Thursday, 26 September 2019

ABN Amro the Latest Bank to Show the Need for a New Solution to Money Laundering

It has been reported today that ABN Amro, the Dutch bank that is half-owned by the Dutch Government, is being investigated by the country’s public prosecutor. Though it has not revealed what that investigation entails, it has warned that ‘it could face fine for lapses in its client due diligence that may have allowed breaches of money laundering and terrorism financing laws’. In today’s post, we will look at the potential for this investigation, and assess this against the backdrop of what seems to be an increased commitment to compliance on behalf of ABN Amro, paradoxically. In light of a recent article I developed looking at Sigma Ratings, it is worthwhile considering their mission again in light of yet another massive breach of AML regulations, potentially.

Though the bank has been unable to declare what the investigation concerns, its suggestion that it may be regarding breaches in AML compliance have resulted in a 9.3% drop in the shares already. The article in the FT discusses how this investigation is likely to be part of a series of investigations throughout Europe. The Dutch public prosecutor fined ING €775 million last year for AML failures, and we have already analysed Danske Bank who, through their Estonian arm, were found to have laundered more than €200 billion of Russian and ex-Soviet money – coincidentally, the head of that Estonian arm was found dead this week. Since the FT article, Bloomberg reports that the prosecutor has stated that the investigation is concerned with ‘failing to report suspicious transactions and not conducting sufficient checks on its clients’, which falls directly in line with the suggestions from ABN Amro themselves. In July, the Dutch Central Bank forced ABN Amro to increase its reserves on account of pushing the bank to review all domestic retail clients under due diligence requirements. The bank actually went further by increasing its compliance spending and increasing the amount of compliance staff – according to the FT, ABN Amro increased its compliance staffing levels five-fold in five years, resulting in the bank having more than 1400 compliance professionals.

The problem here though is that, if it is the case that there have been breaches of AML laws and regulations, then clearly an increase in the amount of compliance professionals has done little to impact the bank’s overall compliance. Although it would be easy to blame the compliance professionals, research actually shows that the current AML regime is particularly punitive towards compliance professionals, so much so that it actually discourages going that extra mile to ensure compliance and has, ultimately, created a box-ticking culture that is becoming pervasive. It has even been suggested that the field of banking compliance is a ‘ticking timebomb’ for professionals, with increasing numbers choosing to move away from the sector. Furthermore, there are a number of initiatives being developed to counter stress and anxiety in the compliance field, as it is becoming clearer that there are underlying issues within the sector. So, if increasing the amount of compliance officers is not the answer, then what is?

It is, of course, difficult to declare the one solution to what is a myriad of problems. We spoke recently about Sigma Ratings and their mission to increase the amount of independent information within the sector. Understanding risk, particularly within the AML realm, is of vital importance and my recent article concluded that the mission of Sigma, and the way that it is going about achieving that mission, is particularly important. The article concluded that further AML-related scandals would only increase the need for Sigma’s product, and that has happened within weeks of the article being accepted for publication. It will be interesting to see whether ABN Amro is guilty of internal-based AML compliance failures, or whether it is related to their dealings with external-but-connected entities, like the model used within ‘correspondent banking’. If this investigation is related to something akin to Danske Bank’s dealings with its Estonian arm, then increased information like that which Sigma could theoretically provide would be particularly useful. It will certainly be worth monitoring this investigation and Europe continues to reel from a number of AML-related scandals.

Keywords – AML, ABN Amro, Banking, Compliance, Sigma Ratings, @finregmatters

Tuesday, 24 September 2019

The Analytical Credit Rating Agency Issues its First Credit Rating to Russia

In 2017 I introduced the Analytical Credit Rating Agency to the literature – the article is available here, and the pre-published version here. I also discussed the Russian rating arena in an article for Financial Regulation International, entitled ‘Rating Creditworthiness in Russia: A Microcosm of Inherent Issues within the Credit Rating Industry’. As a result of these investigations, there were a number of concerns raised regarding the perceived integrity of the ACRA and how important it was that its rating were to be deemed impartial. This month, the agency produced its first sovereign rating to Russia and this is then the perfect opportunity to review the agency.

