As the new government gets to work prioritising the country’s many demands, it is clearly too early to discuss how the world of business – and specifically insolvency, restructuring and turnaround – will be affected by eventual changes in policy direction. At pains not to scare the City, entrepreneurs and moderately minded supporters of the free market, PM Starmer has repeated the mantra of Wealth Creation at every possible opportunity. The implication is that the new Labour government won’t stand in the way of UK businesses making money, generating tax receipts and creating jobs. Fair enough, but detail on tax plans has been scarce so far. Furthermore, in reinforcing his commitment to important areas of spending, such as that on defence as a proportion of UK GDP, Starmer has been quick to qualify his assurances with the cryptic follow-up, “within our fiscal rules”.
The Buchler Phillips team will be sharing expert insight shortly, when the dust has settled on the Labour landslide and the challenging set of results for the Conservative Party. For now, businesses would be best advised to limit their expectations of a major leg-up from government, not least while there are few signs of a sustainable economic recovery in the foreseeable future.
Don’t hold your breath for big rate cuts
It took almost three years to get there, but UK inflation is now down to the Bank of England’s target of 2%. Next step, lower interest rates: when, though?
The Bank’s rate setters want to see sustainable data. Headline consumer and retail price rises have fallen, broadly, from 11% in July 2021, but there is still relatively stubborn inflation in the service sector. In addition, energy costs could still reintroduce some pressure in Q4 2024. Global inflation promises to return, with the US Federal Reserve delaying rate-cutting plans and the European Central Bank increasing inflation forecasts for the rest of the year. At home, the June 20 Bank meeting voted 7-2 to keep interest rates unchanged; the ‘rebels’ wanted a 0.25% cut. It had been the same story in May.
July 17 will see new inflation numbers, but there will be no Bank meeting until August. Leaving the committee ahead of that will be one of the ‘rate holders’, to be replaced by a new member. The Fed will also have made its next interest rate decision in a meeting scheduled for July 30. A recent poll of 11 leading UK based investment bank and fund management economists saw all but one expecting a 0.25% cut in August; the odd one out thought it might be pushed out until September, but conceded it could still be August. The Bank is in no hurry, however, insisting that easing by 0.25% is still within the bounds of restrictive monetary policy.
So there will be no cheap money bonanza anytime soon. This reality is reflected in business confidence: the Institute of Directors’ Economic Confidence Index showed notable drops in business leaders’ investment intentions, which fell to +19 in June from +30 in May. Even accounting for a pre-election ‘wait and see’ mindset, confidence and investment plans won’t improve until the new government articulates a growth strategy that business leaders feel they can get firmly behind.
A nation of shopkeepers, heading online
The post-Covid years have seen a bloodbath on the High Street, with stricken retailers fighting hard to survive the shocks of lockdown, hikes in energy prices and customers’ lower spending power. Price rises may have slowed, but the overall picture is gloomy, with glimpses of retail recovery offset by more closures.
The Centre for Retail Research calculates that nearly 10,500 shops closed down in 2023, a year in which more than 119,000 jobs disappeared from the industry. In 2024 so far, high profile retail administrations have included Ted Baker, Muji, Matches Fashion, The Body Shop, Farfetch and Lloyds Pharmacy. Superdrug’s 400 new jobs contrast with rival Boots closing a further 47 stores. They have been followed in July so far by more shutters coming down at Robert Dyas, The Works, B&M and B&Q.
Higher rents and crippling business rates for physical stores have been driving the retreat of retailers from town centres since long before Covid. They were already struggling to grip structural changes in the sector resulting chiefly from a migration of customers online. The rapid spread of Artificial Intelligence in all industry sectors has clearly raised the prospect of a new factor killing jobs – some analysts estimate a further one in four retail jobs being lost to AI before the end of the decade.
Retail research house Mintel identifies three key challenges for the sector as we enter the second half of the year:
Consumer savviness – cash-strapped shoppers will remain bargain conscious after discovering more loyalty schemes, online discounts and trial offers
Ongoing supply chain issues – logistical challenges and supply shortages will demand very close attention to analytics and stock control
Technological integration – widespread cyber threats mean retailers must implement robust security measures such as encrypted data storage and digital regular audits to safeguard sensitive information
Online sales as a proportion of retail’s total seem to have stabilised at around 25-27%. The high street may have a chance to gather itself ahead of an eventual interest rate cut, but the sector faces further significant change. Expect more casualties.
