Voting Against Directors at Greggs and MAV4

Greggs (GRG) held their Annual General Meeting today. This was a “closed” meeting but with no electronic access provided. Bearing in mind the size of the company, it seems unreasonable that they could not have provided shareholder access.

But I note that the votes reported show that several directors received substantial votes against. For example Ian Durant at 4.8% and Sandra Turner at 7.7%. I wonder why? There were also substantial numbers of votes withheld but no explanation has been given.

One advantage of a physical meeting is that if you see a lot of proxy votes being cast against resolutions you can ask why before the directors close the meeting and depart. Even electronic meetings do not give you that opportunity.

Another company where the directors received substantial votes against recently was Maven Income and Growth VCT 4 (MAV4). But I think I know why in this case. I complained in a previous blog post about the length of service of the directors and suggested shareholders vote against their re-election. At their AGM there were a large number of votes “withheld” on the reappointment of the directors – over 800,000 for all 4 which is usually a sign of disapproval. Perhaps my comments had some impact on shareholders’ votes. They also recorded over 1 million votes against reappointment of the auditors, against disapplication of pre-emption rights and against share purchases, even though voting against share buybacks is usually not a good idea in VCTs. That’s because if the company does not buy-back shares then nobody else may do, with the result there is no share trading in the company’s shares and the discount to NAV widens to a very high figure.

Clearly some shareholders in MAV4 are unhappy. Again there has been no published explanation by the company or commitment to do anything about it.

However you look at it, this is not good corporate governance and the Chairmen of these companies should comment I suggest.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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A Correction or the Start of a Bear Market?

This week saw sharp declines in stock markets. My portfolios headed downhill consistently this week. It’s not just technology stocks that have declined but big miners also despite the fact that there have been several press articles suggesting that commodities are in a “super-cycle” and that the price of products such as copper will rise due to the inadequate supply to meet the needs of electrification required for a low carbon world. At the same time there are concerns about inflation rising with April’s consumer prices index in the USA surging by 0.8pc equivalent to an annual rate of over 4%. That may be a short-term blip but with Governments pumping cash into their economies to offset pandemic impacts, there are certainly worries that sooner or later interest rates will have to rise. If they do then the stock market may become less attractive than bonds despite an otherwise booming economy.

Is this a market “correction”, i.e. a short-term response to excessive exuberance, or the start of a bear market? Or perhaps it’s the normal “sell in May” syndrome as markets enter a quieter period during the summer as has historically been the case?

I doubt we are entering a bear market. Bear markets arise from a combination of economic circumstances and where stock market investors suffer from a deep depression about the future and head for safer havens. But there are certainly sectors of the stock market that appear to be in bubble territory and need calming down.

How this will play out is ultimately unknowable though. Predicting overall stock market trends is rather like predicting overall economic trends. Something that only fools will try to do. One can only follow the trends to see if there is a bear market developing or not. Reacting to short-term trends by selling stocks because the major indices have fallen is not likely to be a wise policy in my experience. But selling individual stocks, or a proportion of your holding, when they appear to be overpriced or in bubble territory is something worth considering.

However, moving in or out of stocks based on the vagaries of the stock market is surely the wrong approach. The prices of individual stocks are driven as much by emotion as fundamentals. Hot stocks and hot sectors can rise disproportionately because sometimes there are only buyers and no sellers as enthusiasm for their future prospects overcomes any doubts about the future risks.

The answer is surely to invest in stocks that are fundamentally sound and show all the qualities of good long-term investments, i.e. forget the short-term and look at the long-term prospects. So I won’t be selling in May because that does not match my investing style. And I will need convincing to sell at all unless I am clear that overall sentiment to a company or to the economy has changed.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Restoring Trust in Audit and Corporate Governance

As it’s Friday afternoon with not much happening, and I have completed my latest complaint about the time it’s taking to complete a SIPP platform transfer, I decided to have a look at the public consultation on “Restoring Trust in Audit and Corporate Governance” from the BEIS Department.

