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Bailey’s tough talk on EU raises City worries over post-Brexit access

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Andrew Bailey’s trenchant criticism of the European Commission on Wednesday has deepened anxieties in the City of London that the UK and EU will fail to agree a series of equivalence deals which will allow the UK to trade more freely in Europe’s financial services market following Brexit.

The Bank of England governor accused Brussels of making a “mistake” in shutting the City out of its markets since the start of the year and vowed to carry on setting financial regulation in the UK’s interest.

The EU, meanwhile, insists the UK must outline its plans for future regulations before it can consider granting “equivalence” status to Britain in most areas of financial services.

“The EU has argued it must better understand how the UK intends to amend or alter the rules going forward,” Bailey said in a speech to financial executives. “This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself.”

With both sides adopting increasingly entrenched positions, the prospect of a breakthrough looks slim — especially as the EU is eager to capture a greater share of the market which London has dominated for so long.

Lord Jonathan Hill, the former EU financial commissioner who is leading a government review into the UK listings regime, told the FT recently that he did not think Brussels would back down.

“Given that their strategy is to build up the EU, why on earth would they? And the more we ask, the more they think it gives them leverage,” he said.

With leaders in Brussels under fire for their handling of the bloc’s coronavirus vaccine procurement, a row with the UK where it succeeds in gaining business from London might help to divert attention. According to one UK official, the “EU’s best hope of getting more business is if we remain paralysed”.

After a difficult few weeks, BoE governor Andrew Bailey might have welcomed the distraction of Brexit © Charlie Bibby/FT

But after a difficult few weeks, Bailey might have also welcomed the distraction of Brexit.

This week Bailey faced allegations from a former judge that he misrepresented to MPs his reasons for asking not to be named in a highly critical report into his handling of a £236m investment scandal.

The spat came shortly before the BoE was rocked by the sudden departure of Alex Brazier, the head of the bank’s financial stability strategy, who was seen internally as “future governor material”.

The central bank has also been accused by its internal watchdog of having “knowledge gaps” about the effectiveness of its flagship quantitative easing programme, adding to the pressure on Bailey.

Caught in the middle of the regulatory argument, the City is increasingly concerned. With share trading in Amsterdam overtaking that of London last month, UK-based brokers and traders are now reconciled to finding other ways to trade in the EU.

On Tuesday, broker Numis became the latest to be forced into moving some of its business to the bloc, saying that it intended to establish an EU-based office in the next 12 months.

“Brexit will have a minimal impact on our financial performance in the short term, however we believe comprehensive EU market access is strategically important for the business in the longer term,” it said.

Most large banks and financial institutions prepared for a hard Brexit over a year ago — shifting people and assets to offices in the EU — which meant that there were no sudden shocks when the UK left the single market on January 1.

Bar chart of Average daily volume (€bn) showing Amsterdam leaps ahead of London in European share trading

TheCityUK, which represents businesses in the financial services sector, has called for progress on regulatory equivalence with the EU, pushing for the speedy establishment of a framework for future regulatory co-operation.

Miles Celic, chief executive of TheCityUK, said that the industry was “pragmatic about the increased friction” but urged the two sides “to move quickly and get these additional agreements in place”.

That looks less likely in the short term with UK regulators refusing to outline how its regulations will change in the future and Brussels insisting that is a prerequisite for granting equivalence status in many areas of financial services.

Amid the impasse, Bailey, with the support of the Treasury, is now seeking to shift regulations in a direction that benefits the City and London’s future — even if that requires divergence from Brussels.

In areas such as its refusal to follow new EU regulations which will include counting software banks’ capital, the UK insists it can demonstrate it is not seeking to create a light touch financial regulation regime, but is in fact aiming to make London the best place to operate financial services efficiently and safely.

The Treasury said it had already set out plans to reinforce the City’s success, “making it more open, technologically advanced and a global leader in green finance”.

It still hopes for a better deal with the EU, but that is no longer its top priority. “We still believe a full set of mutual equivalence decisions is in everyone’s interest, and remain open to discussions with the EU, but we are clear that we have global ambitions for the sector,” the Treasury added.



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Analysis

Pharma groups spend billions to tap into booming China healthcare

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Pharmaceutical groups signed partnerships with Chinese biotechnology start-ups at a record rate last year despite geopolitical tensions and concerns over intellectual property rights and data security in the country.

China has opened up its healthcare industry over the past five years, prompting US and European companies to seal deals with local companies to access the world’s second-biggest drug market.

A record 271 cross-border licensing partnerships were agreed in 2020 between multinational groups including Roche, Bayer, AbbVie and Pfizer and Chinese pharma companies, according to data from consultancy ChinaBio. The collaborations involve clinical trials, development and commercialisation and sharing data and are up nearly 50 per cent from 2019 and more than 300 per cent since 2015.

