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Commercial Awareness Update 14/03/19

1. FCUK: sales fall

French Connection UK has reported a 6.8% fall in like-for-like sales last year as it continues to search for a new buyer. However, having made a small profit for the first time in 7 years, the company saw a 1.9% rise in shares on Tuesday morning. It will also find consolation in the fact that the store closures it has been contemplating may not be necessary as landlords are becoming more flexible regarding terms of rent. Over half of its stores have been closed over the last 5 years. As for the current owners, Mike Ashley’s Sports Direct currently owns a 26% stake in FCUK, whilst founder, chairman and chief executive Stephen Marks still holds another 40%. Marks is not expecting the situation to change anytime soon, citing Brexit-induced uncertainty and the effect it is having on consumer confidence.

Why are landlords becoming more flexible? Is Brexit damaging consumer confidence?

2. New UK audit regulator announced

The UK government has announced plans to replace the Financial Reporting Council (FRC) with a new regulator that will oversee accountancy firms. The Audit, Reporting and Governance Authority will be given enhanced powers to impose greater sanctions, to directly alter companies’ accounts, to demand explanations quickly and to publish reports on a company’s conduct and management. Criticisms of the FRC’s handling of corporate collapses have motivated the overhaul: business secretary Greg Clark last year ordered an independent review of the FRC, which returned a damning verdict. The Competition and Markets Authority (CMA) also called for audit and consulting services to be separated in order to improve financial scrutiny in December. The FRC’s response to the collapse of Carillion in 2017 (KPMG), as well as accounting errors affecting Patisserie Valerie (Grant Thornton) and BHS (PwC), was deemed, by the independent review, to have been inadequate.

Could separating audit and consulting services increase financial scrutiny? Why did Carillion collapse?

3. Boeing 737 MAX grounded

A number of countries have made the decision to suspend the use of Boeing 737 MAX 8 planes after Sunday’s Ethiopian Airlines crash left 157 people dead. The model has been grounded in the EU, Hong Kong, Singapore, China and Australia following the call from the Ethiopian Airlines boss to first determine whether the model is safe to fly or not. Although the same model crashed in the Indonesia Lion Air incident last October, which killed 189, the US Federal Aviation Administration (FAA) insists that “no systematic performance issues” came up in a review. However, both aircraft were new and experienced problems a few minutes after take-off. Further reports obtained by CNN reveal that at least five US pilots have formally complained about the 737 MAX 8 automatically nose-diving after autopilot was switched on. Vietnam’s Vietjet recently purchased 100 737 MAX planes for $12.7 billion, and is still contemplating on whether to use them.

Should the 737 MAX 8 be grounded? What are the legal implications if the model is deemed faulty? Can Vietjet claim compensation?

4. Slump in Chinese exports

February saw China experience its largest fall in exports in three years. Exports fell 20.7% from February last year, while there was also a 5.2% fall in imports. Even once seasonal distortions are taken into account (such as the Lunar New Year holiday), the figures add to concerns about a slowdown of growth in China, which is the second largest economy in the world. Concerns about official figures overstating the size of the Chinese economy, as well, have been compounded by a study released by Washington think-tank, the Brookings Institute. It suggests that official figures have overstated the size of the economy by 12%. Beijing responding to flagging growth by announcing $298 billion in tax cuts last week. It should also be noted that China has expressed its intentions to move away from export-led growth.

How much is the US-China trade war to blame? Is the fall in exports concerning?

5. Shell aims to be the world's biggest electricity group

Royal Dutch Shell is aiming to become the largest electricity company by the 2030s as it prepares for a fundamental shift in global energy supplies towards lower-carbon sources. Maarten Wetselaar, Shell’s director of gas and new energies said at the CERAWeek conference in Houston that if Shell achieved its goal for cutting its greenhouse gas emissions by 2035, ‘the amount of power- of clean power- we will need to be selling… will make us by far the biggest power company in the world’. Achieving this ambition would, however, depend on the company being able to secure an acceptable return on capital 8-12%, of which Wetselaar is confident based on their brand and global presence.

