15 October 2018

Scott Reid

15 October 2018

Good morning,

As anyone who picked up a newspaper this weekend will quickly have realised, there’s no good way to spin the news that someone has been cooking the books – even for a baker like Patisserie Valerie.

Quite who takes ultimate responsibility for the bakery chain’s admission last week of “significant, and potentially fraudulent” irregularities in its financial accounts remains to be answered. However, as The Times reports today, the owners of Patisserie Valerie are considering taking legal action against Grant Thornton for the auditor’s alleged failure to spot a £40 million black hole in the company finances.

The extraordinary story of how a one-time darling of London’s AIM market might find itself in this situation was the weekend’s must-read business story. As Oliver Shah writes in The Sunday Times, far from having bank balances of £28.8 million as declared in May, the company was instead running a deficit to the tune of £38.6 million, including unreported loans of some £10 million which had been facilitated via two secret accounts with Barclays and HSBC.

The company only narrowly avoided total collapse on Friday when the executive chairman of its parent company, Luke Johnson, who also owns 37% of the company, committed up to £20 million in loans, backed by a heavily-discounted share sale.

The Telegraph’s Ben Marlow asked yesterday; was this a conspiracy or a cock-up? Finance director Chris Marsh has already been arrested on suspicion of fraud, and released on bail. But questions will also be asked of Johnson who, in a recent column for The Sunday Times, owned up to his weaknesses as a poor judge of character. He has also penned another entitled “A business beginner’s guide to tried and tested swindles”. 

For those seeking to better understand some of the machinations behind the crisis, there are certainly less illuminating places to start.


Ministers have been told to start implementing plans for a no-deal Brexit as last-ditch talks between the UK and EU yesterday appeared to fail. Brexit secretary Dominic Raab yesterday flew to Brussels to meet with EU chief negotiator Michel Barnier, before talks broke up after little more than an hour. Theresa May has since branded a proposed deal on customs a “non-starter” and has directed government departments to begin initiating contingency plans by the end of the month, regardless of the outcome of a next UK-EU summit due to start on Wednesday. 

Bavaria’s governing centre-right CSU has suffered significant losses in state elections, according to exit polls. If accurate, the result would mean a loss of the CSU’s absolute majority in the state legislature, which it has held almost unbroken since 1957. Projections suggest a 10% drop in support for the CSU at 37% since the last election in 2014, with the Greens coming second on 18%. A coalition between the CSU and centrist Free Voters is still thought possible, given a predicted majority of seats between the parties.

Canada is set to begin the legal sale of recreational cannabis on a countrywide basis from Wednesday. Following legislation approving the sale in June, the product will be sold by more than 100 shops, and will be supplied by about 120 licensed growers. So far, only Uruguay has fully legalised recreational use and sale of the drug.

Business & Economy

The Bank of England has announced its intention to keep the £50 note in circulation, despite its association with money laundering and forged currency. The “new, more secure” note will be printed on polymer plastic and will feature a character to be voted on by the public. Ministers abandoned a review that had begun in March which envisaged scrapping the £50 note along with copper coins, which will also remain in circulation for the time being.
Sky News reports that senior executives at BBC Studios and ITV are being considered as the new leader of the Premier League. Tim Davie, who is chief executive of BBC Studios, and Tom Betts, ITV’s strategy director, are among three contenders to replace Richard Scudamore as chief executive of UK football’s richest league competition. A five-person panel, led by the Chelsea chairman Bruce Buck, is expected to recommend a preferred candidate to a meeting of Premier League clubs in mid-November.
Aberdeen’s property market could be set to benefit from an oil industry jobs “bounce-back”, a law firm has predicted. According to Aberdein Considine, Aberdeen’s property market is experiencing conditions similar to those seen just before the last significant uptick in property prices in the late 1980s, when average prices grew from £38,000 in 1987 to £75,000 in 1997. Future growth may be attributed to continued oil price increases above $80 a barrel, and labour shortages in the region.
Meanwhile, the FT reports that the average price of high-end London homes has fallen by up to 25% as a result of Brexit. According to property data group LonRes, the value of properties in upmarket areas of the capital had fallen by £2m between the third quarter of 2018 compared with the same period last year.


