Wednesday, 18 April 2018

KPMG Continues to Suffer in South Africa

South Africa is currently still reeling from the ‘Gupta scandal’, but in recent news one of the leading global auditors has come under intense fire for a number of aspects, including its links to the Gupta family. In this short post, we will review the recent news and examine the future for the auditor in the country in the wake of incredible action by the South African government.

On Tuesday, it was announced that South Africa has banned KPMG from auditing public companies within the country. The move comes on the back of a number of scandals involving the auditor, including its ties to the Gupta family and also the recent collapse of VBS, a South African bank that despite being given a clean bill of health by the auditor collapsed a short time later. It has been stated by KPMG that senior officials within the South African arm of the company have left the company before they could face disciplinary action for failing to declare a financial interest in the bank. Although KPMG had sent a number of high-ranking people to the unit to attempt to ward off this current outcome, it was to no avail, with the South African auditor-general stating that the company would benefit from no future contracts because of the ‘significant reputational risks’ associated with it in light of recent events. The Financial Times has reported that a number of South African financial institutions have since cut ties with the auditor, or are in the process of doing so, which serves only to deepen the crisis for KPMG further; the unit’s chairman declared that they had ‘reached the breaking point’, and it is likely that this recent and unprecedented action may see his statement proven correct. However, other auditors have been banned from auditing public companies in other jurisdictions (like India and Japan), so it is likely KPMG will be working on a strategy to clean up its act to the satisfaction of the South African authorities, but it is certainly a testing time for the auditor in the region.

However, as the author is based in the U.K. it cannot escape my attention that, as was noted by Professor Shah, ‘in the UK, there is not even a whiff of this kind of attitude from the government or the regulator’, which begs the obvious question – why? In the U.K., the massive failure of Carillion, which after investigation has been found to have auditors’ fingerprints all over it, is surely a vehicle for which this type of action may have been considered. But, as Shah says, there has not even been an inference that anything so impactful would be considered by those in power. In truth, this is perhaps a damning indictment of the situation within the U.K., a situation which portrays a continuing and systemic ‘capturing’ of the British authorities. It is often said that what may be required is a massive crisis to jolt the system and redress the balance somewhat, but this is not true because the Financial Crisis did not redress this balance; in fact, it probably created further imbalance. Thinking further still, it is potentially even more incriminating that suggestions such as public bans have not really been proposed, never mind instituted. Yesterday’s news casts a shadow over other regions who have suffered in a similar manner to South Africa but have not acted.

Keywords – audit, South Africa, KPMG, accountancy, UK, regulators, @finregmatters

Wednesday, 11 April 2018

The Financial Reporting Council Attempts to Fight Back

As usual here in Financial Regulation Matters, today’s post looks at something we have assessed on a number of occasions (which likely hints at the systemic and continued nature of these issues that are identified on a regular basis here). Today’s post focuses on the Financial Reporting Council (FRC) as pressure upon continues to increase. Its position, and future as a regulator, is being called into question more and more recently on the back accounting scandals (like that seen with Carillion), but recently the FRC has announced measures which it hopes will be seen as being representative of a proactive regulatory culture within the organisation.

The news came yesterday that the FRC is endeavouring to incorporate new procedures into its regulation of the audit industry, with the regulator taking specific aim at the so-called ‘Big Six’ (in reality it is probably a ‘Big Four’). The new approach dictates that when one of the six firms cited – KPMG, Deloitte, PwC, EY, Grant Thornton and BDO – want to make a senior appointment, the regulator will have to vet them first to examine the candidate’s “appreciation of a high quality audit’ and their ‘experience and knowledge of driving accountability structures through organisations’; this process will include those applying to be appointed for non-executive positions, heads of audit committees, and heads of ethics committees. The regulator has stated that its aim is to limit the risk of ‘systematic deficiencies’ within the sector, which some industry onlookers have described as ‘long overdue’. However, despite the regulator insisting that the proposed structure should be seen as a response to the recent criticism (which intensified when the performance and actions of the auditors in the Carillion collapse were brought to light), the criticism of the regulator and its attempts to establish its authority have continued unabated.

The Executive Director of Audit at the FRC – Melanie McLaren – stated that this approach is not a ‘direct response’ to the recent criticism, but a number of scholars have been clear in their scathing assessment of the regulator, with one describing the approach as a ‘defensive response’ which does not address the issues of accountability at all. Whilst that sentiment may be debated, the fact that the FRC has now power over the process, but can only ‘advise’ the companies on their recruitment, will not help the FRC’s cause as it strives for legitimacy in the face of private and public pressure. In a recent ‘sanctions review’, the FRC announced that the level of fine available to the regulator would rise to £10 million for ‘seriously poor audit work’, although it should perhaps come as no surprise that the instant response from onlookers was that the new tariff ‘may not have enough of a deterrent effect’; KPMG’s revenue last year stood at $26.4 billion.

With the news coming that two leading board members of the FRC have been ‘stood down’, with both having close ties with the regulated auditors, it is apparent that change is in the air at the FRC. However, whether it can survive this current storm is questionable. The criticism from academia is persistently ‘ramping up’, and now the political machine is seeking to ask serious questions of the role of the FRC after the auditors were identified as ‘feasting on the carcass’ of Carillion; a collapse which has brought the issue of public monies and private business sharply into the limelight. Perhaps there are only two ways the regulator can survive, with the first being the hope for them that something else dominates the political agenda so that their deficiencies are relegated against something much more pressing, or alternatively they change their strategy. There are many arguments for the approach of the FRC, but they are starting to be dominated by the criticism. For a regulator to be so heavily tied to their regulated entities, to be so reliant upon self-regulation, and to have their regulatory weaponry be so obviously blunted (£10 million is no deterrent whatsoever for the Big Four), the only thing that can save that regulator is a good track-record; the FRC, regrettably, does not have that. What it does have is a track record of facilitating the growth of the audit industry as it sought to incorporate the sentiment of prioritising high fees rather than accuracy, and for that the regulator will likely pay a heavy price.

Keywords – Financial Reporting Council, Audit, Accounting, Business, regulation, U.K., @finregmatters

Monday, 9 April 2018

More Warning Signs for the Auto Industry

In Financial Regulation Matters, we have looked at a number of issues within the automobile (hereafter ‘auto’) industry, ranging from the positive – the ever-growing expansion of the electric auto market – to the negative – concerns over the finance bubble which is continuing to grow within the sector. Today’s post looks at the latter issue, with news recently suggesting that the inevitable conclusion to the growing ‘bubble’ is drawing ever nearer.