The largest concern for the agency was its perceived independence, with my article concluding that ‘the latest endeavour by an “outsider” to influence the credit rating industry will, arguably, result in failure. In the non-profit sector the issue is funding, and now in the for-profit sector the issue is rapidly becoming about perceived independence from political pressure’. Russia had declared that it would be ready to use the ACRA as a yardstick for its investments and that, in time, the agency would be able to showcase the creditworthiness of Russian debt to the outside world. In fact, since the annexing of Crimea and the subsequent withdrawal of the international rating agencies, ACRA has become the central agency in Russia with the Central Bank insisting that its banks obtain at least an A-grade rating from ACRA to be licenced. Fast forward two years, and the results of the agency’s first sovereign rating provides little comfort. The report in the press notes that the agency’s rating of Russia’s long-term foreign currency credit rating, and its local currency credit rating, are ‘significantly higher than the three leading international rating agencies’ - both categories were rated at A-. However, the rating commentary does reveal that the agency is attempting to be outwardly unbiased, especially when it states that ‘the rating is constrained by the low potential for economic growth, limited diversity if exports, lack of transparency of the Russian Government’s obligations to a number of state-owned companies, weakness of institutions, and the threat of new sanctions capable of limiting investment and hindering technology-based cooperation and trade with potential foreign partners’. It is quite a damning commentary, but yet the rating remains significantly higher than the Big Three.

Yet, this raises an important question. Russia have never received an A-grade rating from any of the Big Three, despite ‘having one of the strongest macroeconomic fundamentals of any major economy in the world’. The sentiment being offered by Putin is that the Big Three are overly harsh with Russia and that this stems from the US-centricity. The news report states how Russia has been performing particularly well given the circumstances, with a number of the country’s reserves developing strongly in recent years. This leads to the questioning of whether the Big Three’s analysis is either a. politically motivated, b. incorrect, or c. borne of a lack of real access that the ACRA seems to have no real problem with. Whilst US-centricity is an issue in the credit rating field, it is likely not as impactful as one may believe, and would be extraordinarily difficult to prove even if it was. The Big Three may be incorrect in their assessment, with the oligopolistic dynamic at fault for that incorrect analysis being spread across the board, but the Big Three have vastly more resources than ACRA and their traditional accuracy within the sovereign field do not suggest that they are all wrong. Whilst the Big Three have all withdrawn from Russia’s marketplace, more or less, they still have access to plenty of data and have had a presence in the country for a long time – it is incredibly unlikely that things have miraculously changed since the agencies began to withdraw.

The reality is that whilst ACRA have gained some credit for their rating commentary, and have a press report and some research to support their position, it is still that as soon as ACRA had the chance to rate Russia, it rated it a number of notches above the rest of the Big Three. Whilst its first sovereign rating was only a benchmark – ACRA rated Switzerland first – this is really their first big rating. Regrettably, the commentary will not be enough to remove suspicions that ACRA is simply a government rating agency masquerading as a private independent rating agency. Therefore, whilst it will be of use internally within Russia, that will likely be the extent of its usefulness. We have seen recently that China suffered from an internal credit rating market, and have sought to resolve those issues by allowing S&P into the country. It is not unforeseeable that, at some point, Russia will have to do the same.

Keywords – credit rating agencies, Russia, ACRA, Business, @finregmatters

Reports of Credit Rating Agencies Moving into the ESG Marketplace

Earlier this month, the Financial Times reported that the Big Three credit rating agencies were continuing to make their move into the ESG marketplace via a number of concerted deals. This report falls directly in line with the analysis I developed in my recent book The Role of Credit Rating Agencies in Responsible Finance and in an article last year entitled Sustainable Finance Ratings as the Latest Symptom of “Rating Addiction”. As I will be producing a chapter for a book next year, with that chapter being entitled Sustainable Rating Agencies, it seems prudent to review the market and its developments.

