Monday, 27 January 2020

RBS wins legal case against Morley – But it should not be a common victory

RBS has been the subject of so many posts here in Financial Regulation Matters it is hardly worth providing links, although most recently we were looking at updates on the notorious GRG division within the bank. Today, there was a ruling regarding the conduct of the bank and the Unit, which has caused RBS to celebrate. However, in this short post we will see that the case is so unique, that it really is not a predictor of how future cases will be heard (that is, if they are).

We had looked at the case of Oliver Morley recently, a business man who had claimed that RBS owed him £100 million for the damage that was caused to his business portfolio once he entered into the GRG’s remit. The case was based around the concept of ‘economic duress’ and the processes that RBS initiated once Morley struggled to re-finance etc. In today’s case, heard by Mr Justice Kerr, the Judge ultimately ruled that the bank did not place Mr Morley under any economic duress and were not guilty of intimidation: ‘the bank’s duty of skill and care did not require it to negotiate the restructuring any differently from the way it did so’. As opposed to the Business Man who was innocently fed into the GRG machine, Mr Justice Kerr held that, instead, Morley had been somewhat irresponsible during his business ventures and that, after taking an original £75 million loan from RBS, of which £15-£20 million was for personal use, he had not acted particularly diligently. Examples cited include investments in property, cars, jets, and yachts that ultimately proved to become illiquid assets during the downturn, and ill-conceived investments in South African mining ventures. Kerr concluded that if Morley had had the wherewithal to save just £5 million in reserve, he could have held onto his portfolio and had the ability to refinance his assets better. RBS, rather obviously, were happy with this ruling; a spokesperson for the bank declared ‘the judge found that the bank dealt with Mr Morley – a sophisticated business customer – in accordance with the terms of their contractual agreement following a breach of covenant and in a manner that was rationally connected to its commercial interest’. However, the article in The Financial Times is rightly quick to remind readers that an investigation into the GRG by the FCA – who themselves have become mired in the scandal, as well as the Treasury – found that there were ‘widespread and systematic’ problems at GRG, although they found no evidence that RBS intentionally pushed healthy companies to failure.

This post has been a very quick update on an issue we have covered many times before. However, there is a point that must be made at this juncture. Whilst Morley may have been a ‘playboy’ businessman that got caught out by the Crisis and has since sought to blame RBS for his losses, his case is certainly not the norm when it comes to GRG and RBS. Not everybody fed into the process owned jets and mansions. Many were simply seeking to conduct business on their own terms, and suffered as a result. Whilst this will not be the case right throughout the cohort of those affected by the actions within GRG, there were enough innocent people fed into an appalling practice to suggest that this victory being celebrated by RBS this evening will not be repeated too often. If the affected clients of the Unit can muster the energy and resources to fight the issue, then RBS should be in for some serious pain from the judiciary and, in the cases of those who could not be described as financially ‘sophisticated’, absolutely rightly so.


Keywords – RBS, GRG, Oliver Morley, Judges, Courts, Business, @finregmatters

Thursday, 23 January 2020

Ted Baker’s Woes Keeps the Heat on KPMG

In August 2018, KPMG were fined £3m for acting as an expert witness for Ted Baker in a civil case whilst also providing the fashion company with auditing services. On both sides of the Atlantic, KPMG has received numerous financial penalties for its misdemeanours so it is, of course, no stranger to getting into trouble. However, news this week of financial problems within Ted Baker may cause KPMG further trouble, with this coming hot on the heels of its £5m fine for its performance regarding the auditing of the Bank of New York Mellon. This short post will review the recent developments at Ted Baker and ask whether it is to be considered that auditors will naturally transgress, and that financial penalties are simply to be considered ‘par for the course’.