In a post in May of last year, we discussed how the fears regarding a growing credit bubble in the auto industry were beginning to get louder and louder, with the Financial Conduct Authority and the Bank of England raising specific concerns over an increased rate of indebtedness within the sector. Now, in the United States, those same concerns have manifested in the first stages of a process we are all living the result of today. Only a few days ago Bloomberg reported that a ‘growing number of small subprime auto lenders are closing or shutting down after loan losses’, which the outlet had reported would come to fruition earlier on in February. Bloomberg had stated in February that ‘loans to American consumers with some of the patchiest credit histories are packaged into securities to be sold to big investors’, adding that ‘car-owners are increasingly falling behind on bigger loans with longer repayment terms made against depreciating assets’. That scenario has been confirmed now, and the diagrammatical data suggests the curve is only going one way:

There are a number of onlookers who have been quick to note the differences between this bubble and the bubble that exploded in 2007/8, with the common differentiator being that of size. It has been noted that this bursting of a credit bubble is expected to be much different because ‘auto lending is a smaller business relative to mortgages’, with the difference being cited as $280 billion outstanding for auto loans today compared to $1.3 trillion outstanding on mortgage loans at the height of the crisis. It has also been suggested that a decrease in lending within the sector, mostly based on increased competition and subsequently less margins, has sought to negate the continued expansion of the bubble, although that perhaps does not tell the whole story.

Whilst lending in the sector has decreased somewhat, and the relative size to the housing bubble is much smaller, this does not necessarily mean that the effect will be much less dramatic. The environment that this bubble is expanded within is a much different environment that the housing bubble expanded within, with the potential for contagion and the associated effects being particularly acute in the post-Crisis era. Also, whilst onlookers are keen to play down the exposure of the elite financial institutions to this bubble, it is not the case that they are not involved. Goldman Sachs, as just one example, has been noted to be involved in the underwriting of these securities (as one would expect), as to have Wells Fargo and JPMorgan Chase. Furthermore, underneath all of the excessively complicated financial data, the same aspects of the Financial Crisis can be witnessed here, with examples of fraud and predatory lending being cited as growing in response to the tightening margins; this is not surprising in the least, and has been suggested as being representative of the same Ponzi-scheme-like process that we witnessed in the lead-up to 2007/8.

Ultimately, there are issues raised within the current news cycle that can be extrapolated to paint a picture of the regulatory framework’s failures in the post-Crisis era. It has been noted that many of the protections that were designed in the wake of the Crisis do not apply to the auto industry, which suggest a narrow-mindedness on behalf of the legislators and regulators. Alternatively however, perhaps it represents something else. Perhaps it represents the constant gamification of the financial arena where the regulators and legislators are inherently one step behind, always reacting. If this is the case, then it is difficult to see how these bubbles can ever be prevented; it is in the modern finance entity’s nature to chase profits and margins, and superimposing a ‘system’ onto a different sector was perhaps the easiest way within which they could achieve the same objectives. There is plenty of blame to go around, as usual, but perhaps it is worth taking a step back for a moment. Rather than looking at financial practice, or the reactionary stance of the regulatory framework, perhaps a fundamental recalibration of the understanding of money is required; the answer to the Crisis within many jurisdictions was to make credit available at all costs, and to increase the availability of credit to consumers as quickly and efficiently as possible. It is arguable that this is the epitome of short-termism, because that system of credit is, essentially, what allows this ‘ponzi-scheme-like’ system to work; what if, and it may sound like a fanciful theory admittedly, the sentiment and narrative was altered to one of saving and responsible purchasing? This revised narrative would work and would have a demonstrable effect upon the ability of high finance to manipulate the system, but perhaps that view is too simplistic. Rather, there is an argument to say that the flow of credit has become a vital component because of the stagnation in wage growth, relatively speaking, or the continued effects of the era of austerity upon many segments of the population – perhaps people’s standard of living would be decimated without the availability of credit, even more so than the devastating effects of austerity? There are then many aspects to this issue, with no clear answer in sight, but what is clear is that there is a game in play in which many within society will pay the cost, and that is unfortunately becoming an understanding that is being more normalised by the day.

Keywords – Auto industry, subprime auto loans, finance, business, banking, investing, @finregmatters

Sunday, 8 April 2018

Barclays’ Redevelopment Continues to Falter

We have looked at Barclays on quite a few occasions here in Financial Regulation Matters, and today’s post continues with that theme. Following on from developments surrounding financial penalties for the firm, and also the scandal involving Jes Staley and his attempts to uncover a whistleblower, recent news regarding the potential future for the Bank deserve to be discussed as it continues to attempt to redevelop itself within the post-Crisis era.

Earlier this month, the Bank made the headlines for successfully ‘ring-fencing’ their consumer-focused element of the company, which the Bank described as ‘the biggest banking start-up ever’. In responding to the British Government’s insistence that ‘the largest UK banks must separate core retail banking from investment banking’, the bank successfully completed the transfer of more than 24 million customer accounts, which equated to more than £250 billion worth of assets. In addition, which is extremely topical, the ring-fencing system also means that the ring-fenced bank i.e. the element that is not subjected to the travails of the risk-taking investment banking arm, will now be the vehicle to work with SMEs who have an annual turnover of less than £6.5m. The move has been heralded by onlookers (and the bank itself), with the bank stating that the separation represents a ‘seismic’ but positive change, and external analysts suggesting that the divestment would allow for ‘greater balance sheet certainty’. However, a wider look at the fortunes of the massive British-based bank suggest that challenging times lay ahead.

There are a number of potentially negative elements currently affecting the bank, with each contributing to a negative outlook. Firstly, the search is underway to replace outgoing Chairman John McFarlane, which whilst significant in itself is perhaps magnified with the increased stake taken by the activist investor Edward Bramson; Bramson is renowned for involving himself in the businesses within which he invests, which provides for uncertainty in relation to the current issues faced by Barclays. With regards to its leadership, Barclays CEO Jes Staley is still under investigation for his alleged attempts to uncover the identity of a whistle-blower, which although there has been some support for Staley in the media with regards to his position on the matter, continues to be a dark cloud hanging over the bank – if found guilty, it is possible that Staley will be made to be an example (potentially). Additionally, Staley has been praised for his handling of the charges emanating from the US, with the Bank’s settlement with the DoJ for $2 billion being regarded as a positive result for the bank. Yet, others have not been so positive, and it has been argued that the bank’s restructuring plans (strongly attributed to Staley) have not been successful so far; one onlooker suggests that Bramson’s appearance on the scene at Barclays is evidence of this restructuring attempt failing. Furthermore, Barclays’ own audit committee is continuing to raise fears over the culture of compliance within the firm, which point towards a much larger issue. Yet, those issues were all compounded recently by movement from the credit rating agencies, whom we know so well here in Financial Regulation Matters.