The FT begins by noting that Moody’s has been making particular waves in the marketplace, as they purchased a majority stake in Vigeo Eiris earlier this year, and followed this with the purchasing of Four Twenty Seven. In June, S&P published its first ESG evaluation – of the company NextEra Energy. The article goes on to discuss how experts believe the market for sustainable-based ratings will grow from $200 to $500 million in the next few years, with one onlooker stating that the two agencies ‘know this will be a big market in the future and it will only grow’. The article makes the accurate connection between the growth of the marketplace, the attention of the rating agencies, and regulatory designs which are pushing for increased sustainability disclosures. This policy will, naturally, increase the need for the verification and categorisation of this increased data. It should also have the theoretical effect of making ESG-based ratings much more accurate, as disclosure increases.

However, that is only theoretical. The article discusses how research has shown that the agencies, whilst focusing more on ESG, are not disclosing their methodologies and, as a result, ‘ESG ratings from different sources are aligned in about 6 out of 10 cases, whereas regular ratings for creditworthiness match 99% of the time’. Whilst we may not want conformity in this particular instance, a divergence of 40% seems to be too large for investors to incorporate and understand. There are attempts to resolve this issue – standards boards are aiming at creating a single rating spectrum – but the accepted understanding is that this is some way off, if at all.

In my book I raised the issue of the credit rating agencies moving into the marketplace in such a concerted way, that there was bound to be problems. This report suggests that such a conclusion may well be accurate. If the Top Two, in particular, continue at the pace they are setting, then they will devour the market for ESG/sustainable ratings. If they do, then investors will be left with just two choices. Perhaps some investors may suggest this is preferable, given the massive divergence that exists currently within the ratings sphere regarding ESG/sustainability. However, there is then scope for the engrained conflicts of interest within the credit rating model to affect the sustainable finance field. If the sustainable finance field is, as some would suggest, the best response to the Crisis-era, then exposing that to the engrained conflicts of interests within the credit rating industry may not be so preferable. It is worth continuing to monitor this market, if only to confirm the hypotheses that the oligopolistic credit rating industry is on its way to devouring the ESG/sustainable ratings field.

Keywords – credit rating agencies, business, ESG, sustainable finance, @finregmatters

Monday, 23 September 2019

The Collapse of Thomas Cook and the Start of the Blame Game

Earlier this morning, the saga surrounding the British travel firm Thomas Cook came to an end with the news that ‘last-minute negotiations aimed at saving the 178 year old holiday firm had failed’. With the tabloids and social media being flooded with stories of customers stranded abroad, and also with statements from the thousands of employees who have lost their jobs and, apparently, learned of this via the press, it is clear that the saga is far from over. However, a number of issues have arisen from the responses to the collapse this morning, and in this post we will analyse those responses.

Thomas Cook had been struggling for quite some time. In the summer it had reported a £1.5 billion loss. Over the year, it had issued 3 separate profit warnings. As a result, it had sought to bring in new investment and reconfigure its debts. The new deal involved the Chinese Group Fosun – a conglomerate that also owns British Football Club Wolverhampton Wanderers – and would see the conglomerate become the major shareholder. The plan would involve diluting the position of a number of existing shareholders, but the company had responded by claiming that it was the best way to secure the future of the company: ‘it means the oldest brand in travel will continue to deliver good-value travel’. Yet, the deal was not secured by the time a number of other factors had come to the forefront. It was reported earlier this week that the company would fall into administration if the rescue deal was not secured, and that the aspect that was preventing the deal from being secured was that its creditor banks had requested that the company find another £200 million in contingency funds. The result had been for Thomas Cook to approach the government for a bail-out. The BBC had reported that the Government took the view that it was not a decision between a £200 million bail out and a £600 million cost for a mass repatriation, because Thomas Cook Customers are protected by Atol – a fund paid for by levies paid by industry members. This stance was confirmed by Boris Johnson, who had suggested there was a ‘moral hazard’ to rescuing Thomas Cook, particularly as the Government had refused to save companies like Carillion. That may be fair enough, but it is worth noting that the bank that insisted on the increased contingency – RBS – is still majoritively owned by the Government (though some may remind me that the nationalisation of the bank was confirmed under a different party).