This is a quite horrendous consultation on the Government’s proposals to improve audit standards and director behaviour as foretold in the Kingman and Brydon reviews, with proposals for a new regulatory body (ARGA). That’s after a growing lack of confidence in the accounts of companies by investors after numerous failures of companies, and not just smaller ones. I call the consultation horrendous because it consists of over 100 questions, many of them technical in nature, which is why BEIS have given us until the 8th of July to respond presumably.

I won’t even attempt to cover all the questions and my views on them in this brief note. But I would encourage all those who invest in the stock market, or have an interest in improving standards in corporate reporting, to wade through the questions and respond to the on-line consultation (see link below). Otherwise I fear that only those with a professional interest as accountants or as directors of public companies will be responding. The result might be a biased view of what is needed to improve the quality of financial information provided to investors.

The general thrust of the proposals do make sense and it would be unfortunate if the proposals were watered down due to opposition from professional accounting bodies and company directors.

But there is one aspect worth commenting upon. Some parts of the proposals appear to believe that standards can be improved by imposing more bureaucracy on auditors and company directors. This might add substantial costs for companies in terms of higher audit fees and more management time consumed, with probably little practical benefit.

We need simple rules, but tougher enforcement.

The audit profession appears to be already seeking to water down some of the proposals according to a recent article in the FT which reported that accountants were seeking leniency on “high risk audits”. That’s where they take on auditing a company for the first time which may prove difficult, particularly where corporate governance is poor. This looks like yet another attempt by auditors to duck liability for not spotting problems which has been one of the key problems for many years.

BEIS Consultation: https://www.gov.uk/government/publications/restoring-trust-in-audit-and-corporate-governance

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Rampant Speculation, Cryptocurrencies, Buffett Meeting and Ridley Blog

With a long weekend for the May bank holiday, I took the opportunity to prepare the information required by my accountants to submit my and my wife’s tax returns (it’s many years since I completed my own Self Assessment tax returns – my financial affairs got too complicated).

After reading a good article in this weeks Investors Chronicle on Inheritance Tax (IHT), entitled “Eight things executors need to know”, I think I should have simplified my financial affairs long ago! My executors are going to have quite a job on their hands. But IHT is just ridiculously complicated. It looks like a “make work” scheme for accountants.

I have of course tried to simplify matters recently by consolidating two SIPPs on different platforms into one. The process was started on the12th January and is still not complete although most of the assets have now been transferred. As I have said before, the time and effort required to move platforms is disgraceful so I will be preparing a complaint to go to the Financial Ombudsman this week.

Having reviewed my income and expenditure figures for last year, it’s also a good time to review the state of the market. Should I “Sell in May and Go Away” as the old adage goes? Not that one can go far these days without a lot of inconvenience and expense.  

My portfolios contain a mix of individual shares and investment trusts, with a strong focus on technology stocks and small cap stocks. I certainly have some concerns about small cap technology stocks which seem to be fully priced at present, even if their futures look rosy. There are a large number of new IPOs of late where the valuations seem very optimistic. Meanwhile there is rampant speculation being pursued by inexperienced investors, particularly in cryptocurrencies and NFTs.

This is what Warren Buffett’s partner Charlie Munger said at the recent Berkshire Hathaway Meeting: “Of course, I hate the Bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists, and so forth…Nor do I like just shuffling out billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. So, I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization. And I’ll leave the criticism to others”. That’s very much my opinion also.

Government debt has been ramped up to meet the Covid epidemic and interest rates are at historic lows. The concern of many is that inflation will increase as a result requiring Governments to clamp down on the economy to stop it overheating. This was a useful comment recently from the editor of Small Company Sharewatch: “The solution to the problem of lower interest rates is self-evidently higher interest rates. But the US Federal Reserve is having none of it. In the 1970s. inflation of around 15% was the problem. This was cured by higher interest rates, which got inflation down, and allowed interest rates to fall – for the next 40 years! The problem has now flipped. Low interest rates are the problem. Debt is encouraged: complacency grows; savers take on more risk; and investor mania grows. These are all likely to persist until the Fed acts”.