Earlier this week, the Credit Rating giant Moody’s downgraded Barclays to just one level above its so-called ‘junk status’. The agency cited the ring-fencing manoeuvre as its biggest concern, suggesting that whilst it believed the ring-fencing is positive, it has made the bank riskier overall; there was a specific focus on the impact upon the investment banking arm of the bank, which the agency believes could cause the company serious harm if it suffers from the ring-fencing system. The business media has been quick to note that a. the downgrade was expected and b. it is having very little effect upon the perceptions of investors towards the bank. However, there are wider implications in that the pressure summarily increases on Staley at a time where he needs anything but. Yet, it is fair to say that the bank is at somewhat of a crossroads, and its development from this point could have a major impact upon its long-term future.

There are a number of elements that will be concerning the bank, but a few stand out. The credit rating downgrade makes for bad ‘optics’, but the damage to the bank will likely be minimal before it is inevitably raised to a ‘normal’ level. However, the two most concerning elements for the bank are the emergence of Bramson, and the continuing investigation into Staley. With Bramson increasing his stake, the possibility of this notorious investor inserting himself into the business of the bank to satisfy his objectives continue to increase, and that is not a positive for the bank; the bank really needs to develop a longer-term focus to its operations, and many have suggested that Bramson will look to do the exact opposite. For Staley, the argument put forward in his defence (that the whistle-blower was not an employee of the bank) may stand up under legal scrutiny, but is a poor defence when one considers the effect of his actions upon the concept of whistle-blowing more generally; not to re-hash an old post, but with the prospect of ‘amnesia’ setting in within the financial arena as we oscillate further away from the Crisis being a real possibility, there is an acute need to champion the role of a whistle-blower – the question is will allowing Staley to avoid sanction for his actions encourage such a thing? The answer is no, and the effect of that will be massive. Yet, for Barclays, their future is plagued by uncertainty at the moment, and it is important that the bank’s development is kept in focus as it plots a way out of its current malaise.

Keywords – Barclays, Banking, Business, UK, ring-fencing, @finregmatters

Tuesday, 27 March 2018

The Personal Debt Spiral Continues

The issue of debt, and more specifically personal debt, has been a consistent focus here in Financial Regulation Matters, with the most recent post reporting on the fears that the personal debt crisis was set to deepen. Whilst we know that this crisis, and the ‘age of austerity’ go hand in hand, there are, of course, a number of competing elements that are fuelling the current debt crisis. In today’s post, the focus will be on the latest fears regarding the crisis, but also on calls by an influential Labour MP who is calling now for the credit card companies to come under increased scrutiny after successfully campaigning against payday lenders like Wonga.

Rather than general debt figures being the focus this week in the media, the focus instead focuses upon credit card debt specifically. This is on the back of official figures that note that, over the last few months, the rate of credit card debt has risen to a 12-year high. The reported rise was over 8% for the last year, with it also being recognised that in February alone there were 220 million credit card transactions conducted which represents a rise of 3.3%. Of course these figures need to be contextualised, with it being important to state that many utilise credit card facilities as a way of effectively budgeting. However, whilst personal debt from sources such as personal loans i.e. payday and short-term loan facilities, have actually decreased (as a result of recent campaigns one can confidently suggest), fears are continuing to mount in relation to credit card debt; the FCA is concerned on the basis that there are expected interest rate hikes in the offing, which has played a role (to a small extent) in the FCA proposing now regulations for credit lenders. By September, credit card companies must have implemented a specific suite of internal rules to comply with the FCA’s demands, namely that the companies must seek to intervene in cases where people represent being in 18 months’ worth of ‘persistent debt’ (defined as having paid more in interest than principal over an 18-month period); to alleviate these issues, the rules require the companies to provide prompts at certain intervals, more in-depth guidance after three years, and even waive certain components of the debt in the longer-term. Furthermore, the companies will allow customers to opt-out of unsolicited credit limit extensions (with those in debt for more than 12 months being excluded from receiving credit limit extensions), whilst they will be forced to cancel the continuing credit facility of customers who have not paid enough back in continuance of the 18-month period.

However, it was reported today that Stella Creasy MP, the person promoted as being responsible for the enforced capping of fees and interest rates by payday lenders, is ‘calling for a cap on fees and interest charges’ with respect to ‘high-cost credit cards’. The campaign, which is receiving support from a number of sectors, is aiming to block lenders from charging customers ‘more than the same amount they have borrowed in interest and fees’. Yet, whilst Creasy’s target is companies like Vanquis, who target customers who struggle to receive credit elsewhere, The Guardian noted that ‘the FCA has already ruled out taking such steps after a review of the market last year’. The FCA’s reasoning is based on the notion that customers need the ‘flexibility’ that comes with an open market, in conjunction with the supposed safety net that the FCAs new rules in September will bring. However, the issue of credit card debt continues against all the talk of impending regulation.

It is difficult to say what approach is correct, but it is easier to state that this is an issue that is unlikely to get better anytime soon. With similar problems in the U.S., it is difficult not to make the assumption that this crisis is, simply, a natural partner of the ‘age of austerity’ within which we currently reside. It is tempting to suggest that people have a certain lifestyle in mind and have been forced into credit cycles to maintain that standard of living, but that is arguably not the case. Whilst it is positive that payday lending has been reduced since caps were put in place and the lenders came directly into regulatory focus, it is likely that people have simply moved into a different form of credit; companies such as Vanquis allow for consumers to access credit when, in reality, they would struggle to do so from high-street lenders (in theory, at least). Ultimately it is difficult to pinpoint why the crisis is worsening, not through a lack of understanding but because there are so many factors at play. The FCA’s proposed rules are positive, in a sense, but the ‘catch-point’ being at 18 months or longer means that significant debt could still be accrued by those unable to pay it – there is still plenty of scope for this crisis to worsen.

Keywords – personal debt, debt crisis, business, financial regulation, law, consumers, society, @finregmatters

Thursday, 22 March 2018

Elon Musk Brings Executive Pay Further Into the Limelight

Naturally, the issue of Executive Pay has been a consistent focus for Financial Regulation Matters, with a number of posts discussing the elements that make up such a complex issue. News recently from the automotive/technology industries concerning Elon Musk has brought the issue to the fore once more, and in this post the focus will be on the record-setting pay-deal that was recently announced by Tesla, and then what may be the effects of this for the wider issue of executive pay across the financial sectors.