In the immediate aftermath, the Conservative Government is seeking to emerge with some credibility, and have chosen the role of Directors as the vehicle with which to do so. Johnson was cited as saying that ‘one is driven to reflect on whether the directors of these companies are properly incentivised to sort such matters out’. On the one hand, this approach could be incredibly progressive. There is a movement, of sorts, within business circles currently to discuss and action elements of ‘short-termism’, and the fight against it. Industry heavyweights such as JP Morgan and Berkshire Hathaway have recently launched campaigns to guard against the damaging effects of the ideology. Yet, on the other hand, is this just a way for the Government to spin a massive corporate failure to their advantage? At the moment, there are 22,000 jobs on the line and the country is facing its largest-ever peacetime repatriation – there are more than 150,000 customers stranded abroad this morning. If we also factor in the timing of this collapse – just more than a month before the scheduled exit from the EU – then this saga could become extremely damaging for the pro-business Conservative Government. What is the likelihood of the Government taking action against Directors and attempting to influence business policies from an ideological level? Probably not high. We have seen Sir Philip Green take part in the destruction of British High Street stalwarts like BHS, with no accompanying punishment. We are seeing the High Street close around us, with no change to how business is conducted. Finally, we are seeing massive amounts of tax-payers money being appropriated to the Brexit-cause – billions of pounds. Yet, the counter-argument is that Thomas Cook was a company existing within a dying space. Its ownership of its own fleet makes sense during peak times, but becomes a year-long fixed cost that other tour operators rarely have. The amount of customers using the internet to book their holidays themselves, and not through tour operators, have risen significantly. There is also the suggestion in this morning’s press that British Customers no longer flock towards the ‘fly and flop’ holidays, although the 150,000 people currently abroad may suggest otherwise, if only slightly. The end result is the loss of yet another historic company from the British landscape. If one takes a holistic view of the state of British business, it is quite extraordinary. Whether that is because the country (and likely the world at large) is still dealing with the effects of the Crisis, or whether it is related to Brexit, is unknown. It may just relate to changing customer attitudes and practices, or it could relate to poor management within the company itself. Nevertheless, for those employees and customers left stranded this morning, the reasoning will be of little comfort.

Keywords – Thomas Cook, Business, UK, Airlines, @finregmatters

Monday, 16 September 2019

The Educational Business

In May 2017, we looked at the issue of big business moving into the British student accommodation sector in a concerted way. On the same subject, the Financial Times is reporting this week that the market has increased in scale, so much so that the issue facing the sector now may be saturation. This development comes at a time when the British Higher Education (HE) system, at least, is being potentially impacted by a number of factors. In today’s post we will assess the FT report and aim to contextualise this supposed saturation of the market against the current issues in the HE sector.

The FT chooses to focus on Plymouth, in the south of the UK, in order to set its analysis. The article is full of anecdotal accounts of the differing landscape in the city, and also the experiences of those who live there. However, there are a number of important statistics that are contained within the article. For example, investment in the sector has actually been reducing according to Savills Operational Capital Markets, with the 2018 level of investment coming in at just over £3 billion, as opposed to just under £4 billion the year before. Interestingly, the make up of that global investment has also changed. At its height in 2015, the global investment in the British student accommodation market was measured at just shy of £6 billion, with US, Russian, and British investors making up the majority of that investment. In 2018, the American and Russian investors have reduced their appetite for the marketplace, with European investors now making up the majority. Asian investors, who in 2016 where heavily invested in the marketplace, have now followed a similar pathway to their American and Russian counterparts. BlackRock, the world’s largest investment manager, is currently selling £300 million of its accommodation portfolio. The sentiment from these statistics is that the market is peaking, with the FT reporting that, for the University of Plymouth, there are still student rooms going spare just a week before the term is due to start – supply is outstripping demand.