The economy is certainly buoyant. I learned today from attending a webinar of Up Global Sourcing (UPGS) that even pallets are in short supply. Commodities are also increasing in price as a result. I have not lost faith in technology stocks but perhaps it is best to look for new investments in other sectors of the economy – and certainly UPGS is a very different business which I now hold.

For another topical quote, here’s one from Matt Ridley in an article in the Telegraph (he always has something intelligent to say):

“The whole aim of practical politics, said HL Mencken, ‘is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.’

It is hard to avoid the impression that officials are alarmed rather than pleased by the fading of the pandemic in Britain. They had a real hobgoblin to hand, and boy did they make the most of it, but it’s now turning into a pussy cat. So they are back to casting around for imaginary ones to justify their draconian – and deliciously popular – command and control over every detail of our lives. Look, variants!

And yes, the pandemic is fading fast. The vaccine is working ‘better than we could possibly have imagined’, according to Calum Semple, of the University of Liverpool, based on a study which found that it reduced hospitalisation by 98 per cent……”.

If the pandemic and the associated fear of the population is over, no doubt the Government will ramp up the concern about global warming despite the fact that we had the coldest April for almost 100 years. Government actions in this area are already having a significant effect on some sections of the economy and I have been putting a toe into that pool. No I am not buying electric car stocks but the power generation area is certainly of interest. How to avoid the speculations and just buy good businesses that are not totally reliant on Government funding is surely the key.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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New Pre-Pack Rules

Pre-pack administrations, where a company is sold within hours with no publicity, and often to “connected” persons (e.g. existing management) has been widely criticised. It’s often a simple way for companies to dump their liabilities and yet continue in business. This is what I said in the case of the pre-pack at House of Fraser: “There can be a number of reasons for doing so but in essence it’s very typical of what happens with pre-packs where the rush to complete the deal prejudices obtaining the best outcome other than for the secured creditors. So stuff the pensioners, stuff the trade creditors who have supplied goods they won’t now be paid for, stuff the property owners and stuff everyone else so long as the banks get paid”. See https://roliscon.blog/2018/08/14/house-of-fraser-pre-pack-more-details-disclosed/ for details of that case, or search that blog for other similar cases such as Conviviality, Debenhams and SCS.

There have been a number of cases where pre-packs were exploited in public companies, often by dominant shareholders, but they are even more widespread, and abused, among small businesses. They enable companies in difficulties to arise phoenix like from the ashes with the trading assets intact. One advantage is that jobs are retained, but there are many abuses such as assets being sold below fair value to secured lenders or to management, and often overnight.

A good article on the subject covering how it affects retailers with some pointed quotes is here:  https://www.drapersonline.com/insight/analysis/new-pre-pack-law-a-game-changer-for-industry?

But from this month there are new rules in place that might prevent the worse abuses. They include:

  • Stricter independent scrutiny on pre-pack sales where connected parties – such as the insolvent company’s existing directors or shareholders – are involved. The regulations will introduce mandatory independent scrutiny by an “Evaluator” and a responsibility on an Administrator to obtain creditor approval before proceeding to conclude a pre-pack sale to a connected party.
  • Improved transparency during pre-pack sales, ensuring the general public and creditors’ interests are protected.

These new rules might involve delays of some weeks though before the administration can be concluded when time may be of the essence, but it will give those who object to the pre-pack time to mount a legal challenge when at present they are often presented with a fait-accompli which a court would be very reluctant to unwind.

Comment: These changes are welcomed and may prevent the worse abuses but I still feel a more substantial reform of the UK insolvency regime is required along the lines of the US Chapter 11 process. A process of reorganisation and restructuring to enable the business to continue while providing some protection to creditors would be preferable. At present the UK regime favours preferred creditors such as bank lenders as against all the other stakeholders.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Soporific Webinars, Property Market, Portfolio Performance, and It Helps to be Older.