Yesterday, the headlines where Musk was concerned were almost writing themselves, with The Guardian’s ‘Elon Musk wins approval for “staggering” pay deal with potential $55bn bonus’ headline perhaps being representative of the response to the news from Tesla. However, the deal is a complex one with a number of conditions attached, which result in the reality of the situation being somewhat different. Essentially, Tesla has decided to grant its Billionaire founder a $2.6 billion ‘stock option grant’, which will be paid in 12 tranches (slices) over the next years, providing the company hits certain metric markers, like massive increases in revenue and market capitalisation etc. Tied to these milestones are bonuses which, if Musk is absolutely successful, will total more than $50 billion, but the markers are somewhat remarkable; in terms of revenue, Tesla’s revenues must rise to $175 billion, which when compared to the fact that General Motors is recording revenues of $145 billion and Ford, another stalwart of the American (and global) industry is recording $156 billion is remarkably ambitious; at the end of 2017, the firm announced its total revenue to be $11.7 billion. If we factor that the firm has recently been suffering losses, despite increased sales of its products, then the potential of Tesla actually meeting those targets becomes even more remote. CNBC reported that, currently, the company’s market capitalisation stands at $52 billion, with Musk needing it to rise to $650 billion to receive all of his pay award; furthermore, the deal ties Musk to Tesla indefinitely, and he will earn no other compensation for his work with Tesla outside of this pay deal.

There has been, rather predictably, criticism levelled at this pay deal, and from a number of angles. Glass Lewis, a corporate governance group, remarked that ‘the cost of the grant is staggering relative to executive compensation levels among public companies worldwide’, whilst the Institutional Shareholder Services stated that the deal ‘locks in unprecedented high-pay opportunities for the next decade’. Additionally, it came to light today that Norway’s $1 trillion Sovereign wealth fund actually voted against the pay deal, which signals the concerns at the highest levels of finance over the nature of the deal. A piece in Bloomberg today argued that underneath all of the bluster that accompanies the company, its manufacturing processes are ‘taking automotive manufacturing back to the dark ages’, which relates to a number of reports of problems with the company’s ‘Model 3’, upon which it many of its hopes hinge; the sentiment is that with outdated manufacturing processes, the company cannot reach its projected targets. In addition, analysts have raised the question as to why Musk has to be so heavily incentivised to remain with Tesla, on the basis that he is already well invested. Yet, there are views that support the deal, and they potentially make a lot of sense.

It is clear that this deal is an absolute win-win for the parties involved; if Musk reaches the targets set, the shareholders will certainly not begrudge paying $55 billion, and if he does not, then they do not have to pay. Furthermore, opinion offered today suggests that the deal represents the realisation that Musk is, essentially, a brand that Tesla is buying into which, when we consider the rapid elevation of Musk is hard to counter. Also, Musk is having successes with his SpaceX company, with successful launches and landings, and the company acquiring more and more contracts ahead of its competition (relatively speaking); the argument being put forward is that this pay deal incentives Musk to provide more attention to Tesla, rather than SpaceX. There are, indeed, a number of benefits to this deal, but there is one potential issue that may result from this deal, and that is contagion.

It is fully acknowledged here that the chances of Musk ever achieving these milestones is extraordinarily small; the deal almost presupposes that the market will move fundamentally towards electric vehicles (which it inherently will), but that Tesla will be at the forefront; we know here in Financial Regulation Matters that far more established car manufacturers are, themselves, making concerted moves into the electric car market, and recent news from China suggests that the entire Chinese market is rapidly moving towards that particular marketplace. However, whilst the chances of Musk achieving the particular milestones are low, the sentiment that the deal produces are potentially worrying. It is no way a certainty, but there is a very slight potential that other large firms will figure that they should also incentivise their Executives in such a manner; Tesla’s shareholders have produced a deal where they fundamentally cannot lose, and it is not beyond the realm of possibility that other shareholder groups will come to the same conclusion. Whilst the situation at Tesla is rather unique, as is Elon Musk, it is very important that this news does not become somewhat of a benchmark; it is unlikely, but what happens if it does? Whilst such remarkable pay deals are unlikely to have a massive societal effect at Tesla, could the same be said for Goldman Sachs and the other massive banking companies? The push to meet targets in that particular sector has proven to be a recipe for disaster, and something that regulation is seeking to curb – today’s news goes against that sentiment. Yes it is a far-fetched possibility that Musk will reach the goals and that other companies will follow suit, but the point still stands that making today’s deal a bench-mark will be a particularly regressive step.

Keywords – Elon Musk, Tesla, SpaceX, Executive Pay, Investment, Shareholders, Business, @finregmatters

Monday, 19 March 2018

Has the FCA “Gone Soft”, or are its Hands Tied?

The Financial Conduct Authority (FCA), one of Britain’s primary financial regulators, has featured heavily within Financial Regulation Matters, for obvious reasons. However, a lot of the recent posts focusing on the regulator have been concerned with its approach to the unfolding scandal at RBS, with its role in the publication of a damning report drawing attention most recently. However, recently there have been suggestions that the regulator has ‘gone soft’ in its approach to the regulated, with the RBS debacle being cited as the most compelling evidence for the regulator’s approach. In this post, these accusations will be assessed against the evidence, with a larger question being asked with regards to both the role of the regulator in the larger picture, and its willingness to take action.

The decision by the FCA to commission, and then refuse to release a damning report into the operations of RBS and its treatment of small and medium enterprises (SMEs), has caused outrage in the sector, with the regulator being accused of demonstrating a ‘light-touch’ regulatory approach as a result. However, Andrew Bailey – the FCA’s Chief Executive – has sought to respond to the criticism, this week stating that ‘no supervisor can guarantee good conduct at all times’ and that, in relation to the era now after the Financial Crisis, ‘we do now have powers we did not in the past’. Yet, the narrative advanced by Bailey is one that alludes to a helpless regulator doing all they can, which needs to be examined. Much of the criticism has spanned from a divergence witnessed recently because, as opposed to the near-silence and staunch refusal to publish the RBS report (the Treasury Select Committee had to do so instead), the FCA recently banned Paul Flowers from the financial industry, the former Chair of the Cooperative Bank, four years after he pled guilty to the possession of illegal drugs. In addition, the regulator recently took action against the broker Beaufort Securities, declaring it insolvent after a joint operation with American authorities. The obvious question is why take action against these entities, but not RBS when faced with overwhelming evidence of wrongdoing?

In 2017, the FCA’s largest fine was that given to Deutsche Bank for failing to comply certain regulatory codes - £163 million. In 2016, the largest fine was given to Shay Jacobs Reches, for breaching the Financial Services and Markets Act 2000 - £13 million. Before the Financial Services Authority was disbanded, its largest fine was given to UBS on account of rigging the LIBOR rates in 2012, with that fine totalling £160 million. Whilst the business of regulating does not come down to just fines, it is a strong indicator of the power of a regulator, and Bailey’s claims that the FCA now has more power than was available in the Financial Crisis era means that, perhaps, it is their willingness to act which is the question. However, if we continue to focus on their willingness, then another issue arises.

