Marks & Spencer business environment analysis

Introduction
In order to succeed in the ever changing economic business environment, it is important for every company to carry out an analysis on its business environment and take into considerations factors such as the company’s micro and macro environment, its corporate culture and stakeholder’s management strategies. Doing so is important, as not only does it enable a company to gain competitive advantage in the market place, but it also enables it to have an effective strategic management plan which is in line with its stakeholders. An instance of a company which has managed to stay on top of its game in the competitive market is Marks and Spencer one of UK’s largest retail company, (Armstrong, 2006)
However, despite being on top of its game, the company has faced numerous challenges such as double-flip economic recession which had a great impact on consumer’s spending patterns due to their disposable incomes. Nevertheless, despite all these challenges, Marks $ Spencer has managed to retain a strong position and even witnessed an increased food sale of 3.9 percent and a £564.3 million profit before tax in the year 2012/2013. Consequently, in order to understand how the company has managed to stay on top of its game, it is important to carry out an analysis on Marks & Spencer competitive positioning in the UK market. In order to achieve this company’s micro and macro business environment, its corporate culture and stakeholders’ management strategies will be taken into consideration, (Marks and spencer,2013)
Marks & Spencer’s micro and macro environment
Macro environment analysis
Carrying out a macro (external) business environment is important as it comprises all the factors which an organization needs so as to compete in its industry. They are uncontrollable external factors which influence the manner in which the company makes its decisions, and consequently affects its strategies and performance. In order to do so, two strategic tools, SWOT analysis and PESTEL analysis will be used so as to aid in the analysis.
SWOT
This is a strategic business tool that is used in identifying an organization’s internal and external factors which are important in helping it meet its objectives. It identifies a company’s Strength and weakness (internal organizational factors) and Opportunities and Threats (external environmental factors) that are affecting the company. It will therefore help in analyzing and understanding Marks & Spencer’s current business situation and where improvements are needed to be made, (Hambrick &. Fredrickson, 2005)
Strength
• Marks & Spencer offers a wide range of products such as home, wine and furniture products, financial products, clothing and foods which creates for it a large consumer base.
• By sales, it is the largest retailer in the UK which means it has many consumers
• It has a strong cash flow position which is effective for its capital and important for running the large company
• It is one of the leaders in the delivery of premium quality food retailer attracting for itself many consumers because of its products
• It has a brand awareness which means that it has a well established brand loyalty in the UK market.
Opportunities
• There are many emerging new products in the market which means an increased and new set of consumer
• Alliances & Innovations with other companies can enable it to widen its presence in the market
• Customers in the UK retail market are nowadays changing to a more value for cash related products
• The company is continuing to develop and expand its overseas supply chain
Weaknesses
• Many consumers usually have the perception that the company offers high priced products which makes them not to try out their stuff
• Consumers are disinterested in their products
• There are numerous environmental issues which are facing the company like pollution
• There are emerging substitute products and technologies in the market
Threats
• There are new and existing competitors in the market which are a threat to Marks & Spencer
• There is a volatility of prices of raw products in the market
• New and emerging legislations that are being imposed in the country
• Economic recession being witnessed in the UK
• Emerging low cost retailers in the industry that are preferred to them
• There is extremely high competition in the retail industry
PESTEL
These are external environmental factors and include Political, environmental, social, technological, economic and legal factors affecting Marks and Spencer in executing its strategies. This tool highlights the factor which is important and what an organization needs so as to compete in its industry, (Clements & Hendry, 2002).
Political
Free trade agreements and European integration has opened up new markets for the UK and other organizations and countries to invest in Europe. This has greatly affected M& A and has caused it to fight hard so as to maintain its position and market share with innovative and aggressive strategies. In general, any trade can be performed in The UK as long as it does not affect the country’s existing laws, public orders and policy. However, for M& A political factors which greatly affect it are those that deal with industrial relationships and labor laws. It affects the company’s development efforts through labor law infringements in both its international initiatives and local operations
Economic
The retail sector in the UK is quite prawn to economic recessions and it is also very sensitive to interest rate changes. The economic recession of 2009 set the country’s economy struggling for survival but it has managed to get back on its feet again. Therefore, consumers are nowadays optimistic of the economy and the retail industry and Marks and Spencer operations are booming. Nevertheless, UK is the hub of ecommerce in Europe which means that Customers are not limited to local retailers’ only but also to external tourists which creates a diverse retail business and base trends.
Social
Consumer’s tastes, preferences and lifestyle changes have presented both threats and opportunities for the UK retail industry. Consumers in the UK have the tendency of being loyal to one brand and the quality of products. However, this easily changes with a competitive pricing strategy from other competitors. In addition to that, consumers have a preference for trendy styles as opposed to classics which presents a threat to M&A in regaining a big market share for its consumers. This means that consumers in UK’s retail industry usually place a high value on their spent money, (Porter, 2008).
Technology
The retail industry in UK has witnessed radical technological changes. Changes as such include the use of internet as a basis of online shopping store which widens the use of ecommerce in the industry. In addition to that, paperless operations are being used and IT systems have offered a basis for this operation. Online marketing is also another technological aspect being used by Marks and spencer and other retail companies in the market as a basis for competitive advantage in the market place.
Environmental
Most companies nowadays opt for environmental friendly and renewable resources in their production which has posed a great challenge for many companies to maintain their market share. Consequently, this has caused Marks & Spencer to place great concern on the use of environmental friendly fabric and raw materials.
Legal
Legal regulations and laws are being enacted and companies are closely monitored in the UK retail industry. Bodies as such include National Legislation for health and safety which looks out for the rights of the consumers and the production of renewable and natural resources when making clothes.
Micro environmental analysis on Marks & Spencer
The strategic tool and framework which will be used in making analysis on Marks & Spencer is porter’s five forces. This tool examines and determines the level of profitability and competition for a company, thus determining the attractiveness of a market and the level of competition intensity, in this case Marks and Spencer, (Hambrick &.Fredrickson, 2005). The first factor is the threat of new entrants in the retail industry. Despite that the retail environment is very attractive; there is some high level of difficulty in penetrating it. This can be attributed to the strong monoliths in the market and strong and branded companies like Marks & Spencer which have a strong background in the market for a long time make it hard for new companies to survive. In addition to that, there are significant barriers to entry in the market like daily changing consumer expectations and high capital expenditure which make it hard for new companies to enter the market and survive. However, the rise of low cost manufactures in the market is posing as a significant threat to companies in the industry like Marks & Spencer. In addition to that, there exists opportunities for low economy and major competitors like ASDA and Top Shop are considering the introduction of low cost home products in their markets
Threat of substitute products in the industry is very high. This can be attributed to the fact that there are numerous retailers in both food sector and clothing sector in the industry and Marks and Spencer is greatly concerned about this.