However, the report goes on to suggest that this scenario may not last for long. Currently, the rate of student enrolment in the UK has rebounded since a dip in 2015 and now stands at 550,000 for this coming academic year. Yet, this rise in enrolments has been met with criticism. For example, the British Education Secretary has backed a review into the admissions process in the UK, after a 4% rise in unconditional offers being sent out to applicants was reported a month earlier. Whilst the rise may seem inconsequential, it is part of a wider concern that Universities are now competing against each other for students in a detrimental way. Another aspect that the British Government has flagged is the potential issue of grade inflation, which would potentially distort the retention figures, as well as the performance of Universities (amongst other things). These concerns, when viewed together, form part of a much larger societal issue.

It was interesting to read that the University of Plymouth was keen to distance itself from the private marketplace and declare that ‘the rise in new student accommodation developments around the city is in no way directed by the university and is being driven by private commercial developers wholly independent of the university’. There is, of course, no reason to doubt this but the need to make the statement shows that the University understand the implication that lays beneath this story. Any analysis of the sector shows that Universities are competing with each other for student numbers, with the associated fear being that it becomes a race to the bottom. Recent reports suggesting that students are waiting for up to 3 months for mental health care point towards the conclusion that the Universities are not built to cope with the amount of students they are currently recruiting. If that is the case, then the increase in private pressure regarding the building of student accommodation will only make the situation worse. Will it be the case that Universities, in the coming years, begin to lower their entry criteria and make unconditional offers on that lower basis? If so, the potential of harm to the student body increases, as students will be participating in a highly-pressured environment, which is an environment that cannot then meet the demands that such students may require. Although the pressures are relative, the higher-ranked Universities bring with them their own version of HE-related pressure and, if they choose to engage in this theoretical race to the bottom, then that potential of harm fundamentally increases. Yet, the push for more students will increase year on year, irrespective of the effect. With tuition fees now reaching £9,250, would a British University really turn away students on the basis of quality, in order to fulfil their obligations to the best of their ability? Or would the fear of not bringing that revenue in, especially in relation to their competitors, determine their actions? The answer to that question is, of course, difficult to come up with. However, the fact that it is a question is the real concern. The Higher Education system should be exactly that – educational. The focus on money, especially to the degree that it currently exists, is a fundamental problem within the sector. It is crucial that there are rules in place to prevent the potential race to the bottom in the sector. Whether the governmental concerns and proposed reviews help facilitate this is another matter, unfortunately.

Keywords – education, business, accommodation, university, @finregmatters

Thursday, 12 September 2019

Moody’s Cuts Ford’s Credit Rating to “Junk” – Testing Times for the Auto Industry?

Earlier this week it was announced that Moody’s had downgraded Ford’s credit rating to Ba1, the highest rating level within Moody’s’ so-called ‘junk’ category, or in other terms its classification of non-investment grade. There are a number of factors to consider, however, in analysing the situation above and beyond the obviously negative headlines that have accompanied this rating action.

Moody’s have been the first of the Big Three credit rating agencies to downgrade Ford into this non-investment grade classification, with S&P and Fitch maintaining Ford’s credit rating at two rungs above non-investment grade. In the title to this post, the question is asked of whether there are testing times for the automotive industry currently and, in providing their reasoning for the downgrading of Ford’s credit rating, Moody’s appear to believe that this is not the case: ‘The erosion in Ford’s performance has occurred during a period in which global automotive conditions have been fairly healthy’. Furthermore, in May, Moody’s upgraded Ford’s rival Fiat Chrysler (to the same Ba1 status) on account of ‘strong SUV and truck sales in North America’. It therefore appears that Ford is on a downward spiral, but it is being suggested that the entire automotive marketplace is suffering and is in the process of making significant changes to the way the market moves forward. Industry onlookers have stated that the Ford downgrade is ‘an unfortunate inevitability of where we are in the cycle for the auto industry… they have this massive restructuring underway and all the auto companies are trying to figure out how to deal with autos 2.0’. This market refocusing has been likened to ‘turning around a battleship’ and, currently, that is what Ford is trying to do.