It is important to note here, as many regular readers of Financial Regulation Matters will know all too well, there are rarely any punches pulled when it comes to criticising financial regulators in this blog. The handling of the RBS debacle is nothing short of a national scandal, in addition to the actions of RBS itself, and no one should be excused for their performance in this matter which has costs so many their livelihoods. Yet, what if it is the case that the regulator cannot take action? Whilst the regulator is officially independent, we need to question if this is actually the case; taking a larger view of the arena suggests that, whilst critics are right to call for action, the reality may be that no entity exists to take the action. If we take RBS as the prime example, Bailey was known to have been sitting on the damning report for quite some time, with the only movement being to release an abstract. At the same time, the British Government, via its Treasury Department, was holding high-level talks with the US Department of Justice to accelerate its impending punishment of the bank for Crisis-era transgressions, with that fine expected to run into the billions and billions of dollars. Whilst recent news that the Bank has returned to profit made the headlines, the reality is that this is a bank that has been consistently haemorrhaging money since the Crisis, and its largest shareholder is the British Government. The question is, what effect would the public release of information that detailed systemic abuses against SMEs for profit have upon the fortunes of the bank? Whilst the level of impact was unknown at the time, it was sure to be negative, and the Government simply cannot afford that negativity whilst the Bank is on its books. If we add to this discussion that Bailey is, supposedly, being considered to take over from Mark Carney as the Governor of the Bank of England when his term ends, then the situation becomes murkier still. When Bailey was appointed, it was said, rather widely, that he had been appointed by then Chancellor George Osborne because his temperament was different to that of his predecessor –Martin Wheatley – who was to be ‘too tough’ on the banking sector. Furthermore, Bailey today called for deregulation in the fintech field, to speed up growth in the sector, which whilst not overly news-worthy, does hint at the mentality within the regulator. The picture painted is an interesting one.

The decision to focus on Flowers, and not on RBS, is perhaps a microcosm of the FCA and its actual capability; Flowers was an easy target, as to the Cooperative Bank. They are easy targets because, quite simply, they do not belong to the upper-echelons of modern finance, whereas RBS do. The too-big-to-fail has somewhat fallen out of favour in the common business press, but the sentiment behind the concept not only applies to failure, but also to punishment; if the FCA were to levy record fines against the Bank within which its national Government is the majority shareholder, all whilst the US DoJ is preparing fines that may come in at close to $10 billion, the effect would be extraordinary. It would at once put the upper-banking sector on alert that transgressions will be punished severely, without respect for any other factor. However, as it was, the message sent by the FCA was quite the opposite. That message will then reverberate around the sector, with Lloyds being a prime example as they continue, inexplicably, to delay the compensatory proceedings for those damaged by the HBoS scandal; why should they fear reprisals, if it is proven that none are forthcoming? Yet, whilst we should have an independent financial regulator, and systemic transgressions should be punished with everything the regulator can do, the simple conclusion is that regulator does not exist. The FCA, whether declared as independent or not, exists within a much larger framework and, for that reason, perhaps its hands are truly tied. Does that mean we should accept that? It is contested here that we should not, and independent financial regulation is a ‘public good’ that is, in the current era especially, fundamentally required. However, understanding the reality of situation is also a virtue, and in this instance it is unlikely that independent regulation will be witnessed within the current framework.

Keywords – @finregmatters.
financial regulation, FCA, RBS, Andrew Bailey, DoJ, Law, Business,

Sunday, 11 March 2018

Race, Gender, and Business: The Institute of Directors in the Spotlight

In Financial Regulation Matters, we have looked on a few occasions at the issue of gender in relation to the world of business (here, here, and here) and to a lesser extent the issue of race (here). However, in today’s post we will be examining recent developments coming from the Institute of Directors (IoD) that bring both of these issues sharply into the limelight. After gaining a better understanding of the IoD and what its role is, the two issues will be examined to gain a better understanding of the problem facing the business arena, all for the aim of providing context to the revelations that are making the headlines at the moment.

The Institute of Directors was founded in 1903 and, after just three years, was awarded a Royal Charter for the purposes of supporting, representing, and setting standards for business leaders across the country. The Royal Charter was the basis of the IoD establishing and implementing four key ‘principals’, which include: (Better Directors) promoting for the public benefit ‘high levels of skill, knowledge, professional competence, and integrity on the part of directors’; (Lobbying) representing ‘the interests of IoD members’; (Corporate Governance) ‘to promote the study, research, and development of the law and practice of corporate governance’; and finally (Support) ‘to advance the interests of members of the institute’. The IoD has had a long and storied past, with past members including future Prime Ministers (Stanley Baldwin MP), leading suffragettes and Peers (Lady Margaret Mackworth); the IoD has also played host to a number of leading figures like Harold Macmillan, Ronald Reagan, and Margaret Thatcher. In 2015, the IoD elected its first female Chair – Lady Barbara Judge – who is an American businesswoman has been known as a ‘champion of women’s rights and boardroom diversity’ which, when viewed in relation to the attempts to modernise the IoD, seemed to be a particularly shrewd move by the Institute. However, recent revelations have sought to sour that vision.

Last week, Lady Judge resigned from her position as Chair, as did two of the Institute’s most senior directors. Their resignations came as a response to an ever-developing scandal that is rocking the IoD at the moment, with claims of discriminatory remarks and practices being levied at Judge and the two directors (Sir Ken Olisa and Arnold Wagner) amongst others. After claims put forward by members and staff members at the Institute, Judge herself is now facing more than 40 allegations of inappropriate behaviour, with the media reporting that she has been recorded as saying things like ‘we have three inexperienced people doing a job [on the IoD’s secretariat] when one experienced person could do it and they are making mistakes. And so the problem is we have one black and we have one pregnant woman and that is the worst combination we could possibly have. No, two blacks and one pregnant woman. I couldn’t believe it!’ and that black people ‘can get aggressive’. Whilst Judge is rejecting any suggestion that she said the latter whilst admitting the former (she said that her language was not ‘of the modern standard’ but that the IoD ‘had breached her trust by recording a secret meeting’), the consequences for the IoD are proving to be damaging, with a legal investigation by the law firm Hill Dickinson providing a basis for sweeping internal reforms and, potentially, being held to be liable for breaching data protection laws regarding the leaking of information. There are also suggestions that the revelations will form part of claims by employees that will see the IoD answer for these issues in employment tribunals, whilst the damage to the IoD’s reputation is obvious, particularly considering the ethos it presents to the world.