I attended three on-line company meetings yesterday – AGMs and results presentations. I have to admit that I fell asleep watching one of them which shows how soporific many of these events are. It does not help when the presenters read from a script that they have rehearsed beforehand which causes them to drone on. There is much less spontaneity than in a physical meeting.

The other common failure is that they show presentation slides at the same time that are not easily readable. That would be OK if the slides just contained bullet points in large type or graphics that reinforced the points the speaker was making but they frequently contain masses of small font text that are barely readable on a small laptop screen.  If hybrid meetings are going to be the norm in future, then more attention needs to be paid to how to do them well.

One of the presentations was by Equals CEO Ian Strafford-Taylor who had gone to his office in the City on the day. Surprisingly he said he had not managed to get a seat on the tube and there were queues at sandwich shops. So it seems life might actually be returning to City offices.

Perhaps it was coincidence but the share price of Schroder REIT (SREI) rose by 2.6% on the day and has been rising steadily since it bottomed out last July. The trust holds a mixed portfolio of commercial property. This morning the trust gave an update on rent collection which said “The Company has collected 88% of rents due on the 25 March 2021 for the quarter ending June 2021, after allowing for agreed rent deferrals.  This is ahead of the equivalent date in the previous quarter.  The breakdown of collection rates between sectors is 98% for industrial, 96% for office, 83% relating to ancillary uses and 51% relating for retail and leisure.  The Company remains in active dialogue with tenants for all rents due to be paid and expects to recover a significant portion of the outstanding amount”.

Clearly the retail sector is still one in difficulties, but the discount to NAV of SREI shares as reported by the AIC is 26% so I think there is value there if one has the patience to wait some time.

I don’t know how readers portfolios are faring of late but mine seems to be zooming up in valuation – up over 60% since the low point of the start of the pandemic in March 2020 (that’s ignoring dividends received and cash movements). There is clearly a lot of enthusiasm among retail investors for stock market investment. Is the market becoming irrational and over-valued? I would not like to say. But as a dedicated trend follower I have had some difficulty in keeping up (I tend to buy more when share prices are rising and vice versa).

It was interesting to see a report from Interactive Investor (II) who published the chart below of the performance of their clients in the first quarter of the year. Clearly there is a benefit in being old when it comes to stock market investing!

They report “all age categories trailed the FTSE World Index, which was up 4.09%, while the FTSE All Share did even better after a poor 2020, up 5.19%”. They also say though that “the average interactive investor customer portfolio – in median terms – is up 32.09% over the year to end March 2021, ahead of the FTSE All Share”.

They explain these results by saying “The outperformance of the 65 plus age group could be in part due to lower cash weightings in a rising market, and their low exposure (in median average terms) to tech stocks like Apple, Tesla or Amazon, which had a shaky Q1. No tech stocks appeared in the top 10 holdings by value (in median average terms), amongst the over 65s”.

In a quarter in which the FCA warned that some younger investors are taking on board too much risk this does not seem to be an overall trend amongst Interactive Investor customers. They have a high weighting in investment trusts but less in individual technology stocks.

But as Alliance Trust (ATST) reported at their AGM yesterday, I have underperformed global stock market indices because I don’t have big holdings in the mega technology stocks such as Tesla or Apple. They are held by some investment trusts I hold but they tend to be under-weight in them like ATST. I am not unhappy to be under-weight in very large tech stocks which certainly look to be in bubble territory to me.

I hold the stocks mentioned above.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Long Serving Directors and Maven VCT

I have long complained about directors serving on boards for longer than 9 years. The UK Corporate Governance Code (which you can easily find on the web) says any director who serves for more than 9 years cannot be considered “independent” and there should be a majority of independent directors.

When the UK Corporate Governance Code was drafted this principle of avoiding long-serving directors was introduced and I consider it a very sound principle. But investment trusts (including Venture Capital Trust) continue to ignore this rule. An extreme example of this is that of Maven Income & Growth VCT 4 (MAV4).

