Risk Channel delivers the latest, most relevant and useful business intelligence to key decision makers and influencers, each weekday morning.

The G20's risk watchdog, the Financial Stability Board (FSB), has warned that the global financial system remains vulnerable to shocks due to the patchy progress in implementing reforms for non-bank financial institutions. The FSB highlighted that the vulnerabilities that led to incidents during the COVID-19 lockdowns, such as central banks having to inject liquidity to stabilise money market funds, are still largely in place. The progress made by G20 countries in implementing reforms for money market funds, open-ended funds, margining, and liquidity has been uneven, and there is a risk of losing momentum. "To enhance the resilience of the global financial system, it is critical that we finalise NBFI (non bank financial intermediation) reforms and strongly commit ourselves to full and timely implementation,"  FSB Chair Klaas Knot said in a letter to G20 central bankers and finance ministers meeting in Brazil.

 

Financial Times

Reuters

A report from the Department for Work and Pensions (DWP) says British society has become increasingly tolerant of criminality, making it harder to rein in benefit fraud. The DWP said benefit fraud cost taxpayers a record £7.3bn last year and will increase by 5% each year hitting £10bn or more by the end of the decade. The DWP said that “a range of evidence indicates that there is a long-term rising trend in fraudulent behaviour towards organisations and a softening of attitudes regarding fraud in wider society.” Tolerance of tax evasion has also risen, with officials citing a recent study suggesting that one in five Britons can now be classed as having “low integrity,” up from one in 14 just over a decade ago. The report comes as the Chancellor prepares to appoint a commissioner to recoup billions lost to Covid procurement fraud. 

 

The Daily Telegraph

The Times

The Guardian

The FT reports on the growing popularity of “immersive” leadership training sessions for executives that are designed to trigger real-life emotional responses to crises that could hit any business.

 

Financial Times

Writing for the Wall Street Journal, James Rundle and Belle Lin say Friday’s tech outage following a defective update from cybersecurity company CrowdStrike – which was designed to refresh code in the firm’s threat-detection software - raises questions about automating software upgrades and about whether a handful of dominant suppliers in the security software market dangerously concentrates risk. CrowdStrike was responsible for about 15% of the security software market in 2023 based on revenue, second to Microsoft’s roughly 40%, according to research firm Gartner. “There’s always issues with concentration risk,” observes Neil MacDonald, a Gartner vice president. “The vendor providing the capability has a responsibility to deliver service that’s resilient.” Meanwhile, Lee McKnight, an associate professor in the School of Information Studies at Syracuse University, says: “Faulty patches and updates happen all the time. What’s different now is that the scale of these cloud services are so massive.” Instead of turning off automatic updates altogether, security and IT leaders are advised to place extra scrutiny on software updates, even if they originate from “trusted” vendors. Chief information officers and chief information security officers “need to assess where manual intervention makes sense as a layer on top of auto-updates,” says Andy Sharma, CISO of Redwood Software.

 

Wall Street Journal

Microsoft has blamed a 2009 agreement with the EU for enabling CrowdStrike’s faulty update to spread to computers using its software. The European Commission forced Microsoft to allow multiple security providers to install software at the kernel level following a competition inquiry. Apple, by contrast, blocked access to the kernel on its Mac computers in 2020. The global outage comes as the EU’s Digital Markets Act forces Apple to open up its iPhone to alternative app stores and browsers, a move Apple says will make the iPhone less safe. Meanwhile, a US congressional committee has called on the chief executive of CrowdStrike, George Kurtz, to explain how the outages occurred and what “mitigation steps” the company is taking to prevent future episodes.