There are, naturally, a number of associated consequences to this issue. Firstly, there are suggestions that the procedure for this investigation, and its subsequent transmission, was ‘fatally flawed’ which would suggest there will be legal repercussions for the Institute. Second, there are connotations for Judge, who sits on a number of boards and charities within which she could be described as a ‘gatekeeper’ in terms of setting organisational strategies – if commentary that ‘she always talked about these things. But she didn’t necessarily live as she spoke’ is to be believed, then the knock-on effects for the many organisations that Judge is a part of may be long-lasting. Yet, the issues raised do bring up points that are important to consider. There have been a number of analyses recently discussing the race-related inequality in the British workplace, particularly in relation to under-representation in senior roles, and the issue remains a poignant one. This author is reminded of a recent comment by the ousted Cabinet Member Priti Patel who recently stated that the BME (Black and Minority Ethnic) label is ‘insulting’ and ‘patronising’ – Patel bases this view on her belief that people should not be put into positions simply because they fulfil a race or gender-related criteria. Whilst Patel is obviously entitled to her view, there is a potential negative effect to the suggestion because it was not attached to any suggestion of how best to break the institutional and personal barriers that exist otherwise – in fact, the conversation was shaped with regards to her potentially running for the position of Prime Minister. She concluded by discussing that people should be ‘viewed on their individual merits’ which, whilst of course is true, is idealistic; Judge’s comments, when viewed in relation to her status, is just one very small example (of which there are many more) of why Patel’s views are not helpful; being viewed upon one’s own merits is impossible when such bias exists within people who control the entrance to certain positions within society. Whilst it is extremely positive that people from non-white backgrounds do succeed and gain positions of high status, it is vital that we not misunderstand that progression as the ‘norm’ – they are very much sparse exceptions to the rule.

Keywords – race, bias, gender, Institute of Directors, Priti Patel, society, Business, Law, @finregmatters

Monday, 5 March 2018

Dining Crisis Continues: A Spotlight on the Legal Frameworks Surrounding Troubled Companies

Over the past few weeks, a number of the country’s leading casual restaurants have found themselves in financial difficulties, with a number collapsing altogether. With news recently that nearly 35 of the top 100 British restaurant groups are operating at a loss, this post will look at some of the reasons why this may be and the potential effect of such a damaging phase for a sector that employs so many people in the U.K. However, on the back of that review, the question will be raised as to what legal options are available to these companies as they suffer financial difficulties, and also whether they may be effective in allowing the sector to survive the current crisis.

The leading story in this particular field is that of the troubles being experienced by celebrity Chef Jamie Oliver. Oliver, and his Jamie’s Italian group have hit the headlines more than most in recent months, with stories revolving around the development that Oliver had to pump in £3 million of his own money into the struggling company and, as part of rescue negotiations with creditors had to close 12 of its 37 British branches in January. According to reports, based upon court documents, Jamie’s Italian had debts of over £70 million before the attempted restructuring took place, with HMRC being owed over £40 million and staff owed over £2 million. In addition, Oliver’s Barbecoa brand of steakhouses entered administration last month, with Oliver buying one of the chain’s businesses (the St. Paul’s outlet) right back through a process that we will discuss shortly. Yet, it is not just Oliver’s businesses feeling the squeeze at the minute (with Oliver blaming the effects of Brexit as just one reason for the downturn), with news that Strada, Byron Burgers, Prezzo, Chimichanga, and today Carluccio’s declaring that they are in financial difficulty. The reasons for this downturn are plenty, and many have been theorising as to the cause of this sector-wide depression, with suggestions ranging from Brexit to market dynamics where the largest brands are essentially pricing out the smaller competitors (even in the world of branded businesses). Also, another obvious reason is that oversaturation is now having the inevitable effect when faced with a more uncertain economic environment surrounding the sector; the margins of these firms are continually being squeezed, in what one commentator simply labels ‘a house of cards collapsing’. Yet, whilst these stories are making the headlines, the actual processes facing these companies has gone under the radar somewhat, and certainly deserve a mention.

The life-cycle of a company is, since the mid-1800s in the U.K. at least, surrounded by various laws. Whether it is from the creation of a ‘company’, through the management of a company and to its death, the modern day company-related laws (The Companies Act 2006 and The Insolvency Act 1986 mostly) provide for a coverage of rules and regulations aimed to both enhance business and ensure that, if a company fails, associated parties are protected as much as they can be (as the theory goes). Rather than cover these gigantic pieces of legislation in any great detail, the post will now look at some of the main options available to these struggling firms and then examine what the effect of their usage may be. When Jamie’s Italian first ran into trouble, it was widely reported that the company was negotiating with its creditors with the result being the closure of some of its branches. Whilst the company can negotiate with its creditors anyway (within certain parameters), the likely situation is that the company enters into what is called a Company Voluntary Arrangement, or a CVA. The CVA, which represents a ‘legally binding agreement with [a] company’s creditors to allow a proportion of its debts to be paid back over time’, represents what may be deemed to be the ‘first-line’ in relation to the processes which allow the company to survive a crisis. There are many potential aspects to a CVA, with a restructuring of some sort being the core reason for the CVA, and also to allow the company some ‘breathing room’ as it seeks to navigate its way through a crisis, just like Jamie’s Italian is doing right now. Yet, this ‘first-line’ looks good in theory, but there are question marks as to its effectiveness; for example, is the process just delaying the inevitable, and if so does it end up costing creditors even more money and resources? Unfortunately, there is no definitive answer to that, although a colleague of this author Chris Umfreville (@ChrisUmfreville) along with a number of colleagues are currently undertaking major research into just how many companies actually survive this process – the results will be discussed in a later post once the research is published, and can go a long way to answering the questions relating the effectiveness of the process.

However, if the company does not survive this ‘first-line’, or if the situation does not merit such a light-touch approach, then the company can go into administration, which details the process whereby a licensed administrator is appointed to take control of the company and rescue it ‘as a going concern’; the administrator then has a number of options at their disposal to achieve that particular end, ranging from restructuring, to selling components of the business and then, if all else fails, placing the company into liquidation so that the remaining assets are distributed according to the rules contained within The Insolvency Act. This process has many elements to it, but the sentiment is straightforward. However, what is not straightforward is a process that was alluded to earlier when we spoke of Jamie Oliver immediately buying back the St. Paul’s branch of Barbecoa once it had been placed into the processes detailed above; this particular process is called a ‘pre-pack administration’ and, as a concept, is both helpful and hugely contentious. Essentially, the term describes a process whereby the troubled company is immediately sold upon entering administration, with some noted advantages being that the business is not disrupted as a result of the presence of the administrator, and that the value of the assets are somewhat reserved, particularly in relation to if those assets were to be sold through the administration process. However, the contentious element is that, quite often, the purchasers of these pre-packs are the very owners who were in control of the company when it failed, as is the case with Barbecoa. The effect of this is either an actual, or at least perceived subversion of the ‘natural’ process of a company i.e. failures should not be rewarded etc. However, the directors of the failed company, even if they form a new company to re-purchase the assets afterwards, are still liable to be investigated for their role in the collapse of the business, and whilst it may be seen as ‘unethical’ to allow the sale to the same directors, the sale must be completed at a ‘fair market value’ to protect against a flagrant subversion of the process. Furthermore, the rights of employees in the failed business are carried over into the new company where the same roles are preserved, which aims to safeguard against increased job losses. It is likely that these processes will figure heavily in the futures of the brands examined earlier, and as we have seen each have a number of both positive and negative connotations attached to them.