Apart from attempting to reduce the costs of modernisation – Ford and Volkswagen have joined forces to reduce the cost of R&D regarding the electrification of the market – Ford have also begun a massive restructuring process. In June they announced that up to 12,000 jobs would be cut in Europe, which followed news in May that 7,000 jobs worldwide would be cut, representing 10% of its salaried workforce. These cost-cutting strategies are part of an $11 billion overhaul that aims to protect Ford’s position moving forward. However, this week’s announcement has seen opinion become divided over whether that task has just gotten that much harder. Analysts at Bank of America Merrill Lynch have suggested that investors understand this downgrade to be ‘sufficiently idiosyncratic’, although other investors are said to be concerned that companies are happy to issue debt whilst being at the bottom of the investment-grade classification – that fear is based upon the fact that worsening economic conditions around the issuing companies may lead to the inability to service those debts, which could lead to downgrades and a vicious cycle which could put those issuing companies in real danger.

At the moment Moody’s is of the opinion that Ford, whilst deserving of the downgrade, is in a healthy-enough position – its reserves outweigh its debt obligations. However, the chances of Ford moving back into investment-grade is considered slight by Moody’s, who have suggested it could be a number of years before that happens. With Ford currently undertaking a massive restructuring, the timing could not be worse – the potential impact upon Ford’s borrowing capabilities could be massive (particularly as the largest investors are usually regulatory-bound to only invest in investment-grade bonds). Also, the external environment for American auto manufacturers is certainly not stable, with the market being used within the tariff war being waged between the US and China – an increase on tariffs combined with a decreasing demand for their products means that the US automotive market is in a potentially very precarious position indeed. In summation, whilst some are declaring that the downgrade will potentially have little impact, it is probably correct to suggest that the downgrade could not have come at a worse time. If we also consider that the other members of the Rating Oligopoly may be more inclined to reduce Ford’s credit rating now that Moody’s has broken rank, the impact could be particularly significant. It is imagined the next few months will see Ford attempt to convey the narrative that the restructuring is on track and is, ultimately, having a positive effect. Whether that is true or not remains to be seen.

Keywords – Ford, automotive, cars, business, trade war, @finregmatters

Tuesday, 3 September 2019

The Demise of Marks and Spencer

There have been a number of posts here in Financial Regulation Matters concerning the British High Street and the demise of some of its institutions. Whilst Marks and Spencer – a company which traces its roots back to 1884 – is certainly not on the brink of disappearing, it has been reported today that Marks and Spencer (M&S), for the first time since the FTSE 100 was launched in 1984, will be demoted on account of its failing fortunes. In today’s post we will get to know the retailer in more detail in the hope of, potentially, coming to an understanding of what has gone wrong for this High Street stalwart.

In 1884, the Belarussian Michael Marks opened a penny bazaar in Leeds. After some initial success, he entered into business with Tom Spencer in 1894, who invested £300 in the fledgling business which combined Spencer’s accounting accuracy with Marks’ flair for buying and selling. The concept of selling everything for a penny took off, so much so that by 1900 M&S had over 36 Bazaars and 12 High Street stores. However, in the early 1900s both founders had passed away, leading to an entrenched legal battle for control of the company. Ultimately, in 1907, Michael’s son Simon (the future Baron Marks of Broughton, of Sunningdale in the Royal Country of Berkshire) acquired control of the business from Tom Spencer’s executor. Simon would go on to lead the company through continued successes, even during the WWII era in which a number of its stores were damaged, rationing hit its business, and its scientists contributing to the War Effort by way of helping with the rationing strategy. The company had started to develop a foothold in the quality garment business, and through the 1970s and 1980s had started to make a name for itself in the field of high quality food. In the 1970s, an organisational shift occurred with the positioning of Marcus Sieff as Chairman. He had emphasised the importance of developing a close bond with its workers, something which has become synonymous with M&S and still portrayed by staff today, with it being proclaimed that ‘they really look after you’. At the same time, M&S began its attempts to expand globally, with ventures developed in Canada, France, and the US in the late 1980s. However, none of these were to become major successes.