Threats of bargaining power of consumers on the other hand is strong not only for Marks & Spencer only but also for the entire retail industry. This means that the industry has a large number of alternative suppliers in the industry consequently, which causes the industry to have a strong competition rivalry which is another porter’s five factor analysis. Competition is thus high as there is little or no product differentiation in the industry. The threat of bargaining power of supplier is low because there are many suppliers in the market which means that a supplier can be easily replaced due to many alternatives and availability of raw materials by Marks & Spencer and other companies in the retail industry, (Porter, 2008)
The corporate culture and structure theory
There are different definitions of organizational culture and corporate culture differs widely in different organizations. Nevertheless, corporate culture can be defined as patterns of behaviors and mindsets which are shared by people in the same company. Consequently, a corporate’s culture not only defines what is done in an organization, but also why it is done in the organization. Marks & Spencer’s corporate’s culture is a results of the organizations long terms activities and thus an aggregate of subcultures which have become as a result of the company’s response to challenges that it has faced over time which makes corporate culture complex and multifaceted. Understanding the type of corporate culture used by an organization is important as not only does it help in understanding how and why managerial reforms can have an effect between and within the organization, (Schein, 2004).
There are different types of corporate culture which can be adopted in an organization but it is possible for a company to adopt multiple corporate strategies like in the case of Marks & Spencer. Examples of corporate culture include the internal process model which focuses on internal business environment and information and communication management are used so as to attain control and stability in the company. Open systems model on the other hand, focuses on the external business environment where adaptability and readiness are used so as to attain external support, resource acquisition and growth in the company. The rational goal model focuses on control and external business environment where goal setting and planning are used so as to attain efficiency and productivity. Human relations model on the other hand makes use of internal and company’s flexibility where broader development and training of human resource are done so as to attain employee morale and cohesion and as employees are part of its corporate culture, therefore, it is important to know how to manage them effectively, (Bass O’Donovan, 2006).
There are many theories which explain how an organization is structured. Some of them include the scientific management approach which has its basis on work planning so as to attain simplification, specialization, standardization and efficiency. This theoretical approach increases productivity through mutual trust between employees and management. The bureaucratic approach by Weber on the other hand usually considers an organization as being part of the society and is based on democracy, rationality, stability and predictability, specialization and structure as the main principles. Administrative theory has its basis on the management principles and considers management as planning, organizing, leadership and controlling organizational functions. The system approach sees an organization as a system that has several mutually dependent and inter-related sub systems and in its case companies have components which link its goals and processes. The socio-technical approach sees an organization as being composed of technical, social and environmental systems. The situational or contingency theory sees that companies are in a relation with the environment and requires these diverse environments so as to survive, (Armstrong. 2006).
An organization’s structure usually defines how activities are managed and are run in the company like task supervision, coordination and allocation so as to attain the goals and objectives in the company. Therefore, this means that an organization is usually structured in accordance to its objectives. Nevertheless, organizational culture affects it in that it offers foundation in which the standard routines and operating procedures are based on. It also helps in determining which individuals in the organization participate in decision making processes and therefore to which extent their views have an impact on the actions carried by the organization. There are different types of organizational structures that are used by organizations. For Marks and Spencer it makes use of . The matrix structure which categorizes employees in terms of product and function.it makes use of all structures so as to attain its objectives. This is seen where the company’s board of directors delegates its responsibilities who assist in delegating the work and message to other departmental heads, (Jacobides, 2007)
The stakeholders’ management strategies
For many organizations managing its stakeholders is one of the key challenges it usually faces of which this is not an exception for Marks and Spencer. Nevertheless, as much as it is challenging stakeholder management offers a company many advantages in the end. Stakeholder management generally involves considering the stakeholder’s values and interest and addressing them so as to make the stakeholders happy. For any business, there are different types of stakeholders, but for Marks and Spencer in its case, its key stakeholders include, its employees, the government, its consumers, and its suppliers. In its consumer relationship management feedback that the company identifies that it has brand loyalty and satisfied consumers. Good existing relationships as such are in the end converted into partnership and coalitions which built trust between marks and Spencer and its stakeholders. Nevertheless, Marks & Spencer has different ways of managing its stakeholders, (Samantha, 2012)
For the government, the company makes sure that its manages the government expectations by working with it in its wide range of policy development efforts on areas like trade, employability, consumer affairs and other laws. Doing this not only enables Marks & Spencer to follow the governmental rules and regulations, but it also enables it entice the government in coming up with policies which favor it through the good relationships established in its engagements in a number of political audiences.
Its customer relationship management strategy makes use of Marks & Spencer’s customer insight unit that makes sure the customers needs inform every aspect of decision-making. Understanding its consumer’s needs as mentioned before not only does it enable to align its business strategies in line with them but it also enables the company to gain consumer satisfaction as their needs are met .Marks & Spencer makes use of research, focus groups and customer feedback so as to stay in touch with its consumer monthly. Doing so enables the company to know what to change in their products and what is satisfactory to its consumers and helps its gain competitive advantage in the market place.
Marks & Spencer knows that employees are one of its key stakeholders and have done everything to maintain a good relationship with them. The company has done this by practically showing its commitment in the employee retirement, promotion, appraisal, training and development and recruitment and selection processes. In addition to that, the company has also provided its workers with a healthy working environment. Doing this is important as Marks and Spencer’s employees become confidence and comfortable in their business environment which enables it to perform its work effectively and produce quality products and services
Marks and Spencer has managed its suppliers by ensuring that all its suppliers are paid above the minimum wage and they are treated well which develops trust between the two. Doing this is important as it enables the company’s products to be of good quality and arrive in time. Managing all their stakeholders ensures that the organization is able to attain its objectives and goals both internally and externally and that a positive relationship is created through them and the company through good and effective management of their expectations. Marks and Spencer’s stakeholder management has enabled the company to identify its existing positive relationship with its stakeholders, (Robert, 2003)
Conclusion
As seen from Marks & Spencer, Carrying out a business environmental analysis is important a not only does it enable a company in the formation of its strategic plan and strategic management, but it also enables the company to identify its weaknesses, its strengths, and factors which affect it both internally and externally. Marks and Spencer has managed to stay on top of its game and gain competitive advantage in the market place because of its effective use of strategic tools and models in executing its strategies. This makes its strategies effective and fit for the organization as its stakeholders, culture and structure are taken into consideration which are part of the business environment.