In the latest Annual Report (the AGM is on the 12th May), it appears that two of the five directors (Malcolm Graham-Wood and Steven Scott) were first appointed to the board in 2004 and another director (Bill Nixon) is a managing partner of the fund manager. Clearly a breach of the Code therefore and the explanation given to excuse this is feeble (see page 57 of the Annual Report).

I did raise this issue before the last AGM and got a response that the FRC considers compliance with the AIC Code as sufficient, but I have never seen any official pronouncement on this. As the AIC represents the fund managers effectively and certainly not the shareholders in trusts, it is hardly an unbiased body either.

No action was taken to refresh the board since the last AGM so we have the same cosy arrangement continuing. I have therefore voted against the aforementioned directors and also against the Chairman, Peter Linthwaite, for allowing this situation to persist. I recommend other shareholders do the same.

The company’s AGM is being held in Glasgow but no shareholders are permitted to attend and no alternative on-line or hybrid meeting is being provided. All you can do is submit written questions so here again the board is avoiding accountability to shareholders in a proper manner.

This is clearly a good example of how investment trusts (particularly VCTs) can become poodles of the fund manager and ignore good corporate governance principles.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Madoff Dies, Parsley Box, Active Trading, Babcock and Covid Vaccinations

Bernie Madoff, arch fraudster, has died in prison. He ran the largest ponzi scheme in history which defrauded investors of over $60 billion. His funds showed unbelievable good performance because he invented share trades to support his fund valuations. This attracted new investors whose cash he used to pay out departing investors and to support dividends. It is unbelievable that such outrageous frauds can still take place in the modern world despite all the onerous regulations.

I mentioned a recently listed company called Parsley Box (MEAL) in a prior blog post. I have now sampled their products – prepacked dinners and have come to the conclusion that I question whether this is likely to become a great company. The meals are rather bland and you can buy cheaper equivalents from supermarkets. They do have the advantage of a long shelf life and do not require refrigeration, but so do other products such as canned goods so I am not convinced there is a big market for them. The company is spending money on national TV advertising, on channels focused on the elderly like me. You can always generate sales if you spend enough on marketing, but that does not necessarily mean that you have a profitable business.  

How actively should one trade? This is a matter of personal preference I have come to believe. Some people can hold stocks for ever in the belief that they will come good in the end whereas others panic at the first sign of trouble. It does of course depend to some extent on the type of stocks in which you invest. Dumping small cap stocks that are on wide spreads can be a very bad idea. The volatility of small cap stocks can bounce you out of a holding quite easily if you have a tight stop-loss.

But there was an amusing story in the latest edition of the Techinvest newsletter. To quote: “In that respect, we are often reminded of a well-publicised study by a large American brokerage a few years ago that aimed to identify which retail accounts generated the highest investment returns. Top of the list were: the accounts of customers who it turned out had been deceased for some time; next best was those accounts that customers had forgotten about and had not traded on for many years; the poorest of investment returns belonged to accounts that had clocked up the highest transaction costs through frequent stock rotation”. Techinvest runs a portfolio and certainly its returns have been very good over the years as they rarely sell stocks. They appear to just wait until some idiot comes along willing to pay a premium price for their holdings.

Personally I often hold stocks for years but I am also impatient when investments seem to be going wrong. I cannot sit there doing nothing. As a man of action, I pander to my impatience by selling a proportion of my holding but not all, i.e. I sell on the way down in stages. That cuts my possible losses. The only exception to this rule I make is if the news is catastrophic or I have lost all trust in the management when I dump the lot.

Babcock (BAB) is a good example of the danger of holding on regardless. It has looked fundamentally cheap for some time but the shares have actually lost 75% of their value in the last 5 years in a steady downward trend. There was more bad news on the 13th April. An announcement from the company said “The contract profitability and balance sheet review (“CPBS”) has identified impairments and charges totaling approximately £1.7 billion”. They now plan some disposals which they suggest may enable them to avoid an equity issue.