What is Shell’s business expansion plan a response to in the world’s energy system? To what extent do you think outdated business models are a disadvantage to Shell’s competitors? What other disadvantages are there for the competitors?

6. Spotify reports Apple to the EU Commission

Spotify has reported Apple to the EU competition authorities over the way the company handles its app in the App Store. Chief Executive, Daniel Ek, states that Apple’s platform is a gateway to the internet for over a billion people around the world. The company also runs Apple Music - a rival to Spotify. Ek said Spotify is forced to pay a 30% ‘tax’ on purchase made through Apple’s payment system, a charge which is not made for Apple Music. This causes a problem for Spotify because it would force them to artificially inflate the price of their Premium membership well above the price of Apple Music however they also need to maintain their competitive price for their customers.

What other things do you think Apple has introduced to the App Store that purposefully limit choice and stifle innovation at the expense of the user experience?

7. Daimler BMW to launch Uber rival as Lyft races toward IPO

Conversations around ride-hailing has centered on Lyft and Uber, the two tech companies racing to list on the US stock market. However, just two weeks before Lyft makes its IPO filing public and starts to market its shares on March 18th, the German carmakers Daimler and BMW have announced that they are set to enter the market as well with a joint €1bn investment. Whilst neither Lyft nor Uber has yet made a profit, others have clearly been inspired by their business models to enter the market. This is clear from Daimler and BMW having decided to combine their ride-hailing, parking and electric car-charging services into a ‘single mobility service portfolio’. The €1bn cash will be invested in developing a business which will offer ride-hailing via a fleet of self-driving electric cars that will be able to park and charge themselves autonomously.

What would be selling points for Daimler and BMW from the investors’ point of view? Does the future of ride-hailing rest with manufacturers, not tech firms?

Legal News

BPP preparing for the future of the law

The head of development at BPP University Law School, Adama Curphey, says, ‘ The digital revolution means it’s now all about the “blended legal team” rather than the “lawyer”, and innovation managers, legal technologists and design specialists all increasingly play a role in the future law firm. A new module, at BPP, goes some way in preparing lawyers for the future with this change. The jargon-busting course decodes tech talk and teaches innovation and design elements to give students access to a wider skillset.

High retention rate, high pay at Linklaters

Magic circle firm, Linklaters, has confirmed a spring 2019 retention result of 80%. From a March qualifying cohort of 51, the firm confirmed that 41 had signed their contracts and the newly qualified (NQ) base rate salary would be £83,000. The firm, which offers roughly 100 training contracts each year, more than any other City firm, said that NQs could reach as much as £90,000 with performance-related bonuses.

Linklaters' push for more women

Linklaters has also surpassed its gender targets for the second year in a row with females making up 33% of the latest partner cohort. The firm said on Monday that 33 lawyers have been promoted to partner this year, 11 of whom are women. That said, most of the new female partners come from outside London and only one of the 11 promoted lawyers in the City is female, raising questions as to whether the next step should be to make more of an effort to increase female partnership specifically in the London office.

Sri Lankan national represented by Freshfield's pro bono efforts

Freshfields’ pro bono team helps secure victory in Supreme Court asylum torture case. The pro bono team, led by Craig Montgomery, a dispute resolution partner, represented a Sri Lankan national who alleges torture by the Sri Lankan government and has sought asylum here in the UK. ‘KV’, who has scars on his arm and back, which he argues are the result of torture but which the Home Office says may be ‘self-inflicted by proxy’, stated his case that he used to melt gold for the Tamil Tigers. However, he did not fight for them, which resulted in the Sri Lankan government torturing him to get the information about where gold was being kept. KV’s case was first heard by an Upper Tribunal but was dismissed due to his ‘serious lack of credibility’. After the Court of Appeal also dismissed his case, the matter was further appealed to the Supreme Court.

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