References

Armstrong. M. A 2006, handbook of Human Resource Management Practice .10th edition.
Kogan Page, London
Bass O’Donovan, G.2006, The Corporate Culture Handbook, How to Plan, Implement and
Measure A Successful Culture Change Programme, Dublin: The Liffey Press.
Clements, M. P., Hendry, D. F. 2002. A companion to economic forecasting. Blackwell Publishers
Ltd. p. 3
Hambrick D. &. Fredrickson J, 2005 Are you sure you have a strategy?,Academy of
Management Executive, vol. 19, no. 4(2005), pp. 51–62.
Jacobides., M. G. 2007. The inherent limits of organizational structure and the unfulfilled role of
hierarchy: Lessons from a near-war. Organization Science, 18, 3, 455-477.
Marks and spencer.com 2013, Annual report 2103 (online) available from
http://annualreport.marksandspencer.com/docs/MS_AR2013_Report_Full.pdf, last accessed 07th January 2014
Porter, M.E. 2008.The Five Competitive Forces That Shape Strategy, Harvard business Review,
January 2008.
Robert P. 2003. Stakeholder Theory and Organizational Ethics. Berrett-Koehler Publishers
Samantha M, 2012. Stakeholders: essentially contested or just confused?. Journal of Business
Ethics108 (3): 285–298
Schein, E.H.2004.Organizational Culture and Leadership, Third edition, San Francisco:Jossey-

ACTIVE VERSUS PASSIVE INVESTMENT

Active versus passive management

Ever since the first index fund was created, the debate between active versus passive management has been nothing less than heated.

Active management is simply an attempt to “beat the market” as measured by a particular benchmark or index. For example, an investor might buy or sell certain stocks to try to get better returns than the stock market indices such as the TSX, S&P 500 or the Dow Jones Industrial Average (DJIA).

The aim of active fund management — after fees are paid — is to outperform the index for a particular fund (or to outperform other fund managers they may be competing against). Prevailing market trends, the economy, political and other current events, and company-specific factors (such as earnings growth) all affect an active manager’s decisions.

Mutual funds generally fall into the active management category because, in most cases, the fund managers select the stocks rather than passively buying an index. However, many mutual fund managers are closet indexers and are not worth the fees they charge, and most mutual funds are so large they are not nimble enough to respond quickly to market fluctuations. For these reasons, most mutual funds fail to beat the indexes. Only select mutual funds are worthwhile investments—make sure you choose carefully.