Global finance fails to tire of London
Whether or not human rights protesters and other detractors succeed in derailing the planned £50bn London IPO of Chinese retail giant Shein, the UK capital is showing few signs of losing its crown as Europe’s leading financial centre.
Globally, it’s still not far behind New York; in some respects it may even be ahead. Post-Brexit, the European Central Bank is understandably unhappy that the world’s second largest reserve currency, the Euro, depends so heavily on a financial centre outside its territory. Nonetheless, although some areas of FX trading and clearing have shifted to other European centres, recent years have seen business as usual for London. It needs to be: financial services have grown to become one of the largest segments of UK national income in recent years and, with looser ties to its closest trading partners, the sector is vital to the nation’s recovery and prosperity.
Banks, securities firms, fund managers, insurers and all the specialist businesses that support them are far from easy to manage and grow, not least because they have to flex amid constant regulatory and economic changes. They are endlessly overhauling their ownership structures, refocusing their business models and having to generate sustainable income against a background of higher inflation, rising costs and low visibility in markets. All under close scrutiny from a range of authorities.
Technology has brought problems as well as solutions. While it has acted as a great enabler – electronic trading, online banking, screen-based interaction and even compliance – two clear, unintended consequences are (i) a further demolishing of barriers to entry in markets that already have too much capacity, and (ii) the rapid rise of cybersecurity breaches and institutional grade fraud.
For smaller market participants, in particular, the time and cost incurred to undertake ESG-driven risk management and disclosure requirements can become an existential problem when added to growing competition, narrowing margins and tech challenges.
Sale to a consolidator or exit via a voluntary liquidation will be the main options for many. Specialist lenders, leasing businesses, wealth managers, and insurance brokers are already being absorbed by financial buyers, mainly private equity firms, while others are throwing in the towel and at the same time are still in one piece before they face calls for additional regulatory capital, or have to meet other higher costs.
Whether selling or closing, it is vital to adopt a planned, managed approach with professional advice that might cover:
- Unwinding of contracts
- CVLs / MVLs
- Schemes of Arrangement
- Forensic accounting
- Investigations of financial crime
- Tax treatment of trading positions
- Support for market participants in regulatory investigations
- Issues involving the Financial Services Compensation Scheme
- Liaison with the Prudential Regulatory Authority and Financial Conduct Authority
Partners or Directors of financial services businesses facing trading or regulatory difficulties should act quickly to assess options for closure or restructuring.
Chasing payment that isn’t due
Fraud takes many forms in companies. In desperate times, fraudsters within businesses get more creative and daring. We’re not necessarily talking about embezzlement or structured ways of syphoning cash; crooked behaviour may be aimed at first inflating a company’s receipts ahead of benefiting from the spoils.
‘Fresh air invoicing’ is a nasty practice that rears its head more regularly when trading is tough. It’s a euphemism for issuing invoices, demanding specific amounts, when no service has been provided or goods supplied. The invoice’s recipient is often a factoring company, settling the amount at a discount to improve a business’s cashflow. Factoring, or invoice discounting, is of course perfectly legal; it’s an accepted cashflow tool used by many businesses in expectation of a genuine receipt from a customer. The operative word here is ‘expectation’, which is too often substituted with ‘hope’ or even ‘chance’. There may be no specific order behind an invoice submitted to a third-party for discounting and payment of perhaps 80-90%, the document instead representing only a potential sale. This is fraud.
Imagine the bemusement of the ‘customer’ being pursued by the factoring company. Novice fraudsters may see existing, genuine customers as low hanging fruit in their scam, their historic trading relationship adding credibility to a new fake invoice. This is clearly a fast route to upsetting customers and jeopardising long term revenue for a short term fix. Other customers may not have even heard of the supplier and may escalate suspicions of criminal activity.
In other cases, no factoring is involved. What an unscrupulous manager might dismiss as ‘aggressive invoicing’ consists of randomly billing counterparties, some previous customers, others not, in the hope that an accounts department will process a payment with little or no scrutiny. It might even be chased quite innocently by the bogus invoice’s own credit controller. Motivations here may be different: perhaps creating a useful debtor by a year end, or a manager seeking to trigger a revenue-generated bonus.
It rarely takes long for such behaviour to be detected, internally or by auditors, so the temptation should be resisted before the first move snowballs into a major fraud. There are many better, legitimate ways in which advisers can help businesses improve cashflow, grow revenue and secure better terms with creditors, including tax.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.