On Wednesday it was widely reported that Ted Baker had admitted to an accounting error – it has overstated the value of its stock by nearly £60m. Media reports confirm that, last month, the firm had hired Deloitte to investigate what had happened, after preliminary investigations suggested that the overvaluation could be between £20 and £25m. On the news that the actual figure was more than double the initial estimations, the shares in Ted Baker fell nearly 10%, putting the fashion company in real danger. Banks supporting the company have already started placing advisors within the business amid fears the company will need a cash injection to stay afloat at some point in the near future. In March, the company’s Chief Executive – Ray Kelvin – resigned over claims that he presided over a culture of ‘forced hugging’, whilst in October of last year the company reported a £23m loss for the six months to the 10th of August. There has been no official word yet of what area was overvalued, and why – initial reports suggest the overvaluation came from within its clothing line – with the company declaring that the cause will be made public with the release of its annual accounts due shortly. Yet, the bad news just keeps rolling in for Ted Baker, with Kelvin’s replacement, and the firm’s Executive Chairman, both resigning after continuously poor financial results. With the added pressure of increased competitive and environmental forces at play on the High Street, these stories make for a bleak outlook for the struggling firm. However, for KPMG, they may be about to encounter even more bad press as a result of this overvaluation.

The media is reporting that this situation represents a major embarrassment for the auditor, as it had declared during its time as Ted Baker’s auditor that it had uncovered some mis-statements, but that they were too small to affect the company’s accounts. With Deloitte coming in and uncovering this massive overvaluation, the attention will no doubt turn to why KPMG both a. did not catch this overvaluation, and b. decided that the mis-statements they did find were immaterial. The answer to those questions will likely result in some sort of regulatory investigation, particularly if Ted Baker continues to suffer and, ultimately, if it collapses.

KPMG, and in truth the other members of the Big Four auditors, are facing challenging times. For KPMG, it is currently attempting to take action in order to alter the perception of it, with Bill Michael – the Chairman – attempting to ‘restore stability to both its finances and brand’. That objective took a hit recently with the firm’s most senior female officer quitting the firm after two decades, the multitude of fines it is incurring around the globe, and its attempts to ward of British Governmental regulation by way of self-divesting from the ancillary services market which provide it with so much income. Michael is apparently mulling over the sale of a number of the firm’s advisory units before the British Government seeks to put pressure on its regulators to enact some sort of separation between the auditing and advisory arms of the Big Four auditing firms. However, I have warned about this before whilst making the case for a fundamental separation of core and ancillary services within the credit rating industry. After the Enron and WorldCom scandals at the turn of the century, the auditors were allowed to self-divest before it was forced upon; the result was that, just 10 years later, they had all re-implemented the divisions and restarted the lucrative business. Both the credit rating and auditing industries are vital to the efficient running of the marketplace (a stronger case can be made for auditors of course, but I digress), but within them they both have inherent conflicts of interest. The injection of remuneration is the key, but there are sometimes conflicts that we must live with. One that we fundamentally do not need to live with is the development of ancillary services. These industries are massive, and can recoup enough money from the delivery of their core services to both continue delivering those services, and also make massive profits. The development of ancillary services, I argue, feed directly into negating the only penalty that is politically palatable – financial penalties. Until personal liability is opened to the managers and partners of these financial firms, financial penalties must be impactful to deter future transgressions, and with the vast profits obtained from the delivery of ancillary services, that impact is minimal. The Big Four are, it seems, in the news almost every week being fined for something they have done, or not done, in a given area of the world. They continue to do this for a number of reasons. However, one of the main philosophical reasons why financial gatekeepers transgress is, simply, because they can. Some transgressions are much more complex, of course, but when there is simply no impact on the organisation or the people transgressing, and when there are such vast financial rewards to be had, human nature tells us that transgressive behaviour will continue. KPMG will no doubt have their knuckles wrapped for this particular transgression, but it will not matter. The Big Four will also divest from the ancillary service sector in some form in the UK, and British politicians will no doubt celebrate, but it will not matter. But, for those who need these financial gatekeepers to do their jobs honestly, and impartially, it matters.


Keywords – fashion, retail, business, audit, KPMG, @finregmatters

Saturday, 18 January 2020

Moody’s Investors Service President Responds to Criticism, but why now?

Today’s post will be concerned with Moody’s. We will look at a recent article in the Financial Times, and the surprising response to it from the President of Moody’s Investors Service, the rating arm of the Credit Rating Agency. What is surprising is that Michael West responded at all, because a. the rating agencies do not usually respond to such broad criticism, and b. there was really no need to. However, we shall see that there may well have been a need to, as recent geopolitical developments may prove to be a massive victory for the agency and it may be vital that the agency seeks to reassure the marketplace about its ability to be of use, and as impartial as possible.