 

The Daily Telegraph

The Washington Post

Employment lawyers are advising their clients to take action ahead of the government’s incoming Employment Bill, which is expected to include awarding workers’ full rights from day one. Nicholas Le Riche, an employment lawyer at BDB Pitmans, said: “We’re definitely flagging the upcoming changes with clients and highlighting that now is the time to consider their workforce structures for the rest of the year.” James Davies, an employment lawyer at Lewis Silkin, has said that some firms are also considering strengthening the terms of probationary periods. He said: “The advice we are giving at present includes looking at contracts for new hires to make sure they have properly drafted probationary periods . . . Many employers have historically managed them poorly as there was little legal significance to an employee failing a probationary period and an employer deciding a little later that it wasn’t working out.” Caspar Glyn, who is chairman of the Employment Lawyers Association, observed that employers will want to “set up and implement more rigorous systems to ensure that new staff who don’t measure up can be fairly dismissed within their probationary period.” Andrew Taggart, head of employment at Herbert Smith Freehills, added: “Businesses need to think about what changes might be needed . . . We’re advising that clients get ready to contribute meaningfully to the consultation because the devil is in the detail.”

 

The Daily Telegraph

The government has launched Skills England, a new body aimed at addressing the fragmented and broken skills training landscape. The goal is to reduce firms' over-reliance on migrant workers and meet the skills needs of the next decade. Skills England will bring together local authorities, businesses, and training providers to achieve this. It will also oversee the new growth and skills levy, which replaces the apprenticeship levy and gives businesses more flexibility in using funds for training. The body will work with the Migration Advisory Committee to reduce reliance on overseas workers. Skills shortages have doubled between 2017 and 2022, making up 36% of job vacancies. The government's urgency in tackling the skills shortage has been welcomed by employers, but they also stress the need for a fair and flexible immigration system to access global talent when necessary.

 

City AM

Barclays is urging the High Court in London to remove claims by passive funds from a lawsuit seeking damages related to “dark pool” violations that were settled in the US in 2016. Barclays was fined $70m at the time. Investors have been suing Barclays since 2020, claiming compensation for a drop in its share price triggered by the regulatory scrutiny. But Barclays is arguing that passive funds, which are taking part in the litigation, could not be said to have been misled by the bank as they had not read disclosures made by the lender. The FT notes that the outcome will help determine if index tracking funds can participate in other lawsuits that are piling up against UK companies over share price declines.

 

Financial Times

City AM

The billionaire founder of British trading firm XTX Markets and the UK’s biggest individual taxpayer, Alex Gerko, has lost a legal appeal with HMRC over taxes on payouts from trading foreign currencies. Profits he and other traders made while working for hedge fund GSA Capital between 2010 and 2015 were allocated to an internal investment unit before they were ultimately distributed to the traders. The fund paid corporation tax when the amounts were first allocated, but HMRC successfully argued that the payouts to traders should additionally be treated as the higher rated income tax. Following the ruling, Gerko said: “I fundamentally disagree with the judgment, which results in massive double taxation and has wider implications for the financial industry.”

 

Bloomberg

Financial Times

MarketWatch

London Evening Standard

The Financial Reporting Council (FRC) has made significant updates to the UK Stewardship Code, focusing on five key themes: clarifying effective stewardship; defining necessary reporting; promoting transparency in proxy advisors' activities; reducing reporting burden, and collaborating with other regulators for consistent implementation. The changes aim to reduce the reporting burden on existing signatories and promote transparency and accountability in investor stewardship activities. The revised Code will apply for the next application window, and signatories will be informed individually of how these changes impact them. Commenting on the update, Richard Moriarty, CEO of the FRC said: “The UK Stewardship Code is an important driver of the UK investment stewardship eco-system, safeguarding the interests of all savers and pension holders by promoting the transparency and accountability of investors stewardship activities and decisions, as well as being adopted by global investors.”

 

Financial Reporting Council

FT Adviser

Professional Pensions

City AM

The Daily Mail examines why life science companies are eschewing a listing on AIM, citing high costs and the dearth of investment into the UK. The AIM All-Share Healthcare index has almost halved in value since hitting an all-time high in April 2021. Legal, accountancy, audit fees, and financial public relations have all quickly become prohibitively expensive, the paper’s Ian Lyall asserts. The FT also notes that about 80 companies on AIM have come off the exchange in the past year, shrinking the total number of groups there to 722, according to UHY Hacker Young.