Passive management is more commonly called indexing. Indexing is an investment management approach based on purchasing exactly the same stocks and bonds, in the same proportions, as an index through Exchange Traded Funds (ETFs) and other index funds. This management style is considered passive because portfolio managers don’t make decisions about which individual components to buy and sell; they simply invest in funds that copy the indices.

Which approach works best?

Proponents of each believe their approach is the right one, the one that has the potential to generate the greatest amount of return over the long term. The two camps see the investment world in very different ways, both making logical and passionate arguments for their viewpoint.

Passive managers generally believe that it is difficult to beat the market. Therefore, they essentially offer performance that closely matches an index for those investors who are unwilling to assume the risks of active management.

Active managers believe the market can be beaten. While they can’t beat it all the time, many active managers do believe there are certain irregularities in the market that can be taken into consideration to achieve potentially higher returns.

Active management: Advantages
Expert analysis — seasoned money managers make informed decisions based on experience, judgment, and prevailing market trends.
Possibility of higher-than-index returns — managers aim to beat the performance of the index.
Defensive measures — managers can make changes if they believe the market may take a downturn.

Active management: Disadvantages
Higher fees and operating expenses.
Mistakes may happen — there is always the risk that managers may make unwise choices on behalf of investors, which could reduce returns.
Style issues may interfere with performance — At any given time, a manager’s style may be in or out of favour with the market, which could reduce returns.

Passive management: Advantages
Low operating expenses.
No action required — There is no decision-making required by the manager or the investor.

Passive management: Disadvantages
Performance is dictated by the index — investors must be satisfied with market returns because that is the best any index fund can do.
Lack of control — managers cannot take action. Index fund managers are usually prohibited from using defensive measures, such as moving out of stocks, if they think stock prices are going to decline.

The debate between active and passive investment management will, no doubt, continue and from time to time one approach may be more popular than the other. As an individual investor you must ignore the trend of the moment.

 

Will the new “twin –peaks” structure of bank regulation ensure that banking crises will be a thing of the past?

Will the new “twin –peaks” structure of bank regulation ensure that banking crises will be a thing of the past?

Introduction

The financial crisis of 2008 had many far reaching consequences for many countries, which led to different start contemplating about reforming and improving efficiency of their institutions. As a result, in UK, there is concerted effort to establish a regulatory twin-peaks structure that separates prudential and market conduct regulation[1]. A number of countries in other parts of the world have managed to successful establish twin-peaks regulatory structure. Examples of these countries are Netherlands and Australia, hence, the success to be achieved in UK with regard to implementation of the twin-peaks structure is likely to draw key lessons from these countries.

Twin-peaks regulatory structure in Netherlands and Australia is seen to have helped the countries to experienced lesser consequences of the global financial crisis than other countries that relied on centralised regulatory system[2]. As a result, UK aims to ensure that what was experienced during the financial crisis of 2008 is something that is not experienced again in future. Whether this goal is achieved or not remains ‘wait-and-see’ strategy. The planned move to implement the twin-peaks regulatory structure in UK is to commence on 1 April 2013. Two twin regulatory bodies are to be established: Financial Services Authority (FSA) and Prudential Regulation Authority (PRA). The two are to supervise the financial market structure in a transparent manner, unlike in the past when the responsibility was largely bestowed upon the bank. Therefore, with the anticipated reform initiatives, the basic question to ask is whether the instruments in place will cushion or protect the country against experiencing another financial crisis in future?

The road to twin-peaks regulatory structure

The financial crisis of 2008 provided awakening moment for the world, especially those in developed world to reflect on the soundness of financial institutions, especially those mandated with regulatory responsibilities, to protect or cushion future financial crises[3]. As a result, it became clear in the UK context that the failure of the financial system in the country could not be divorced from the activities of financial regulation agencies. The prime factor here is that no single institution possesses grand responsibility, authority or powers to conduct monitoring of the system as whole and also be in a proper position to respond to such trends with effective actions. In fact, after the financial crisis of 2008, diverse opinions both at global and national level agreed to one thing; the failures in regulation should be partly blamed for the financial crisis that occurred[4]. In the case of UK, an observation was made that the failure in regulatory agencies was caused by weaknesses in the tripartite system of regulation[5]. At this point of discovery, agreement was reached that the tripartite system of regulation required thorough reforms so as to equip the financial regulation regime adequately for future crises.

One of the outcomes for the reformation of the tripartite system of regulation is a proposal for a new regulatory structure that embeds the twin peak model of regulation. According to the Financial Services Act (2012) proposals have been made to split the role of regulating the financial market structure. According to the Financial Services Act (2012), there will be the establishment of an Independent Financial Policy Committee (FPC) that is based at the Bank of England[6]. At the same time, the move will see the Financial Services Authority (FSA) cease to operate in its current form where the body will be split into two and its responsibilities shared between the two new bodies. The first body the PRA will handle prudential matters and remain a component of the Bank of England[7]. The second body is the Financial Conduct Authority, which is a separate body and will be tasked with responsibility of supervising business and market conduct[8]. In addition, the process of reform largely bestows the role of supervising the financial market structure to the FSA instead of the bank.