 The original article in the Financial Times, an opinion piece by Patrick Jenkins entitled ‘Credit Ratings, like dodgy boilers, can still blow up the house’, offers very little other than the usual criticism of the credit rating model of the modern era. For example, Jenkins says that ‘whenever there is an asymmetry of knowledge… the scope for being ripped off is large’, following this with ‘the realm of credit ratings is more heavily stacked against the users than the flaky plumber of mechanic could even dream’. The basis of this is, according to Jenkins, that rating agencies ‘use essentially backward-looking methodologies… this approach also makes ratings pro-cyclical when things do go wrong’, and also that whilst some big bond investors have implemented their own in-house rating departments to negate the potentially negative effects of the conflicts of interest that plague the credit rating industry – he uses the example of Pimco -, ‘most debt investors cannot afford such an overhead’. He cites Scope Ratings, who we discussed recently, as an example of a new offering hoping to ‘shake up the model’, but concludes that on the basis of ineffective regulations and the settled fines which have proven to be ineffective, ‘rating agencies got off lightly’. This leads him to conclude that the outlook for the future of the relationship between agencies and marketplace is a ‘depressing’ one, because the agencies are reporting massive increases in revenues – quarterly results show that S&P’s net income rose by 25%, and Moody’s 22%. The reason for this growth, according to Jenkins, is because record-low interest rates are encouraging increased debt issuances – last year marked a new $2.6 trillion high for corporate bond issuances. However, the response from Michael West hints at another reason for the change in approach from the agency.

In a letter response entitled ‘Moody’s greatest asset is the quality and integrity of our credit ratings’, West starts by declaring that ‘I am writing to clarify important facts regarding Moody’s Investors Service’s credit ratings and their value to the market’. These so-called facts, according to West, are that the ratings are, in fact, ‘predictive, forward-looking opinions based on quantitative and qualitative analysis, combining empirical and statistical research with the credit judgments and opinions of experienced analysts’. He attaches to this the common line of the agencies that credit ratings are meant to be used alongside a broad range of analysis, not the sole basis of any investment decision. So, no surprises so far. He then declares that the agency is careful not to mix the rating and commercial elements of the business, although as we read yesterday with Morningstar, doing this in reality is extremely difficult to maintain. He then states the similarly common line that the issuer-pays remuneration model is actually a public good, rather than an area of real concern, as it makes ratings freely available to the public and allows the agencies to continue their business. This is joined by, almost naturally at this point, a criticism of the investor-pays model because ‘investors, like issuers, have a stake in the outcome of ratings’ and the model is subject to similar conflicts of interest. He concludes by confirming that ‘ultimately, the success of our business depends on trust in the independence of our ratings. Our greatest asset is the quality of our analysis, and this is reflected in the strong, long-term performance of our ratings as highly predictive of credit quality’. Now, before we move to the reason as to why West would have even bothered to reply, it is worth examining his statements and countering these ‘facts’. First, it is mostly true to say that the ratings are indeed forward-looking – reviewing the ratings shows us that they attempt to use a number of factors to predict the creditworthiness of a given entity or product. Fine. Second, whilst careful consideration may be given to the separation of raters and commercial officers, the reality is that this is both regulatory enforced, and they have fallen foul of this many times in the past and will, more than likely, fall foul of it again – it is an inherent conflict of interest. This is because of two elements: the structure of rating committees, and human psychology. Committees are supposed to be constructed so that every analyst has a fair vote in the rating process, but in reality they do contain senior officers who can, and have influenced the decision of the committee to go with what the agency needs, commercially. Also, a junior analyst is placed, fundamentally, in a difficult position when a more senior member of the organisation is present and voting – committees are simply not immune to commercial influence. Third, the criticism of the investors-pays model is based on broad, and incorrect assertions. To say that investors can asset pressure on the rating process just like issuers is not true, just based upon poor logic. To make the process commercially viable, the rating would have to be available to a number of investors, and those investors will not all be interested in the same portion of the rating, or may be utilising them for very different means, whereas issuers simply want the best rating they can for their issuance and/or debt position. In truth, the biggest issue with the investor-pays model is that you simply cannot derive the same revenues from it. Third, the accuracy of the credit ratings angle is true, but only from a corporate bond angle. The accuracy of the Big Two’s structured finance ratings are much lower when analysed historically. Lastly, the notion that Moody’s value is derived from their integrity and impartiality is very easy to counter – many onlookers have suggested that their ratings have very little informational value. The contention is that the value is derived from signalling to regulators or investors; that is it. For regulations, compliance can be monitored via ratings. For investors, an issuer’s creditworthiness can be signalled. However, for regular readers, all of this will not be of any major surprise. So, why has West chosen to respond.