 

Financial Times

Daily Mail

The Bank of England has advised banks to prepare for increased usage of its repo facilities as it sells down its government bond holdings. Repos, or repurchase agreements, allow banks to temporarily swap bonds they own for cash from the BoE, helping to keep market interest rates in line with the central bank's policy rate. The BoE is reducing its holdings of government bonds bought between 2009 and 2021, which could put upward pressure on overnight interest rates. The end of a separate BoE scheme that offered banks cheap credit to lend to small businesses is also adding pressure. The BoE's Executive Director for Markets, Victoria Saporta, stated that banks and the market need to prepare for increased usage of both short-term and long-term repo operations.

 

Bloomberg

Reuters

The number of firms facing "significant" financial distress has increased sharply over the past year, according to Begbies Traynor's Red Flag Alert. In the second quarter, the number of firms reporting "significant" financial distress jumped by nearly 10% to 601,950. The travel & tourism sector recorded a 20% increase in distress, while hotels & accommodation and bars & restaurants saw a 16% and 12% increase, respectively. Consumer-facing firms were hit the hardest, but distress levels increased across 20 of the 22 sectors covered. Julie Palmer, partner at Begbies Traynor, said that 2024 is shaping up to be another tough year for UK businesses, particularly those in consumer-facing sectors. Ric Traynor, executive chair at Begbies Traynor, said that the macro-economic environment remains “extremely testing” for businesses.

 

City AM

The majority of Carpetright’s stores will close and almost 1,600 workers will lose their jobs following a rescue deal by rival Tapi. Administrators at PwC said the chain “has fallen victim to challenges facing many retailers, especially those selling big-ticket items.” Tapi was founded by Martin Harris, the son of Carpetright founder Lord Harris of Peckham. The company said it was “desperately sad” that it was unable to save more of the business but “[it] has been materially loss-making for a number of years and it has significant debt held by the owner.” Tapi’s decision to offer to buy just 54 stores was also influenced by the prospect of a probe by the Competition and Markets Authority, seeing as Carpetright had a 14.8% share of the flooring market, compared to Tapi’s 10%. 

 

Financial Times

The Daily Telegraph

The Times

The Guardian

Vivendi’s French TV business Canal+ will list in London as part of a break-up of the conglomerate controlled by French billionaire Vincent Bolloré. Vivendi said the decision reflected the increasingly international operation of Canal+, which will remain incorporated in France and is expected to have a secondary listing in Johannesburg. Meanwhile, Vivendi’s advertising business, Havas, will be hived off and listed in Amsterdam, while publishing and distribution companies, including Lagardère and Prisma Media, will be listed in Paris under the Louis Hachette Group.

 

Financial Times

The Times

The Guardian

Retailers have come under fire for using unethical discounts and rewards to encourage consumers to spend using Buy Now Pay Later (BNPL) and other credit options. These practices, which are generally unregulated, can lead to vulnerable individuals accumulating more debt. The Financial Conduct Authority (FCA) has expressed concerns about the risks posed by BNPL, but the Treasury has taken no action. Retailers like the Frasers Group and JD Sports are offering big discounts exclusively to BNPL or new credit shoppers.

 

Daily Mail

A "catastrophic failure" of its emergency call handling service has landed BT with a £17.5m fine from Ofcom. The network fault on 25 June last year led to 14,000 calls to emergency services failing to connect. Suzanne Cater, Ofcom’s director of enforcement, said: "Being able to contact the emergency services can mean the difference between life and death, so in the event of any disruption to their networks, providers must be ready to respond quickly and effectively."

 

BBC News

Daily Mail

Hubert Barth, the former boss of EY Germany, is to challenge a €300,000 fine for alleged violations of professional duties during the Big Four firm’s audits of Wirecard.

 

Financial Times

The UK economy is expected to grow faster than previously anticipated, providing a fiscal windfall for Chancellor, Rachel Reeves. According to forecasts from the EY Item Club, the economy is projected to expand by 1.1% this year, a significant upgrade from the previous estimate of 0.7%. The forecast also predicts a 2% growth rate for next year and 2026, which is among the most optimistic forecasts from City analysts. EY expects inflation to remain close to the Bank of England's 2% target, coupled with strong pay growth, leading to higher consumer spending. The Bank is also expected to lower interest rates twice this year. "Combining higher public investment with a concerted effort to build on the UK's recent success in business investment could provide an economic shot in the arm," said Peter Arnold, Chief Economist at EY UK.

 

The Times