Deals are being signed despite concerns over intellectual property protection and the safety of US healthcare data in China, with analysts saying the market is too big and fast-growing to ignore.

China’s healthcare industry overtook Japan in 2016 to become the world’s second-biggest and is expected to surpass the US within three years. Pharmaceutical spending in China totalled $137bn in 2018 and will reach $140bn-$170bn by 2023, according to data provider IQVIA.

“There has been an increase in both deals where Chinese companies will develop and commercialise innovative drug candidates discovered by western companies and where multinational companies will do the same with cutting-edge Chinese-invented pharmaceuticals outside China,” said Sam Thong, chairman of Goldman Sachs’ healthcare group in the Asian investment banking division.


$170bn


Potential size of pharma spending in China by 2023

Under the Made in China 2025 strategy, a scheme designed to advance the country’s technology and manufacturing goals, Beijing has set targets for domestic drug companies to make progress on innovation and has streamlined the drug approval process.

China’s state medical insurance scheme has also added more branded, non-generic drugs to a list of those that qualify for patient reimbursement, including products by foreign companies such as Novartis, in a move that could boost demand.

Western groups have already reported the financial benefits of their China strategies.

Eli Lilly, the US pharma company, agreed a $255m deal with Shanghai-listed biotechnology business Junshi Biosciences last May to collaborate on a Covid-19 antibody treatment and reported a 41 per cent jump in quarterly profit in January. Eli Lilly’s chief scientist lauded the “exciting” phase 3 trial results for the treatment with Junshi that showed the antibodies reduced risk of hospitalisation and death by 70 per cent.

Junshi said the record string of partnerships proved China’s drugs were of “international quality”.

US was the most desirable region for cross border partnering

Pfizer agreed a $480m deal in September with CStone Pharmaceuticals that gave the US group a 9.9 per cent stake in the Hong Kong-listed company, which focuses on immuno-oncology medicines, as well as an exclusive licence to commercialise CStone’s cancer drug in China.

For Chinese start-ups, the partnerships can be used as a launch pad for their global ambitions, enabling companies to carry out trials and win commercial approval for their products in the west.

Eli Lilly signed a licensing deal worth more than $1bn with Suzhou-based oncology group Innovent in August for the exclusive rights to its lung cancer therapy outside China.

AbbVie, another US pharma group, agreed to pay mainland biotech I-Mab up to $2bn for access to its experimental cancer drug in September.

“This is an important step for Chinese companies because it validates their capabilities — their R&D is reaching a global standard,” said Cathy Zhang, Morgan Stanley’s head of healthcare for global capital markets in Asia.

Column chart of Number of deals showing China pharma partnering hit a record in 2020

But China remains under pressure to better protect intellectual property, a longstanding grievance for overseas companies.

Patent law changes in 2020 gave foreign groups more confidence they would be protected, but “enforcement is still a big issue in practice”, said Rocky Wu, a Shanghai-based partner for KPMG, the professional services firm. “The detailed guidelines on implementation of patent linkage has not officially been published.”

US national security experts are also worried about Beijing gaining access to American healthcare data, particularly genomic information, for both privacy reasons and concerns about the ability to use such data to help develop biological weapons.

The US-China Economic and Security Review Commission, which evaluates the national security risks attached to doing business with China, last year said Beijing had made the collection of foreign healthcare data a priority and tried to gain access to US information through “licit and illicit means”.

Chinese entities have done this through investments, partnerships and sales of equipment and services, the commission said in its 2020 report to the US Congress.

The commission added that “Beijing has placed increasingly tight restrictions on foreign firms’ ability to access and share healthcare-related data collected in China”, despite officially encouraging foreign participation.

Additional reporting by Wang Xueqiao in Shanghai, Thomas Hale in Hong Kong and Hannah Kuchler in New York



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Teachers grapple with how to help students scarred by pandemic

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As staff at Strive Collegiate Academy in Nashville prepare for the school’s reopening this month, principal LaKendra Butler is grappling with the best way to support pupils after a traumatic year in which their education was thrown into chaos by the pandemic.

“Our students are performing 10-15 per cent below the level a year ago,” Butler said. “Right now I’m prioritising their time during the school day and making sure we’re focused on bringing them back . . . [but] longer-term we need to look at how to do school differently. We can’t go back to the status quo.”

Strive is one of tens of thousands of schools around the world, from the US to the UK and the Netherlands, that will reopen their doors in the coming weeks, as students return to the classroom after months of often solitary online study.