There is no definitive answer of course, but one particular recent event may well provide an answer. This week President Trump signed the first phase of a Trade Deal with China. This deal, of course, contained plenty of elements but there is one in particular of interest. Yahoo Finance reported that ‘US credit rating firms are emerging as some of the winners in the trade deal signed between Washington and Beijing’. The reason for this is because the deal confirms that ‘China commits that it shall continue to allow US service suppliers, including wholly US owned credit rating service suppliers, to rate all types of domestic bonds sold to domestic and international investors’. I wrote an article recently on the changing face of Chinese credit rating provision after S&P became the first US rating agency to be allowed within China on its own basis, and it appears now that Moody’s has been given the green light to join them – as we expected. Moody’s CEO Ray McDaniel was in an unsurprisingly buoyant mood, declaring that ‘China has taken important steps on credit rating agency market opening… the US-China Phase I agreement acknowledges and enshrines those commitments in a bilateral trade agreement, which we support’. This trade deal, and the invitation to internationally-used credit rating agencies is a fundamental component to China’s plans to expand across the globe via their One Belt One Road initiative, which Yahoo Finance supposes has accelerated the opening of China’s $21 trillion capital market by up to 8 months. When President Trump was vehemently arguing that the US has ‘won’ during the negotiations, the reality is that China has gotten everything that it wanted, just in a longer-term fashion. However, for the agencies, it is almost akin to winning the lottery, and it is for this reason that West has chosen to respond. It is vital that Moody’s is considered to be impartial, fair, forward-looking, and most of all useful in this stage of its development – nothing can jeopardise the riches that will come with the opening of the Chinese capital markets. I expect to see much more of what is, essentially, an optics campaign, in the coming months and years because securing their position at the front of the queue can almost guarantee the company’s success moving forward. Though the market is dominated by the Big Two, Fitch are not an inconsequential player. Also, with Morningstar moving into fourth place with the acquisition of DBRS, the oligopolistic model does protect Moody’s but that protection is not absolute. Opinion writers would do well to expect responses from the rating agencies in the coming period.


Keywords – credit rating agencies, China, US, Business, @finregmatters

Friday, 17 January 2020

Can the 737-Max Bring Down Boeing?

We have covered the story of Boeing and the issues it has bene having since the two airplanes fell from the sky in 2018 and 2019. However, today there was news that there are now even more issues with the same plane that is supposed to being fixed for a new rollout, which begs the question of whether this scandal could really bring a company like Boeing down. Though it is almost unthinkable, there are many components to consider. In this post we shall examine why this case is different to most other scandals and why, potentially, it could be more impactful for Boeing than it thinks.

To begin with, it must be said that although it is facing turbulent times, Boeing remains one of the world’s largest companies. It is certainly not facing its downfall any time soon, but its situation is certainly not optimal. We last discussed the situation when we looked at the incredible number of aeroplanes that it has grounded since the demise of the Ethiopian Airlines plane in 2019; so much so that only in December of last year did Boeing completely halt production of the aircraft. However, it was announced today that a new flaw with the 737 Max’s software was discovered, in an area different than the original fault that was forcing the nose of the aircraft down to prevent the plane from stalling. The current issue is with the software that is responsible for checking whether the aircraft is receiving the right data for its purposes. Bloomberg reports that the issue is occurring when the aircraft starts up, with the Seattle Times suggesting that the issue may only be a slight one, and relatively easy to remedy. Nevertheless, Boeing’s share price continued to tumble on the news, sending it down by 2.3% and causing Fitch to downgrade the company (with all of the factors affecting Boeing taken into account). Boeing has continually stated that its main focus is on fixing the aircraft so that it meets with FAA regulations, with the company stating that ‘our highest priority is ensuring the 737 MAX is safe and meets all regulatory requirements before it returns to service’. Yet, analysts are still predicting a heavy hit for the company, with one analyst suggesting the hit could top more than $20 billion, and that is before the families of those affected by the tragedies have any lawsuits settled (and this is predicted upon a Summer return for the aircraft). However, leaving aside the issue of regulators hopefully taking a hard line with the company regarding the aircraft’s return to service – on account of a reaction to suggestions the relationship between the FAA and Boeing is already too close, or ‘incestuous’ as one outlet put forward – one wonders whether there may be bigger issues around the corner.