Implementing twin-peaks regulatory structure

In 2012, Hector Sants, the chief executive officer of the FSA, who also doubles as the deputy governor at the Bank of England, hailed the move by the financial regime in the country to move towards twin-peaks regulatory structure[9]. According to Hector Sants, the move was well developed and would see those tasked with financial regulatory responsibilities change their behaviour of supervising, especially in regard to making assessment of the risks that individual firms in the country have. Twin-peaks model is perceived to be the opportunity that the country’s financial regime has to rise to the occasion and rectify past loopholes that in one way or the other are connected to dysfunctional of financial regulation structure[10]. For instance, under the new model, the financial supervisory and regulation roles are to be shared, unlike in the past when such roles have been the preserve of one institution.

Under the new arrangement, two independent groups have been proposed to carry out supervision roles for the banks, insurers and major investment groups in the country. The supervision of the two independent groups is to cover issues of prudence and conduct[11]. As a result, the new approach is seen to have the ability that will enable each of the independent groups to establish separate and independent regulatory judgments based on different set of objectives and benchmarks[12]. Also, the independent groups will be able to coordinate and maximise utilisation and exchange of information that improves the regulation process. Therefore, even as the two new groups aim to operate independently, they are supposed to coordinate their activities in order to enhance the regulation process. In an effort to move to the new direction of regulation, effort has been made identify the problems of the past regulatory system. The consensus is that the past regulatory regime lacked clear objectives of its supervisory roles, as well as transparency and efficiency of its activities[13]. In other words, the regime can be said to have lacked proactive capability, as well judgment-based supervision that in many ways would have seen soundness of financial regulation regime, thereby, cushioning the country against the financial crisis of 2008.

The Financial Services Act (2012) has proposed that FSA should be abolished. Furthermore, FSA should be substituted by the creation of Financial Policy Committee, the Financial Conduct Authority (FCA), and the Prudential Regulation Authority (PRA). These new institutions should have different responsibilities to fulfill in regard to the regulation of the financial regime in the country. When the new proposals come into function as from 1st April 2013, it is anticipated that the primary responsibility of Financial Policy Committee (FPC) will include identifying and monitoring systematic financial risks, thereby, developing protective mechanisms in an attempt to make and enhance the resilience of the financial system in the country[14]. Additionally, the committee will play an important role in the country’s economic policy process; a situation that is perceived will help the country’s financial system.

The second regulatory agency that has been created is the Prudential Regulation Authority. The Prudential Regulation Authority shall be part of the Bank of England and it has been envisioned that it will start to operate on 1 April 2013. The PRA has been mandated with responsibilities of supervising banks in the country, constructing insurers, credit unions, and societies together with big savings groups. It is estimated that the PRA will be in custody of regulating over 1,700 monetary institutions in the country. According to the Financial Service Act (2012), PRA has major objectives to accomplish and they include promoting and ensuring safety of financial firms and enhancing efficiency so as to guarantee policyholders maximum security of investments[15]. The other responsibilities that this regulatory agency has been accorded is the powers to ensure that all harms that firms may cause on the UK’S financial system are identified and addressed in advance. To perform this role properly, the PRA will operate in a coordinated manner with Financial Conduct Authority (FCA), hence creating a ‘twin-peaks’ regulatory regime in the country[16]. The primary responsibilities to be performed by FCA include ensuring healthy competition in the financial sector, ensuring financial markets are stable and their functions are not threatened and ensuring partnership between financial firms and clients is based on fairness and transparency[17].

Will the new reforms protect the country from future financial crises?

A survey of firms in recent past has indicated that overwhelming majority (79%) are confident that the new financial regulation regime will be able to deliver in ensuring that the UK’s financial system is strengthened and protected from future crisis[18]. The new regulatory regime offers opportunity for the country’s financial system regulation to move from the old reactive style of regulation. The structural changes are seen to provide relative adequate ‘checks’ and ‘balances’ that have been put in place in order to ensure that financial crisis in future are prevented in advance[19]. What can be expressed is that the establishment of more ‘checks’ instruments provide opportunity to increase transparency and efficiency in the whole process of regulation. Also, it provides opportunity for different institutions and players to participate in financial regulation, a process likely to ensure problems are identified in advance and remedies undertaken before such a problem can escalate to a large scale[20].

Furthermore, the primary worry among key stakeholders and analysts has been on the future effectiveness of the new institutions of regulation within an established and effective legal framework. The idea has been that there is need to establish an appropriate, effective and strong legal framework in order to enable the new institutions has ability to operate effectively and efficiently[21]. Nevertheless, efforts in the recent past have seen the legal framework to guide the new institutions strengthened as expressed in the Financial Services Act (2012). The aim of the strengthening the regulatory law is to empower the FCA and the PRA to have powers to act in ensuring all the laid down laws are observed.

Apart from the financial regulation law that is being strengthened, more attention is not just directed towards focusing on structural changes, but also paying attention to the need to change the behaviours of key stakeholders such as consumers of financial services[22]. Furthermore, financial operators have been requested to change the way they thing about regulation in order to increase the level of success of the reforms in future. What can be observed is that there is a call for the establishment of a wholistic approach towards ensuring new regulatory regime success and remains resilience to future financial crisis threats[23]. Hector Sants, deputy governor of Bank of England, has observed that in order for the new regulatory regimes to succeed and achieve the desired goals, there is need to accelerate the behavioural and cultural changes for both regulators and financial firms[24]. Furthermore, plans across the board are culminating into many firms aligning their goals with those of supervisors and society at large. Also, many firms have been found to be confident and trust the new regulatory regimes, hence they are willing to actively comply with the new supervisory laws and requirements[25]. Furthermore, there is the acceptance that the new ‘twin-peaks’ model may lead to increase in costs as new measures come into action, but consensus among many firms is that the model is worth implementing and sustaining given its long-term benefits to the financial system in the country.