A first priority will be regular Covid-19 tests and measures to cut the risk of the virus spreading in schools. The longer-term challenge will be assessing how far behind pupils have fallen in their academic and emotional development and finding ways to rectify the problem with often limited resources.

Getting students back into the classroom is just the start. Many educators believe schools will need to adopt radical new approaches to learning and spend eye-watering sums of money to close the “learning gap” and prevent a generation being scarred, their prospects set back permanently.

LaKendra Butler, left, says students at Strive Collegiate Academy in Nashville are performing 10-15% below the level of a year ago
LaKendra Butler, left, says students at Strive Collegiate Academy in Nashville are performing 10-15% below the level of a year ago © STRIVE Collegiate Academy

“Covid has been the largest disruption to education in history,” said Per Engzell, a researcher at the Oxford Leverhulme Centre for Demographic Science in the UK. “Ninety-five per cent of children were affected and in many countries schools have remained closed since [last] March. It’s totally unprecedented.”

Using detailed testing in the Netherlands, his team has identified an “alarming” average loss of learning equivalent in that country to one-fifth of the academic year — the entire period students were out of school in 2020. The finding “seems to bear out some of the worst misgivings on the magnitude of learning loss and social disparities”, he said.

The pattern is similar elsewhere. Jonathon Guy, research officer at the Australian Education Union, said the learning loss was even more marked for children from marginalised communities and disadvantaged groups. “Demographic factors, low levels of prior achievement and a lack of access to technology are the main concerns,” he said.

Surveys in Australia and other countries suggest widespread disparities in access to computers, affordable internet, safe places to learn and supportive home environments.

Home-schooling in remote Tarpoly Creek, New South Wales. Surveys suggest learning loss has been more marked for children from marginalised communities
Home-schooling in remote Tarpoly Creek, New South Wales. Surveys suggest learning loss has been more marked for children from marginalised communities © Lisa Maree Williams/Getty Images

Luke Sibieta, a researcher at the UK’s Institute for Fiscal Studies, has estimated that British pupils could lose a combined £350bn over their lives as a result of missed education during lockdown. According to a forecast by the World Bank, globally the loss could be as much as $10tn if effective policy responses were not introduced.

Those responses will not come cheap. In the UK, Sibieta suggested £30bn — equal to six months of spending on schools — as a useful benchmark for what the government should consider spending on “radical and properly resourced ways to help pupils catch up”.

Some teachers have sought to learn from approaches adopted after previous disruptions, such as when Hurricane Katrina overwhelmed New Orleans in 2005. Then, a so-called spiralling technique was used to reteach essential missing skills before proceeding with scheduled lessons.

David Steiner, head of the Johns Hopkins Institute for Education Policy in the US, who led a review of “catch up” techniques for Unesco, said the evidence was against strategies that promoted students automatically to the next grade regardless of the gaps in their learning or got them to retake the entire year with a younger class.

Instead, he called for “acceleration” programmes to test students and focus on missing skills essential to the next stage of study. “You need to narrow the list of topics to those that really matter and do ‘just-in-time’ instruction so they’re ready to take regular classes with grade-level peers,” he said.

Children sanitise their hands at a school near Bordeaux, France. Researchers say the pandemic has been the biggest disruption to education in history
Children sanitise their hands at a school near Bordeaux, France. Researchers say the pandemic has been the biggest disruption to education in history © Philippe Lopez/AFP via Getty Images

Butler has carved out two hours during her school’s daily schedule away from normal lessons, to focus on teaching in one-on-one and small group sessions, guided by periodic assessments of students’ progress and surveys of their parents.

She is also exploring more use of tutoring, an approach that has garnered attention around the world, including in a £1.7bn package in Britain. The UK has also appointed an “education recovery tsar” who has made clear that the catch-up would take years of work and “radical” curriculum changes.

James Turner, head of the Sutton Trust, a charity participating in the UK tutoring programme, said this was an essential response. “It’s not the complete solution but the evidence is very strong,” he said, estimating that the country would need 20,000 additional tutors to meet its objective of supporting 250,000 pupils in the current school year.

Matthew Kraft, associate professor of education and economics at Brown University in the US, cautioned that while there was strong evidence for the value of tutoring in small groups, “we know much less about scaling and maintaining its effectiveness”.

He proposed a “peer-to-peer” volunteer system where older students helped younger ones, to reinforce their own learning and give something back.

Jelmer Evers, a teacher in the Dutch city of Utrecht and vice-president of the country’s General Education Union, said the task was best tackled by qualified teachers, despite a backdrop of falling numbers entering the profession. They had greater knowledge of their students’ needs and of the curriculum than external tutors, he said.

For Amy Wood, principal at Mossbourne Riverside Academy in London, student wellbeing and social activities would be as important as academic work when her pupils return on Monday.