The issue for Boeing, and something that separates it from other corporate behemoths, is that its products are central to modern human existence. It is not a bank who may pilfer investors, and see very little consequence as a result. When its products fail, people usually perish. It is for this reason that its current position is an extremely precarious one. Imagine the scenario; the 737 MAX is returned to service and, within a week, another plane falls to the Earth. The fallout would be monumental for the company and it would, arguably, struggle to regain the confidence of the public. It is already understood that it will take a while for consumer confidence to come back, and how Boeing and its airline customers decide to phase the aircraft back into service will be important. However, there are a number of elements on Boeing’s side moving forward. It is still the dominant player in the marketplace, and its other products continue to dominate the sky. It competitor, Airbus, whilst close to moving ahead of Boeing in terms of current sales, likely does not have the capacity to take over the market where Boeing to face more struggles. Also, whilst the US would argue the EU are the more guilty party, it is still providing Boeing with state-backed subsidies and, in the current political climate, would surely not be allowed to fail. Boeing will be safe, but its return will be a long and probably painful one. If another plane were to fall, Boeing would be in trouble unlike it has seen before and it would be, there can be no doubt, in a real crisis.


Keywords – Boeing, airlines, consumer safety, @finregmatters

Morningstar Potentially Fined for Lack of Internal Control

Life as the fourth-largest Rating Agency has not gone as planned for Morningstar. Last year the firm acquired DBRS – as we discussed here – and were hoping to improve investors’ trust in the rating industry by bringing a new and honest approach to the field. However, as Cezary Podkul of the Wall Street Journal has recently reported, it appears that they are about to be fined for falling foul of one of the oldest conflicts of interests that plagues the rating industry.

The article introduces the news that Morningstar will, in coming days, be fined ‘several million dollars’ for ‘violating riles in its bond-rating business that prohibit analysts who hand out credit ratings from being involved in sales and marketing for their companies’. There are a number of regulations that came in after the Financial Crisis – and, in truth, agencies pledged on a self-regulatory basis to prevent the same thing from happening even before the Crisis – to prevent this behaviour. The calls to erect so-called ‘Chinese Walls’ between analysts and sale-side activities were loud and clear after the crisis, but clearly that particular conflict of interest remains. The SEC and Morningstar have not commented yet, but the WSJ article suggests it will not be long until this settlement will be made public. This comes on the back of more damaging news for Morningstar. Podkul again broke the news that the firm was struggling to integrate the two sets of rating methodologies since the merger and that ‘investors received an almighty surprise towards the end of last year when Morningstar announced that “25% of the bonds that it had rated were likely to be downgraded”. It turned out that, after a deluge of calls from investors, the firm had actually made an error and that it was actually likely to upgrade 25% of the bonds it had rated, with only 3% being downgraded. The article reports that investors have stated that ‘it certainly isn’t confidence inspiring’, and that it probably a polite version.

Life as the fourth-largest agency has certainly not gone to plan for Morningstar since it acquired DBRS. Whilst it is not being suggested that the firm would not be suffering for these aspects if it has not acquired DBRS, it is suggested that the level of scrutiny has been raised on account of its new position in the marketplace. Yes it may not be anywhere near challenging the Big Three, but it is closer. With that comes scrutiny, and Morningstar would do well to avoid proclamations that it will be doing business differently than other agencies, because in all truth it cannot – some of the conflicts of interests within the credit rating arena are inherent. The adoption of the issuer-pays model precipitates the potential for conflicts such as this particular violation to occur, and they cannot be stopped, unless the remuneration model itself is dropped, which will not happen. It is not anticipated that the fine will be substantial – anything in double figures would be surprising – but the agency is now beginning to feel what life is like towards the upper echelons of the credit rating field.