Therefore, what remains important for the new regulatory regimes to succeed in their functions is to ensure that a good working relationship is established between consumers and the regulators, an aspect that has been lacking in the past[26]. This will ensure the two stakeholders work in a collaborative and cooperative manner, where exchange of information is not an issue and the level of transparency is increased. This will help to prevent some on the unethical financial practices that characterised the past regulatory regime. Similarly, more observation has been to the point that the UK new regulatory system should not insulate itself from other accredited regulatory systems being put in place within the European Union community[27]. This will ensure that in the long-run, the country’s regulatory regime is able to work in harmony with other relevant regulatory bodies so as to ensure that financial crises are prevent in advance or its symptoms mitigated in time. For instance, at the present, EU is involved in the creation of three new regulators known as European Supervisory Authorities[28]. The new regulators will be able to supervise activities of banking, securities and markets, insurance and pensions.

In summary, when the EU and UK regulation structures are viewed and analysed, it becomes clear that they manifest a number of differences, which have to be addressed in a proper manner. Therefore, an effective domestic coordination and cooperation regulatory regime is required in order to enable the country have more power when it comes to dealing with EU regulatory institutions. Therefore, evaluating the structural reforms that have been put in place, together with legal frameworks, it is clear that the new regulatory reforms are unlikely to become ineffective. The prevailing goodwill among stakeholders indicates that the success of the new reforms to some extent is guaranteed. As a result, the level of transparency, openness, supervision and delegation of responsibilities is likely to make the ‘twin-peaks’ model more effective and efficient. Its ability to handle and help the country’s future financial sector has been developed and all indications show that its performance and reliability can be guaranteed. Nevertheless, modification to the system will be need to be undertaken in future based on evaluation of the way the model function in order to make it more effective and resilience to future financial crises.

Conclusion

The financial crisis of 2008 affected UK and other countries in many ways. Different factors were identified which in one way or the other contributed to the financial crisis. In the case of UK, the role of an old reactive financial regulation regime came to forefront. It was found out that the regulation system prior to financial crisis was poor, a situation that gave rise to collapse of many financial institutions. Immediately after the financial crisis, efforts have been made to strengthen the regulation regime. Proposals have been made to adopt ‘twin-peaks’ model as a better way of strengthening the regulatory regime, hence preventing future financial crisis. The primary idea that is evident in the new financial regulation structure is that regulatory roles have been put in hands of two-empowered institutions: FCA and the PRA. This is to ensure transparence, efficiency and trustworthy of the new regulatory regime is achieved. There has been effort to improve the legal framework, as well as call for behavioural and cultural changes among the stakeholders so as to make the system successful. Therefore, analysis of the current framework of the regulatory systems indicate that with greater support and further structural legal changes to the system, it is likely that future financial crises may be dealt in advance before they cause enormous havoc like that witnessed in 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Caprio, Gerard. Handbook of Safeguarding Global Financial Stability: Political, Social, Cultural, and Economic Theories and Models. London, UK: Academic Press, 2012.

Central Banking. FSA Chief Hails New Twin Peaks Approach to Regulation. 2012. Web. 16 March 2013. <http://www.centralbanking.com/central-banking/news/2144310/fsa-chief-hails-twin-peaks-approach-regulation&gt;.

Chance, Clifford. UK Regulatory Reform: Adapting to the New Approach to Regulating Insurers. 2012. Web. 16 March 2013. <http://www.astrid-online.it/regolazion/note-e-con/Clifford-Chance_UK-Regulatory-Reform_05_2012.pdf&gt;.

FSA. Structural Reform of Financial Regulation: FSA Annual Report. 2012. Web. 16 March 2013. <http://www.fsa.gov.uk/pubs/annual/ar11-12/section1.pdf&gt;.

FSA. Delivering a ‘Twin- Peaks’ Regulatory Model within the FSA. 2012. Web. 16 March 2013. <http://www.fsa.gov.uk/library/communication/pr/2012/012.shtml&gt;.

FSA.  Dear CEO: Updates on the Transition to the new Regulatory Structure. 2012. Web. 16 March 2013. <http://www.fsa.gov.uk/static/pubs/ceo/twinpeaks.pdf&gt;.

Great Britain. Financial Services Act 2012. 2012. Web. 16 March 2013.  <http://www.legislation.gov.uk/ukpga/2012/21/contents/enacted&gt;.

KPMG. Twin Peaks Regulation: Key Changes and Challenges. 2012. Web. 16 March 2013. <http://www.kpmg.com/uk/en/issuesandinsights/articlespublications/pages/twin-peaks-regulation-changes-challenges.aspx&gt;.

