, its outcome.

The reality is that a number of agencies offer something specialised. Egan-Jones Ratings offer an investor-pays model that is championed as restricting key dynamics that affect the position of the investor within the credit rating market. A.M. Best is renowned for its services within the insurance sector. Scope Ratings is currently offering a pan-European model that has intense knowledge of the European Sector. Yet, all of this is to no avail. Not one entity has even come close to challenging the Big Three and regular readers will know that the Big Three are getting stronger and stronger – on account of movements into the ESG sphere and now China. It is therefore probably best to change the conversation. Is it the case that there is an unnecessary pressure placed upon these smaller agencies to ‘challenge the Big Three’ when, in reality, that is not their fight? Morningstar and DBRS will be much better off consolidated, and have likely secured their futures in the face of what may be a new wave of M&A activity by the Big Three now the fines have been paid and the new markets are opening up to them. Perhaps, it is only regulators that can challenge the hegemony of the Big Three and the smaller agencies are there to feed on what is left for them. Morningstar’s move is a positive one for them and for the marketplace, because moves like this allow for the existence of some sort of alternative, whereas ‘challenging’ alone will likely reduce the field operating below the Big Three.

Keywords – Credit Rating Agencies, Morningstar, DBRS, Oligopoly, @finregmatters