She remained optimistic. “Children are more resilient,” she said. “They’ll bounce back.”



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Analysis

Pandemic shift to premium brands leaves drinks makers in high spirits

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Drinks industry chiefs may be hoping for a new “roaring 20s” when coronavirus restrictions ease, but millions of households have already embarked on an era of upmarket stiff drinks in their living rooms as Covid-19 reshaped global drinking culture.

Global sales of tequila, vodka and liqueurs outperformed the broader alcohol market in 2020 as housebound consumers took to sipping high-end spirits and mixing their own cocktails.

While parts of the population faced acute financial hardship because of coronavirus, wealthier consumers who kept their jobs have been left with extra disposable income as holidays and going out became all but impossible.

That has resulted in “huge trading up” when it comes to alcohol, said Ed Mundy, analyst at Jefferies, as these cash-rich drinkers also took advantage of lower retail prices compared with those for the same drinks served in bars and restaurants.

“If you’re stuck at home and you don’t want to go out to the shops, it’s easier to buy a big bottle of spirits than 24 beers. There’s more cocktail making at home going on . . . people are trading up from brandy to cognac, from cheap drinks to expensive drinks,” said Mr Mundy.

Sales of prestige spirits, which cost more than $100 a bottle, are forecast to grow by more than two-fifths to 2024, about four times faster than standard brands and almost twice the growth of premium bottles, according to drinks analytics group IWSR.

Chart showing that prestige and premium brands forecast to outperform standard spirits

The world’s largest distiller Diageo said its tequila sales shot up 80 per cent last year, driven by the high-end brands Don Julio and Casamigos, which was co-founded by the actor George Clooney. The boom, centred in the US, has followed a resurgence of upmarket “pure agave” tequila as a sipping drink.

“The trend of moving to spirits away from beer and wine has accelerated in the pandemic,” said Ivan Menezes, chief executive of Diageo. The group’s North American chief said late last year that household penetration for spirits had increased in 2020 at three times the rate of beer, and double that of wine.

Pernod Ricard said its whisky brands Jameson and The Glenlivet had shown “solid growth” despite the closure of stores in airports and train stations, which have traditionally been a major sales outlet for spirits.

Globally, overall alcoholic drinks consumption fell just 8 per cent in 2020 by volume from the year before despite many pubs, bars and restaurants being closed, according to IWSR figures. But there were substantial differences between countries.

Chart showing drinks sales fell modestly in 2020 as people switchedto cocktails and upmarket spirits

Shifts in drinking patterns, at first glance, appear similar in the UK and US: sales through the “on-trade”, which includes pubs, bars, restaurants and clubs, dropped by half in 2020 in both countries, while retail sales rose 12 per cent.

Yet overall drinking was far higher in the US last year, since retail sales of drinks to consume at home account for much more of the market. Before Covid-19, a fifth of alcohol sales by volume took place in bars and restaurants in the US, while it was twice the level in the UK, Jefferies said.

In South Africa, where periodic alcohol bans have been imposed, and Turkey, where drinks sales are closely linked to tourism, consumption dropped by about a third. Many countries still turned to a spirit of choice: Brazilians favoured gin, Colombians liqueurs and vodka, said Diageo.

While all drinks makers suffered to some extent from pub closures, brewers were especially hit: the world’s second-largest brewer Heineken announced 8,000 job cuts this year as it struggles to deal with the drop in beer drinking.

In China, where the pandemic originated but where the virus was brought relatively quickly under control, drinking declined by 9 per cent but retail sales of drinks by volume were up 23 per cent, the highest among major markets. Kweichow Moutai, which makes a luxury version of the national white spirit baijiu, reported a 10 per cent sales rise for the year.

Chart showing that drinking dropped in countries with strong barand restaurant cultures

For those with a thirst for less fiery drinks — Kweichow Moutai comes in at 35 to 60 per cent alcohol — another trend has taken hold: the cocktail in a can. 

Ready-to-drink cocktails, a broad group that also includes the flavoured alcoholic sparkling water known as hard seltzer, were the only category to record growth last year. Sales increased by more than 40 per cent, a surge that began in the US but is also evident in other markets such as the UK and China.

As vaccinations are rolled out, analysts at Bernstein expect a return to “near normal” in terms of socialising by the middle of 2021. “As the vaccines are rolled out and lockdowns ease, there will be enormous pent-up demand to socialise, glass in hand,” said Trevor Stirling, analyst at Bernstein. 

And entrepreneurs are making a similar bet; in the UK, despite the pain of coronavirus, the Wine & Spirits Trade Association said a record number of new distillers were registered in 2020.



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