The week ahead

Tensions within Theresa May’s cabinet will come to a head on Wednesday and Thursday as EU leaders meet for their last regular council meeting to discuss Brexit. Although diplomats hope to have a draft version of a “political declaration” on future UK-EU relations ready for Thursday’s gathering, two issues – including the Irish backstop and the UK’s involvement in a customs union with the EU – have yet to be resolved. French president Emmanuel Macron has also called for EU leaders to update on progress in completing a banking union for the eurozone bloc.

In corporate news, Tuesday sees a bumper crop of earnings reports, including BlackRock, Goldman Sachs, Morgan Stanley, IBM, Johnson & Johnson, and Netflix reporting third-quarter results. Despite last week’s news of record profits at other US banks, analysts are expecting little positive movement in banking shares, given anxiety among investors over rising interest rates. Outside that sector, Netflix is also expected to report growth, following a rise in non-US subscribers after spending to expand its portfolio of original content across different languages.

Other corporate reports to look out for include Q3 results at Unilever on Thursday, following its decision to abandon plans to move its legal HQ to Rotterdam, and Procter & Gamble on Friday, when the consumer goods manufacturer is expected to post a fall in Q1 sales.

In other news, the winner of this year’s Man Booker Prize will be announced on Tuesday, with women accounting for four out of the six nominations. The shortlisted authors include Anna Burns, Esi Edugyan, Rachel Kushner, Richard Powers, Robin Robertson, and 27-year-old Daisy Johnson who is the prize’s youngest nominee with her novel, Everything Under.

Pires Investments
Cambian Group
CareTech Holding 

Intl. Economic Announcements
(07.00) Import Price Index (GER)
(13.30) Retail Sales (US)
(15.00) Business Inventories (US)

Columns of Note

Kevin Pringle writes in his weekly Sunday Times column that boosting local government is the next step in improving Scotland’s constitutional settlement. Whilst the EU’s impact in our day-to-day lives may be currently overexaggerated as part of the Brexit debate, Pringle points out that local government accounts for almost £19 billion in revenue, and nearly 10% of Scotland’s total employment. The next steps, he suggests, might be to pursue council oversight of a tourist tax, and land value taxation. 

An FT magazine feature by Simon Kuper looks at the waning influence of British and American universities on the world stage, suggesting Asia and continental European competitors are beginning to make their mark. Long-term, the most existing rising new intellectual capital could be Berlin, Kuper suggests, benefiting from a mix of healthy funding, cost effective living, and – ironically – widespread knowledge of English.

Did you know?

London's Metropolitan line was originally supposed to link to France via a cross-channel tunnel (a 6,000 foot pilot tunnel was built near Dover in 1881). 

Parliamentary highlights


House of Commons
Oral questions
Work and Pensions (including Topical Questions)

Offensive Weapons Bill - remaining stages

Rail fares between Ipswich and London - Sandy Martin

House of Lords
Oral questions
Improving Home Office assessments of asylum applications on the grounds of religious or belief-based persecution - Baroness Berridge

Adapting education and training to address the needs of the changing economy - Lord Haskel

Ensuring prisoners participate in purposeful activity during their sentence - The Lord Bishop of London

National Police Chiefs’ Council concern that problems with Police and Crime Commissioners have resulted in fewer applications for Chief Constable positions. - Lord Hunt of Kings Heath

Mental Capacity (Amendment) Bill [HL] - Committee stage (day 2) - Lord O'Shaughnessy

Protection of property guardians - Baroness Jones of Moulsecoomb 

Scottish Parliament
In recess until 23 October

House of Commons
Oral questions
Business, Energy and Industrial Strategy (including Topical Questions)
Ten Minute Rule Motion
Cold Weather Payments - Hywel Williams
Consideration of Lords amendments
Rating (Property in Common Occupation) and Council Tax (Empty Dwellings) Bill
Money Resolution
Overseas Electors Bill
Opposed Private Business
Named for consideration by the Chairman of Ways and Means
Childhood obesity - Ms Nadine Dorries

House of Lords
Oral questions
Independent Age report 'A Taxing Question: How to fund free personal social care' - Baroness Wheeler
House of Commons International Development Committee report: 'Definition and Administration of the ODS' - Lord Collins of Highbury
Support for local authorities to set up private rented sector licensing schemes. - Lord Kennedy of Southwark
Courts and Tribunals (Judiciary and Functions of Staff) Bill [HL] - Report stage - Lord Keen of Elie
Orders and regulations
Regulation of Investigatory Powers (Juveniles) (Amendment) Order 2018 - motion to regret - Lord Paddick