Markets Media. UK moving to ‘Twin Peaks’ Structure. 2012. Web. 16 March 2013.  <http://marketsmedia.com/uk-moving-to-%E2%80%98twin-peaks%E2%80%99-structure/&gt;.

Mittner, Maarten. Banks Brace Themselves for Twin-Peaks Model. The Financial Mail, 26 February, 2013. Web. 16 March 2013. Web. 16 March 2013.  <http://www.fm.co.za/business/2013/02/26/banks-brace-themselves-for-twin-peaks-model&gt;.

Osborne, George. Welcome to Twin Peaks. Central Banking, 2010. Web. 16 March 2013. <http://www.centralbanking.com/central-banking-journal/feature/2042899/welcome-twin-peaks&gt;.

 

 

 

 

 

[1] Bank of England, Reforming the Regulatory Framework (2012) p.1

[2] Maarten Mittner, Banks Brace Themselves for Twin-Peaks Model (The Financial Mail, 2013 February 26) p. 1.

[3] FSA, Structural Reform of Financial Regulation : FSA Annual Report (2012) p.1.

[4] FSA, Delivering a ‘Twin- Peaks’ Regulatory Model within the FSA (2012) P.1.

[5] Clifford Chance, UK Regulatory Reform: Adapting to the New Approach to Regulating Insurers (2012) p. 2.

[6] Great Britain, Financial Services Act 2012 (2012).

[7] Gerard Caprio, Handbook of Safeguarding Global Financial Stability: Political, Social, Cultural, and Economic Theories and Models (London, UK: Academic Press, 2012) p. 476.

[8]Gerard Caprio, ibid.

[9] Central Banking, FSA Chief Hails New Twin Peaks Approach to Regulation (2012) p.1

[10] Adrian Brown and Sam Robinson, Impact of the new ‘Twin-Peaks’ Structure of Financial Regulation on Enforcement (Bloomberg Law, 2012) p.1

[11] Markets Media, UK moving to ‘Twin Peaks’ Structure (2012) p.1.

[12]Adrian Brown and Sam Robinson, ibid.

[13]Adrian Brown and Sam Robinson, ibid.

 

[14] Great Britain, ibid.

[15]Great Britain, ibid.

[16]Great Britain, ibid.

[17]Great Britain, ibid.

[18]BDO and DLA Piper, The New ‘Twin-Peaks’ Model: A Report on the Financial Services Industry’s Views on Upcoming Regulatory Issues (2012) p.8.

[19]BDO and DLA Piper, ibid

[20]BDO and DLA Piper, ibid

[21] George Osborne, Welcome to Twin Peaks (Central Banking, 2010) p.1

[22] KPMG, Twin Peaks Regulation: Key Changes and Challenges (2012) p.25.

[23]KPMG, ibid.

[24] FSA, Dear CEO: Updates on the Transition to the new Regulatory Structure (2012) p.6

[25]FSA, ibid.

[26] Charles Batchelor, High Hopes for the Twin Peaks (Financial Times, 2011) p.1.

[27]Maarten Mittner, Banks Brace Themselves for Twin-Peaks Model, p.1.

[28]Maarten Mittner, ibid.

AUDITOR INDEPENDENCE

Introduction

Audit can be defined as the examination of accounts or records of a firm so as to ensure they are accurate and make any correction, adjustments and examine verified accounts. It can also be defined as the true and fair analysis of financial accounts according to the laws and legislation. Owing to today’s competitive world, there is need for auditors to take full responsibility on ensuring that value added service are provided to their consumers through the identification of any risks related to the businesses and offering guidance on any weaknesses in the management and internal control of the firm.An auditor is required to be free from biasness in representing a company’s financial status. It is essential for every auditor in the UK to be a registered member of any of the accountancy bodies in the UK. One of the rules they have to abide with is to become independent.  By utilizing a framework approach based on principles, auditors are provided with guidance on how to ensure independence. There are a number of benefits that the auditor stands to gain from this framework approach. One of the benefits is that the auditor has the responsibility of assessing a particular circumstance to determine which types of safeguards can be implemented to reduce the threats of independence.

Analysis on threats on independence of auditors and safeguards to those threats

Types of threats affecting the independence of auditors and their safeguards are usually mentioned in the ethic codes of the professional accountancy bodies. Consequently, any regulatory review of the accountancy profession by the government is normally transferred to the independent auditing practices board which is responsible for coming up with the standards on auditor’s independence. Nevertheless, the requirements and structure of the independence of an auditor is not likely to change any time soon. According to the regulatory framework, threats of auditors’ independence can be categorized in to the following;

Self interest threat; it happens when an audit firm or when any member of the audit team can profit financially or from other self-centered disagreement with the audit consumer. Instances of situations where this threat can be created can encompass the following, although are not limited to; a direct monetary material or interest or an indirect financial interest in an audit customer, A guarantee or a loan which is to or from the audit client or any of his officers or directors, worries on the probability of loosing an engagement among others

Advocacy threat; This takes place when the audit company or any member of the audit team may seem to be promoting or endorses the position or opinion of a client to a situation where the independence may be compromised. Instances of events include but are not limited to Acting as a promoter or dealing with the securities or shares of an audit client and when an auditor acts on behalf of the client or as an advocate in resolving disputes or litigations’ with third parties.