Keywords – credit rating agencies, Morningstar, conflicts of interest, @finregmatters

Wednesday, 8 January 2020

An Update on Carlos Ghosn

The title of this last of three posts today is a little misleading, because it would probably need a dedicated team to keep up-to-date on the case of Carlos Ghosn. In November 2018 we heard from Oluwarotimi Adeniyi-Akintola of Aston Law School how Carlos Ghosn had been accused of financial improprieties and the falsification of securities reports or, as The Independent put it, Nissan had found that he had engaged in the personal use of company money and had under-reported his income in violation of Japanese law. However, since then, the case has taken an almost soap-opera style turn and today, in front of a packed room of reporters in Lebanon, the former Chair of the Nissan Alliance put forward his case as to why he had circumvented the conditions of his House Arrest in Japan and fled to Lebanon.

After being charged by Japanese authorities last year, Ghosn had posted a £6.8 million bail in April. Owing to his abilities and connections, the bail deal was structured so that he was to be monitored by a 24-hour camera inside his house, that his use of technology was to be restricted, and that he was to be banned from travelling abroad – his passports were to be kept at the offices of his Lawyers in Japan. However, in a statement emanating from Lebanon on New Year’s Eve, Ghosn declared ‘I have escaped injustice and political persecution’. Ghosn was born in Brazil to parents of Lebanese descent and, crucially, there is no extradition agreement between Lebanon and Japan. How he managed to escape Japan has been the subject of much debate in the New Year. Although Ghosn today did not confirm how, suggestions have been put forward that he was smuggled through an airport in a musical equipment case to a private jet, by a private security firm that he hired. This suggestion, however, has been dismissed widely and the originator of the story – MTV – have provided no evidence for it. Yet, conversely, the Financial Times ran a story on the former Green Beret who allegedly masterminded the escape.

Nevertheless, the case will no doubt continue to amaze. Today, Ghosn stated that he is not above the law, and looks forward to defending his name in a place that he believes will give him a fair trial (a privilege not shared across society of course). Ghosn has shaped the narrative that insiders within Nissan, and the Japanese system moreover, were against his plans to bring Nissan and Renault closer together and, he proposes, the only way they saw to prevent that was to aim for Ghosn himself. For their part, the Japanese prosecutors denied conspiratorial connections with Nissan and stated, quite rightly, that in addition to confirming that Ghosn had broken more Japanese laws by escaping, that he had provided no further evidence to exonerate him from the charges originally brought against him. It appears that a standoff will ensure whereby Ghosn must only stay in countries that do not have extradition treaties with Japan and, if he does so, there will be no recourse for the Japanese prosecutors.


Keywords – Carlos Ghosn, Nissan, Japan, Justice, Law, Business, @finregmatters

Tesco’s Organisational Shift Faces Close Scrutiny

We have examined Tesco and some of its organisational policies on a number of occasions here in Financial Regulation Matters. Most recently, we looked at how it was adopting a more regional approach to its business by acquiring companies like Booker, and moving away from its previous, more global ambitions. One element that clearly illustrates this once global ambition, and subsequent retreating from it, is the company’s Asian endeavour. Tesco Lotus, which saw the firm expand out into Thailand and Malaysia mainly, has proven to be successful for Tesco, relatively speaking – it has been suggested by experts that from the nearly 2000 stores it has in the region, Tesco Lotus accounts for more than 9% of the company’s global retail sales, with the division reporting nearly £2.6 billion in sales last year alone. However, as part of an operational turn-around, Tesco is looking to sell the division.