Yet, the retailer was continuing to be successful in the British marketplace. With a very different retail environment surrounding it in the early 2000s, none other than Sir Philip Green had put together an £11 billion package to purchase the group, but negotiations failed. However, with hindsight, the Financial Crisis-era took its toll on M&S, with a series of store closures and strategic reconfigurations coming since the downturn in the late 2000s. In 2016, former head of food provision, Steve Rowe, took the job as CEO and immediately set about putting together a new plan for the retailer, especially in the light of the very different trading environment surrounding it since the Crisis. Rowe had identified that there were a number of problems facing the retailer, including an ‘aging customer base and dated stores’ for its clothing arm, and food halls that were too expensive. In response, the retailer sought to stock more of its popular clothing lines (with availability being cited as a particular issue) and also increase the sizes of its food offerings to tempt families to shop in the retailer’s food halls. That strategic revolution is still taking place, but a number of factors are piling up against the retailer.

The retailer announced this year that its plan to close 110 stores was ‘not finite’ meaning even more could be at risk. Shareholders have supported this restructuring plan as a necessary move, particularly as the retailer wants to make more than £350 million in savings in the coming years. However, shareholders have been less pleased with the deal for M&S to purchase Ocado, the online grocery retailer, which saw M&S purchase 50% of Ocado for £750 million and which will facilitate the delivery of M&S food products to British homes from the end of 2020. Steve Rowe had announced that ‘we think we have paid a fair price’, but that did not stop the share price falling by 10%. Whilst onlooking analysts have suggested the deal makes sense, the price has been called into question on account of Ocado not yet making a profit from food sales, and the inherent risk of entering a new marketplace (for M&S). Yet, perhaps one of the biggest factors affecting the future of the retailer is its reputation and, as is being reported today, it is likely that tomorrow will see that reputation take a massive hit. The BBC have reported today that the company will be demoted from the FTSE 100, an index of Britain’s largest listed companies. Retail experts have been noted as declaring that ‘symbolically, falling out of the FTSE is just another milestone in the slow-but-steady decline of what used to be a great British institution’. The BBC notes how the company’s demotion to the FTSE 250 has been expected and that, when viewed in comparison with its competitors like Next (who have a market value of £7.9 billion as opposed to M&S’s £3.6 billion), it is clear to see why the demotion is taking place.

There may be a number of reasons for the decline, and reasons which may suggest at the potential for M&S to salvage its position. The company does need to be modernised, but it is questionable whether it can shake its tag of being for older generations. It is surrounded by younger and fresher retailers like Next, Primark, and a new breed of retailers who are making serious grounds like Boohoo. On the food front, the deal with Ocado has the air of a make-or-break deal for the retailer. If it takes off, then it is likely that the retailer will focus the majority of its energy on capitalising on that momentum. However, it is fails to take off, the company will be in serious trouble. It is that realisation which is the most concerning of all – that the company is depending on one particular aspect so much. The only other solution is to match its movement with regards to store closures and simply just downsize – the question then becomes whether its shareholders will accept such an institution being happy to play second fiddle to other retailers. One suggests that they will not be, which puts M&s into a precarious position whereby they are chasing victories for the shareholders. This is probably not the marketplace to do that, especially with the brutality of the High Street in the recent era. The High Street suffered a massive loss when BHS folded, but losing M&S would be much more impactful.

Keywords – retail, UK, Business, Marks & Spencer, @finregmatters

Monday, 2 September 2019

China’s Belt and Road Initiative Moves into a New Phase, but What are the Consequences?