Intimidation threat; This happens when any member of the audit teams does not act in objective or in a professional manner due to actual or perceived threats from the officers, employees or directors of an audit customer. Instances as such may include but are not limited to, stress and pressure to limit the length and extent of any work performed so as to decrease the fees involved, intimidations over replacement and firing in case of a disagreement with the appliance of principles of accounting and never changing personality in a big position at the audit client and being in control of any deals with the auditor.

Nevertheless, in case of any of the engagement undertaken, the auditor ought to be able to articulate which of the audit independence threats apply. Any threat and it’s extend will depend on the circumstances involved .Consequently; any assessment which is considered will necessitate the use of judgment.

Effective and efficient safeguards are usually the solution to success when it comes to the framework approach. It is vital to comprehend that independence can and will never be complete as an auditor is normally selected and paid by the shareholders or the clients. With this in mind, the main aim of safeguards is to limit the effects of threats to independence at   a level which does not distort the opinion forming process of the auditor. There are a number of ways in which threats to auditor independence are limited. One way is through mandatory audit rotation. This method is advantageous as auditors would not be vulnerable to pressure and stress caused by the management as they are aware that they will be replaced and move on to some other company in due time. Major partners should be rotated after every seven years whereas their engagement partners after five years. In comparison to other countries UK is already ahead of other countries in terms of maintaining auditors’ independence. The EU Eighth directive principle states that statutory auditors or audit firms are not supposed to make decisions on behalf of their customers and therefore should be independent. The country has effectively established ethics, rues and principles which tackle auditors’ independence issues and threats. Consequently, auditors’ independence will be improved while conflict with the management reduced.

Another way that threats to auditors’ independence can be limited is through peer review. This is where the audit work carried out by one firm is constantly reviewed by another company so as to ensure quality of work provided. It is the responsibility of the profession to make peer reviewed to be disciplinary as opposed to being corrective or educational. In addition, the standards of the audit should come with penalties offer benefits to the profession. This way, threats such as self interest or advocacy can be limited.

One other way of safeguarding auditors’ independence is through the formation of audit committees by the audit profession regulatory bodies. Activities such as annual reports and audit committee meetings usually have a great impact on auditors’ independence. An active committee is also a vital factor in ensuring and maintaining the independence of auditors. This has the implication that, stakeholders have or will put their trust or have faith in the audit committees as communication between auditors and management in a firm will be enhanced.

In the United Kingdom, the regulations of the audit profession include provisions which are meant to govern their independence. These can be found in the Company Acts of 1985, which contain Auditing guidelines and standards that are meant to reinforce and strengthen the outlook of auditors’ independence. Under the Companies Act of 1985, auditors have the independence and the right to use a firm’s book of accounts during the time of audit. However, through out the years, many changes have been made in the in the company act of 2006, which mentions the auditors regulations and rights.

The Auditing Practices board (APB), issues specific ethical standards which normally deal with any matters which are in relation to the independence of auditors. These ethical standards are compiled in recommendation of the European commission. However, these ethical standards are not are not a component of the regulations but are again vital and necessary for auditors to follow when doing their work which is based on the objectivity, integrity and independence of the auditors.

After the collapse of the Enron, the Co-operative Group of Audit and accounting was formed by the UK Government to set up an adequacy framework for the auditor’s independence. The responsibilities of APB in auditors’ independence were extended to that of setting up the standards of auditors’ independence. In addition, so as to effectively manage the relationship between auditors and firms, there is need for audit committees to play a big role in ensuring this.

Recommendations

 

There are various recommendations that can be offered to increase an auditor’s independence. The first proposal has been set out by the European Commission which states a mandatory audit rotation. This enables editor to serve a company at least two years but no more than six years. Once the maximum term to serve has expired, the audit firm will no longer be able to serve as an auditor in the company. This is important since it assists in the formation of solid friendship between the management and the auditor team. In this way, the auditor will be able to maintain objectivity and utilize their professional judgment since management familiarity will have been scrapped off. In addition to that, mandatory audit tendering has been suggested. If organizations apply a tendering process when appointing an auditor, then this will enable competitive and transparent auditors. Moreover, shareholders will be included in the process of choosing an auditor. This will encourage onus on shareholders since they will ensure that the auditor independence is upheld. In addition to that, the client management will be forced to justify their reason for choosing the auditor which has to be based mainly on competence and independence of the auditor. Lastly, the third recommendation which can be put in place to ensure audit independence is the placement of limit on the non auditor work that the auditor is required to perform. This ensures that the auditors become objective in their work thus ensuring auditor independence. Any work that is non audit related will be considered as a conflict of interest therefore encouraging the objectivity and independence of auditors.

 

 

Conclusion

 

It is important for auditors to be protected against any threats. However, the current safeguards are there to ensure that the independence of auditors is in place, despite the fact that, they are not enough as they one protect auditors at an individual level only but not at inter firm levels, Nevertheless, Effective and efficient safeguards are usually the solution to success when it comes to the framework approach. It is vital to comprehend that independence can and will never be complete as an auditor is normally selected and paid by the shareholders or the clients. Thus The European Commission has therefore, come up with some proposals to fix this. Some of them include audit firm rotation and mandatory audit rotation which helps in addressing issues such as lack of independence by stakeholders.