Ultimately, the demise of the dining sector has a number of causes; however, the vast oversaturation of the marketplace, when adjoined to economic uncertainty stemming from the obvious political decisions in a post-Crisis era, mean that there will have to be a substantial loss to the sector before it regains any ground. In an era of job losses, this should not make for comfortable reading for those who are employed in this sector. However, we also looked at some of the legal processes that are designed to allow the company every chance to survive such a downturn, and it is interesting to note that some companies are able to make use of them, whilst others have immediately gone into administration/liquidation, which perhaps hints at the precarious nature of the scenario these businesses find themselves in. What will be interesting to note, and we shall do so in a future post, is the results of the CVA research discussed above, because understanding the effectiveness of that particular ‘tool’ will have an effect on the sentiment that surrounds the ability to rescue a company at the ‘front-line’ i.e. a CVA; if it is found that it is not effective, even for the most part, then there is a potential for the demise (if even slight) of the CVA which will result in the need to readdress the other options available.

Keywords – Restaurants, Food, Business, Politics, Law, Company Law, Companies, Administration, Liquidation, CVA, @finregmatters

Sunday, 4 March 2018

Updates – Carillion, Sir Philip Green, and Toys ‘R’ Us

As is usually the case in this particular arena, business stories are continually developing and usually at a rate of knots. Therefore, today’s post catches us up with a few stories that we have looked at previously; all of these stories selected today were always going to be end up in a negative, and today’s updates confirm that with news that the Carillion collapse was not what it first seemed (predictably), that Sir Philip Green is continuing his war of words with British Politicians (and one in particular), and that the retailer Toys ‘R’ Us failed in its attempt to save itself.

The Carillion Collapse Reveals Predictable Skeletons

We have looked at the issue of Carillion on a number of occasions, ranging from the onset of the crisis to the collapse and subsequent call for the Pensions Regulator to much more in clawing-back some of the pension fund that was depleted by the company. Rather predictably on the back of such a large and interconnected collapse, the post-Carillion era has been littered with revelations regarding mis-management and poor performance from the company and the associated ‘gatekeepers’. This weekend it was announced that a previously unpublished report detailed the fact that the company’s managers ‘aggressively managed’ the company’s balance sheet to paint a rosier picture than was actually the case; whilst regular readers of Financial Regulation Matters and, in truth, almost everyone else, will not be surprised by this revelation in the slightest, the details make for interesting reading. The report, commissioned by Carillion for its lenders, suggested that income had been brought forward and payments delayed on the balance sheet, whilst subcontractors had their payment terms quadrupled to four months, with the BBC now reporting that many of those subcontractors face the inevitable as a result – bankruptcy. Whilst Carillion bosses felt the report was ‘too harsh’, Frank Field MP reacted by stating that the report clearly identified ‘gross failings of corporate governance and accounting’. However, whilst the internal governance mechanisms were clearly not suitable, it is interesting to note that the report was seen by interested lenders like RBS, Barclays, HSBC, Santander, and Lloyds, which suggests that the ultimate losers of the collapse – the pension holders, the supply chain, the contributors to the Pension protection Fund, and ultimately the public – were not considered at any point in the process. There is a general understanding that those ‘within the circle’ knew about the ever-increasing potential for Carillion’s demise far in advance of it happening, though there are other arguments for widening that circle to a number of other parties. Furthermore, the plot thickens with news that Ernst & Young had suggested to the firm that they would become insolvent in March 2018 (so, just a short while out from reality) and presented a plan that would see Carillion broken up and inject over £200 million into the pension fund (it is also being reported that the Government knew of this plan, and did not put any pressure on Carillion to accept it); the result of this is a realisation within one of two fields of reasoning – either, the management at Carillion genuinely believed that they could save the company, or they did not want to dismantle it as there was still money to be extracted before it failed. Which understanding one supports is down to the faith one has in the corporate field, but the sentiments of both are valid; if they did believe they could save it, then the Government needed to do more to push for the E&Y plan to be executed to save at least some money for the pension holders. If they continued past the point of no return for personal gain, then the directors and leading managers are in breach of a number of statutory rules within the U.K., and the punishment for that should be as severe as allowed under those same statutes. One thing is certain, and that is that there are plenty more skeletons in the cupboards of Carillion.

Sir Philip Green Calls for a ‘Truce’ in the Only Way He Knows How

We only covered the latest development in the so-called ‘feud’ between Sir Philip Green and Frank Field MP very recently, so we will not go into much detail on the ongoing ‘saga’ here. The post last month essentially related to the calls from Field to closely monitor the proposed sale of Arcadia to a Chinese firm if and when that transaction took place, mostly on account of Green’s poor record of fulfilling his responsibilities to employees and pension holders (mostly because of the collapse of BHS). Whilst one should not be surprised at Green’s inappropriate level of bravado, recent developments offer a clearer demonstration for his contempt of due process and the requirement to be a responsible business leader. Recently, Green sent a letter to the House of Commons Work and Pensions Committee, and in that letter he has called for a ‘truce’ to what he perceives is a long-running ‘spat’ between the two, stating that ‘everyone is bored with this story’. Green continues by stating that there is no truth to the proposed sale to Shandong Ruyi and that ‘all the Board are aware, if the company is sold, there are pensions obligations and there is a process’. Yet, rather than leaving it there, Green continues by accusing Field of building his ‘press profile on the back of me’, and that is it time to end the spat that Field ‘so enjoys’. Finally, Green suggested to Field that he should ‘go and tackle Carillion or someone else’. Field responded by stating that ‘Philip Green never ceases to amaze’ and that ‘he doesn’t know how to behave like an adult’. Yet, if we remove this back and forth, the facts of the matter present a telling picture; Green, a Billionaire who attempted to make off with the pension funds of his BHS employees and was forced to pay (just) a proportion of it back is now telling the elected official in charge of overseeing the fight against such practices that he is pursuing a ‘press profile’. The arrogance and narcissism displayed by Green is obvious and predictable, but it does not excuse his incredibly poor behaviour; if ever one wanted a demonstration of why white-collar crime is rife, then this is it – the lack of penalty means that not only does it continue, but perpetrators actually attempt to engage and bully those who are tasked with representing people who cannot represent themselves. Ultimately this saga will continue, no doubt, but the acknowledgement that Green represents the darker sides of the corporate ideal need to be recognised at every turn.