On a personal note, I had my second Covid-19 vaccination yesterday (the Pfizer version) so I am feeling slightly tired this morning, as I did after the first. The organisation was chaotic though this time. Originally planned to be done at Guys Hospital but then redirected to St. Thomas hospital and they lost my wife’s record altogether. My tiredness may partly relate to the miles I walked yesterday around and between hospitals. The person who administered the injection worked for British Airways as cabin staff. He was redeployed as there are few flights to service at present. He said a lot of people are extremely nervous about taking the vaccine. He had spent 45 minutes talking to one person before they eventually refused it.

Personally I have no qualms at all about any of the vaccines. They are much safer than the risk of catching the virus. But there are a lot of idiots in this world are there not! The latest bad news however is that the CEO of Pfizer has suggested that we may need a booster every 12 months in future. As I have been having annual flu vaccinations for 25 years that is of no great concern.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Platform Transfers – It’s Even Worse Than Thought

I commented last month on an article in Investors Chronicle by Mary McDougall on the subject of platform transfers, and how they are inordinately slow. Despite past efforts by the FCA, the situation does not seem to be getting any better. My latest transfer, which was commenced on the 12th of January, is still not complete. The shareholdings have recently been transferred to the selected new platform but not the substantial cash holding in the portfolio.

But according to the latest article (see link below) by Mary, other investors have even worse experiences. Six months is how long it took in two examples reported to her. Hargreaves Lansdown, who otherwise have a good reputation for service, seem to be no better in doing transfers than other brokers although none seem to be exactly fast. Of course it requires both sending and receiving brokers to act quickly to expedite a transfer so they tend to pass the buck if you complain. See her full article on the link below.

Mary would like folks to send her examples of their own experiences with broker/platform transfers so she can take up this problem with the regulators. Please send her an email to mary.mcdougall@ft.com . Please help her so we can get this problem fixed.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Latest Investors Chronicle Article: https://www.investorschronicle.co.uk/news/2021/04/12/time-for-the-fca-to-crack-down-on-platform-transfers/

My Previous Article: https://www.sharesoc.org/blog/brokers/platform-transfers-progress-has-been-pitiful/

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Woodford Legal Claims, But How Long to Settlement?

There is a good article in this week’s edition of the Investors Chronicle covering the various legal claims being pursued over the debacle of the Woodford Equity Income Fund. ShareSoc is backing a claim managed by solicitors Leigh Day but there are several other law firms competing to represent the 300,000 investors affected.

The article makes some good points and is certainly worth reading if you have suffered losses on any of the Woodford funds. But it suggests that the legal process could take as long as “two to three years” based on comments from the law firms. That’s presumably if the claim is successful.

In fact it might take a lot longer. For example, and coincidentally, my wife was a small claimant in the Royal Bank of Scotland Rights Issue case. That stems from 2008, and she has just received the second interim payment after the case was settled out of court. There may be more to come while the overall costs to be deducted are not yet clear but will obviously be substantial.

But twelve years to achieve a result is possibly a better estimate than two to three years. With many investors elderly, one wonders how many of them die before their claims in such actions are settled. It is a good example of the inability to obtain justice swiftly and at reasonable cost that is a major defect in the English legal system. Lawyers benefit greatly from the current system of course. In effect we have a Rolls-Royce legal system when we would be better served by a Ford version. Even the Rolls-Royce version does not necessarily provide justice as we have seen in other recent cases (e.g. the Lloyds/HBOS case).

Also coincidentally the Law Commission has just issued a call for ideas for the Law Commission’s 14th Programme of law reform” – see https://www.lawcom.gov.uk/14th-programme/ . Surely one idea worth suggesting is how to demolish the massively complex process of pursuing a commercial claim in the investment sphere.  We need much simpler law, simpler processes and quicker judgements.

Meanwhile although I have no interest in the Woodford claims as I was never invested in any of his funds, I would not wish to discourage any participation in legal claims so long as you study carefully any contract which may be proposed. The outcome may be uncertain and the process lengthy but success might discourage other similar cases and encourage the FCA to tighten up the rules for fund managers.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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