In a previous post, we examined the recent change in environment for credit rating provision in China. It was concluded that this changing of the environment – essentially opening the doors to Western credit rating agencies, fully, for the first time – was based upon forthcoming requirements connected to the ‘Belt and Road Initiative’ being developed by China. We have looked at the Initiative before in a number of posts, but in today’s post we will be assessing some of the latest developments as the Initiative, seemingly, moves into a new phase. It seems that these developments are borne out of necessity, so assessing what these factors mean to the future of the largest development program the world will have seen will be important.

Going back to April this year, the tone used by President Xi Jinping was very different to the tone he had used in 2017 to champion the development and growth opportunities that the Initiative would bring. This time the focus was on ensuring that the sentiments of transparency and progressive thinking were made absolutely clear to the world. There are a number of reasons for this, and a Bloomberg article from last month neatly sums up the growing list of issues that are being associated with the project. There are 126 countries that have signed up to, or are in some way associated with the project, although the majority of these countries are classified as developing countries. This has led to suggestions that China is exploiting these developing countries for its own economic, militaristic, and environmental ends. A number of American pieces have focused on the growing political and militaristic influence being developed in Asia, Africa, and the Pacific on account of the Initiative, with the suggestion being that economic difficulties are being traded for influence. It is being reported that Tonga, Vanuatu, Papua New Guinea, and Fiji have signed up to the Initiative via the renegotiation of existing debt. There is also the suggestion that the Initiative will be the vehicle for a massive exploitation of natural resources from partner countries. Additionally, Sri Lanka recently handed over a 99-year lease to a State-owned Chinese company for a strategically-placed port (and supposed oil refinery) because it could not afford to service the debt. On top of this, a number of countries have been forced to renegotiate their deals with the Chinese, including Pakistani, Malaysian, and Myanmar-based projects to the tune of billions of dollars.

This has led Xi to declare that the Chinese government will be taking a much more conservative approach to the development of the Initiative, whilst also increasing the supervision of Initiative projects and associated expenditure. Also, Xi has called for the development of ‘greener’ projects, which has become a key issue as research focuses on the Initiative more and more. Today, research was released by Tsinghua University – President Xi’s former University – entitled Decarbonizing the Belt and Road: A Green Finance Roadmap. The authors, Dr Ma Jun and Dr Simon Zadek, seek to examine the current emission rates of the countries that are aligned to the Initiative, and then forecast how the economic development of the entire group will affect global carbon emissions. The report’s suggestion is that the Initiative must be decarbonised because, if the Initiative is not aligned to greener principles, then ‘it may be enough to result in a 2.7 degree path’. This has led to suggestions that the Initiative could ‘make or break the Paris Agreement’. This is based on a number of factors. The report identifies that the nations aligned to the Initiative account for 28% of global man-made emissions (excluding China), with China contributing 30% itself. However, the report suggests that by embracing industrial ‘best practice’ with regards to employing greener technologies, the entire Initiative could see its emission rates cut by a massive 39%. Whilst China is attempting to make positive moves within its domestic marketplace, its investment in fossil fuels outside of China has been cause for criticism. The solution, according to the Report, may be to develop a Green platform that supports green initiatives and the incorporation of green principles across the Initiative, which will surely be of interest to the Chinese as it further cements their control of the Initiative.

The Initiative is an important global development, but perhaps needs to be contextualised consistently. For example, yes it is positive that President Xi has declared that the Government will focus more on making the Initiative greener, but what effect will the trade wars with the United States have? Will it force China to focus on the economics of the Initiative more? If so, and we combine this with the Trump Administration’s moving away from the Paris Climate Accord, then the question becomes whether the Earth can afford its two superpowers to move away from prioritising the effects of climate change. With such an extensive project it is obvious that there will be plenty more phases in the Initiatives development, but the recent developments hint at the focus turning from posturing to actualisation and implementation – in that sense, it is positive that research is calling for a greener Initiative and that the Chinese Government, according to its declarations, are hearing those calls.

Keywords – China, Belt and Road, Business, Politics, @finregmatters