Toys ‘R’ Us Fails in its Attempts to Save Itself

Very briefly, we looked at the demise of the famous ‘Toys “R” Us’ brand recently, with the British segment of the business facing collapse if it could not find a buyer to save it from collapsing. Last Wednesday, the firm – and, coincidentally fellow retailer Maplin – failed in its attempts and fell into administration putting 5,500 jobs at risk between them. Part of the administration process is to attempt to bring the business back to health, although reports are suggesting that administrators are seeking to have the businesses sold as businesses, rather than breaking them down into parts to be sold. It is interesting to note that the collapse of Maplin, an electronics specialist, on the very same day paints a particularly bleak picture for the world of high-street retailers in the face of pressure from online retailers like Amazon. The Labour Party has called for the Government to work with Unions to safeguard the jobs that are at risk but, unfortunately, this seems to be a political move rather than a genuine call because, in essence, these types of firms are losing relevancy all the time in the modern marketplace – a fact demonstrated by a large number of job losses in the retail sector this year alone (and it is only March). The year-on-year losses experienced by Toys ‘R’ Us were a statistical representation of the reality that is coming to many a high street in this country (and many other countries) – the battle with the online marketplace is close to being lost, particularly in the niche sectors like toys or electronics. It appears, from recent developments, that spending habits in the current era will continue to re-shape the landscape that many have known for a large portion of their lives.

Keywords – Business, Politics, Law, Regulation, Pensions, Corporations, @finregmatters

Tuesday, 27 February 2018

Geely Automotive Becomes Daimler’s Largest Stakeholder: The Latest Demonstration of an ever-tightening Market

We have looked at the Auto Industry on a few occasions here in Financial Regulation Matters, with posts ranging from industry reorganisation with Peugeot’s purchase of Opel-Vauxhall, the increasing securitisation of auto finance packages, to corruption within the industry. Today, we will review the latest demonstration of an ever-tightening marketplace by looking at the news that Geely Automotive, a significant player in the Chinese electric vehicle market, has recently invested $9 billion for a 9.7%, and largest stake in German automotive powerhouse Daimler. There have been some concerns raised as to the potential effects of the deal, so whilst we shall be focusing upon those, we will also look at the sentiment that this news provides for the direction of the automotive industry.

Geely’s purchase of the Daimler shares, making it the largest shareholder, comes on the back of a concerted wave of action by Chinese automotive companies outside of Chinese markets. Geely is the full owner of the Swedish automotive company Volvo, whilst also relatively recently acquiring the London Taxi Company. Great Wall Motor has recently signed an (outline) deal with BMW to have the new electric-powered Mini Cooper cars built in China (as well as in the U.K.), whilst there have also been investments in recent years in companies like Peugeot-Citroen. There are a number of reasons for these collaborations, in both directions, but we shall get to them shortly. If we focus on the current deal for a moment, it will be clear to see why the recent wave of investment benefits all parties (although there are some added complexities to these deals).

In announcing the deal, Geely stated that the emphasis was on accompanying Daimler ‘on its way to becoming the world’s leading electro-mobility provider’, adding that to deter ‘invaders from outside’ firms must cooperate and work together through the forming of partnerships like that created by this current deal. As part of the deal, Geely is said to be looking for greater input into its electric vehicle portfolio, mostly as a result of increased emission-related regulations that come into force next year; the recent partnership between BMW and Great Wall Motor, and also between Ford and Zotye reflect the pressing need to adapt to the forthcoming rules that are designed to reduce the pollution experienced in many Chinese cities. Yet, these deals (particularly the Geely deal) have raised some issues which suggest there is a potential shift on the horizon.

Germany’s Economy Minister recently stated that the German Government would be ‘keeping a watchful eye on developments’, as fears grow that the investment could a. ‘be used as a gateway for other States’ industrial policy interests’, and b. bring about a negative effect in the development of the German automotive industry. Whilst Angela Merkel was quick to suggest that the deal was all above board, this has not been enough to stop an investigation anyway, with Reuters reporting that a German Parliamentary Committee will tomorrow question whether any disclosure rules were broken, and whether securities trading law needs to be reassessed in the country. However, whilst these financial issues (potentially) remain, the larger issue is with regards to the foreign access to Daimler’s lauded technological developments, particularly within the realms of electric vehicles which, of course, represents the future of the industry; Germany itself broke with the E.U. to an extent last year and tightened its takeover rules on the back of Chinese companies gaining access to elevated technologies in a number of sectors (it must be stated, however, that Geely is not Daimler’s only foreign investor). Whilst we wait for developments in this regard, it is worth considering the benefits for the two ‘sides’ in this equation and the potential effects of this increased collaboration.

For the Chinese companies investing in these Western automotive firms, the allure is fairly obvious; they are purchasing the technological know-how they need to fall in line with the new regulations – the first phase of these regulations comes into force in 2019 and requires firms to, essentially, contribute to the phasing out of fossil-fuelled powered cars. There are also issues in relation to the relatively low number of exports on behalf of Chinese automotive manufacturers, with recent endeavours resulting in very little progress; the sentiment is that by potentially incorporating this technological know-how Chinese cars will be seen as much more viable options for car purchasers around the world. For non-Chinese firms, the need to work with Chinese companies is both enforced on one hand, and sensible on the other. Non-Chinese companies must work with a Chinese enterprise to bring their products to the Chinese market by way of Chinese regulations, but the suspected development of the automotive marketplace in China over the next few decades makes for incredible investment opportunities for foreign firms; the world’s largest car market now, is predicted to grow substantially, with the usage of electric vehicles estimated to stand at 176 million cars in China alone by 2040 (equating to 46% of all cars on Chinese roads). Volkswagen’s recent $12 billion investment in electric vehicles within the Chinese market is just the latest demonstration of non-Chinese companies realising the immense potential that the Chinese regulations will bring to the industry. However, what may be the effect of this phase?

Ultimately, but certainly not definitively, there is a potential shift in the midst. The increased investment into the Chinese ‘infrastructure’ in this particular industry carries a gamble for these non-Chinese companies, and that is mostly based upon ‘brand-power’; Chinese endeavours outside of their own market have fallen short mostly because of a perception surrounding the quality of the products being offered, but if the product is enhanced significantly (as this wave of investment will surely do), then competition in this tight-knit marketplace may be about to explode. If that happens, on the basis that the divergence created by ‘brand-power’ will be reduced, then there are likely to be many casualties, with a number of ‘well-known’ automotive brands being enveloped within the larger conglomerates; Geely Chairman Li Shufu’s declaration that he is attempting to build a ‘new Volkswagen’ is a telling one, with the potential for just a very small number of massive conglomerates ruling the industry becoming that much more of a reality.

Keywords – automotive industry, Daimler, Geely, China, Business, Finance, Electric Vehicles, @finregmatters