Yet, according to a recent Financial Times article, that plan may not be as straightforward as Tesco might have hoped. The company aims to generate more than £9 billion from this sale, with it being suggested by onlookers that this sum will be given over to shareholders. Before those shareholders can think about obtaining that money however, the declarations coming from Thailand’s Office of Trade Competition Commission should be a worry. Historically a weak outfit in relation to the regulation of Thailand’s largest financial players (mostly families), the regulator is seeking to assert its dominance. Sakon Varanyuwatana, the Chairman of the Commission, has said recently that whilst the proposed deal to sell Tesco Lotus would be a very big task for the regulator to regulate, ‘we have to build public trust in our operation’. The list of suspected bids for Tesco’s Asian empire grows by the day, and with it grows the regulatory task for the Commission. According to reports, there are three Thai family-owned enterprises in the queue – Charoen Pokphand (CP), Central Group, and the TCC group (all of whom have stakes in retail empires within the region themselves – while the retail unit of Thailand’s biggest energy company PTT is reportedly interested.

What this has done is stoke fears of a monopoly being created in the vacuum left by Tesco. All three retail giants lining up a bid would be catapulted into the lead of the marketplace were they to be successful, whilst the looming presence of the country’s largest energy supplier will do little to calm the nerves of the regulators. The Commission has already set up a specific task force that is tasked with assessing the implications of the deal, and also the connections that exist already between Tesco and the bidding entities. There are a number of factors that will need to be considered – like, for example, the fact that CP owns major cash-and-carry brands that could affect other competitors were it to take the lead in the market – and all of them together are steadily increasing the pressure on the regulator. If the regulator is conscious of how it itself is perceived by the public throughout this deal, then the fears for Tesco are that it may be inclined to take a more forceful approach then Tesco would want. It will be worth monitoring, although the historical trend perhaps tells us that big business will prevail in this particular deal, and that the Thai marketplace will have to cope as best at it can with the fallout.


Keywords – Tesco, Tesco Lotus, Asia, Retail, Business, @finregmatters

Slight Fears Raised for Scope Ratings

In the first of three short posts today, this particular post will continue analysis that we started here in Financial Regulation Matters in early 2018. We first previewed an article on Scope Ratings that I had written for the European Company Law journal in February 2018, and then followed that up with an update in May 2019 here. As the company was recently featured in the Financial Times, a small further update would be good to keep us abreast of the development of this European-based challenger to the Big Three’s hegemony.

The last time we assessed Scope Ratings, all was positive. They had grown their workforce from around 50 to over 200 staff, and also had received the fantastic boon of a number of major insurance companies coming on board with the project. HDI and Signal Iduna had joined as investors, taking the investor pool to over 70. However, in the Financial Times article dated 2nd January, and entitled ‘Scope faces uphill struggle to crack credit rating market’, the article attempts to present a sentiment that all is not going well any more. This is based on both a stalling of Scope’s revenues for the first time – according to the article, ‘Scope’s revenues have stalled over the first nine months of 2019, while its losses before interest, taxes, depreciation and amortisation widened to €14.3m’ – and that, after all of its successes, it still only controls 0.5% of the European credit rating market, languishing behind competitors like DBRS. However, Scope have responded by declaring that this loss was caused by regulatory changes that damaged its structured finance rating business, and that the company fully expected revenues to increase by 50% in 2020 and that the firm would be looking to break even in 2021.

As a relatively young endeavour, in a particularly crowded and oligopolistic marketplace, the chances of Scope ever swaying in and dominating the scene where next to impossible, and so it has proven. However, in their region, they are performing well. They are also riding on a wave of goodwill, with major investors remaining calm and certain that although the firm is still in its investment stage, ‘we think it is an achievable goal’. Scope has certain backers, like the largest single investor in BMW, who has backed the firm because he wants to see a serious European-based contender to the Big Three. Although, there are still detractors of course, with asset managers stating that the issue is that whilst Scope’s analysis may be good, Scope’s rating cannot drive changes in credit spreads, whilst S&P and Moody’s can. Yet, at this stage of the firm’s development, there is clearly no need to worry. The reporting of the article is, admittedly, still positive about the endeavour and the 2019 losses do need to be reported; it is almost guaranteed that Scope’s progression will contain bumps along the way, and perhaps this is its first. If we look at its progression on a long-term basis, then the firm should still be very much on course to make some sort of meaningful impact upon the credit rating market, whatever that may relatively look like.


Keywords – Scope Ratings, Business, Credit rating agencies, Europe, @finregmatters