Gamma Communications AGM and FCA News

I have received the Annual Report and Notice of the Annual General Meeting for Gamma Communications (GAMA). Despite the fact that this company specialises in electronic communications and actually say in their Annual Report that “This year we have adopted a digital first approach reflecting how we operate as a business”, they expect me to physically attend the AGM in central London at 10.00 am on the 19th May. There is no electronic attendance via web cast or hybrid meeting supported. This is a waste of my time for what is likely to be a routine event. I have written to the Chairman to complain.

Their registrar Link Group also failed to include a proxy voting form with the AGM Notice so I had to use my own. This is a repeated failing recently by Link Group which undermines shareholder democracy. They seem to be trying to force everyone to register for their electronic voting system. I don’t mind voting electronically but that should be provided by a simpler system such as that used by Computershare.

The Financial Conduct Authority (FCA) have published a press release that says “The FCA has finalised rules requiring listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management, making it easier for investors to see the diversity of their senior leadership teams”. They have simply gone ahead and implemented new rules that were the focus of a public consultation which I severely criticised – see https://roliscon.blog/2021/08/06/diversity-but-at-what-cost/ . What feedback did they get to the public consultation? They have not said and no report has been published on it. I have asked for more information to see what support they got for these proposals which I consider to be political gestures which will have no benefit but add a lot of costs to listed companies.

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

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Reform of Defamation Act to Stop SLAPPS

Today the Government has announced that it intends to reform the Defamation Act and take other steps to stop abusive legal practices. In particular the use of expensive lawsuits to inhibit free speech – so-called Strategic Lawsuits Against Public Participation (SLAPPS).

This is particularly relevant at the moment as it is alleged wealthy Russian oligarchs have used the high cost of litigation to stifle public criticism of their actions and past careers. Just by commencing a legal action on claimed defamations they can force the defending party to run up costs of thousands of pounds and the threat of pursuing it through the courts at even higher costs effectively bullies the defendants to concede defeat and withdraw. The current English legal system effectively allows the wealthy to defeat justice.

It is suggested that the “public interest” defence could be strengthened and a need to prove “actual malice” be introduced, although to my mind that would not solve the problem as it would just lead to more lengthy debate by lawyers. This would not be a simplification in essence.  

SLAPPS are not new of course but may have become a growing industry for lawyers to feed on. For example, it was well known that fraudster Robert Maxwell used lawyers to intimidate reporters and suppress negative stories on his activities.

But the real problem is that such cases are always tried in the High Court. That means there is a complex pre-action protocol and discovery phase and when it gets into court, potentially several days of multiple QCs acting for both parties at enormous cost.

It not only makes defending against allegations of defamation exceedingly costly, particularly if the pursuing party uses delays, complications or repeated claims to increase the costs, but it also makes it prohibitive for someone to make a claim for defamation unless they are quite wealthy. The risk of losing a case when the other side have run up enormous legal costs puts off most people from pursuing such cases.

In summary libel cases are too expensive and can only be pursued or defended by the very wealthy even when the complaints might be quite trivial in nature. The whole system needs reform with minor cases being considered by more junior courts and a cap on costs being imposed early on.

Government announcement:  https://www.gov.uk/government/news/government-clampdown-on-the-abuse-of-british-courts-to-protect-free-speech

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

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Should Evraz Have Been Suspended?

The listing of shares in Evraz (EVR) have been suspended so all trading is barred. They were not suspended at the request of the company which is the more common circumstance but at the behest of the Financial Conduct Authority. The suggestion is that this was to protect investors pending clarification of the impact of the UK sanctions.

But the suspension of shares should in my view be an action of last resort. The suspension of shares is enormously damaging to investors because they are then locked in, and such suspensions can last a very long time. Investors may have borrowed cash to purchase the shares and then can’t get out.

Similar problems are affecting other Russia-linked firms such as Polymetal, Petropavlovsk and Raven Property as they are deleted from FTSE indexes and it is reported that brokers are refusing to trade their shares.

EVRAZ is a vertically integrated steel, mining and vanadium business with operations in Russia, the United States, Canada, the Czech Republic and Kazakhstan. EVRAZ is one of the top steel producers in the world based on crude steel production of 13.6 million tonnes in 2020. Picture above is of one of their steel mills from their annual report.

It is a UK registered company but Roman Abramovich owns 29% of the shares and allegedly has close links with Vladimir Putin, although he denies that. The BBC recently ran a programme which did a hatchet job on his reputation and alleged he acquired his wealth by fraud. Without going into the accuracy of those reports, it does seem to me that sanctions are being imposed on political grounds in an extra judicial process.

I think few people might question the imposition of sanctions on individuals who are linked to the Russian regime. But the problem is Evraz has a wide shareholder base. That includes many private shareholders. According to an Investors Chronicle article, they said AJ Bell had revealed that shares in Evraz and Polymetal were its two most bought shares over the past week. With both stocks plunging more than 80% year to date, this has led some to buy in as an opportunity to reap dividend payments potentially higher than the cost of the shares. However dividends have been suspended at Evraz.

The suspension of shares in Evraz might harm Abramovitch and his Russian friends but it will also damage the interests of other innocent people. This is not reasonable.

Evraz is clearly in a difficult financial position as the company will suffer from sanctions and all the non-executive directors have now resigned. Is that justification for halting trading in the shares? I am not convinced it is.

Companies can rightly, in my view, request suspension of their shares when past accounts are shown to be dubious – for example because of discovered frauds. This is to give time for the company to report what it knows and ensure all shareholders are aware of the issue before the listing is reinstated.

But simple doubts about the future prospects of the company should not be a sufficient justification for suspending a listing. I recall the example of Northern Rock where it got into financial difficulties and there was a run on the bank. It was running out of cash and there was a threat of nationalisation, but the shares were not suspended. It was only delisted when nationalisation took place.

It does seem to me that ShareSoc, which represents private shareholders, should take up this issue and request that the listing be reinstated as soon as possible. And the FCA should establish clear rules about when a listing should be suspended.

A suspended share listing can create enormous problems for investors. For example, if they have borrowed to buy the shares, or are trying to act as executor for an investor. Valuing the shares for probate is very difficult and there is no way to realise the value to pay IHT.

Mixing politics (the attack on all things Russian) with finance is a very bad idea.

For the avoidance of doubt, please note I have no interest in the shares of Evraz or any other Russian linked companies.

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

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Abrdn Vote Delayed by Paper Shortage

It has been reported by Sky News and the FT that the vote on the acquisition of Interactive Investor by Abrdn (ABDN) has had to be delayed. The reason is simply that there is a shortage of paper it is suggested. Abrdn have about 1.1 million shareholders and the offer document is 120 pages long. Company law requires the document to be sent to everyone on the share register, and quite rightly you may so for such an important transaction.

Does this not highlight the absurdity though that email addresses are not held on share registers, only postal addresses. Some shareholders may prefer a paper document but most might prefer an option to receive it electronically, particularly as they are unlikely to read the whole 120 pages.

It is surely time to update the Companies Act to ensure all shareholders (including beneficial owners currently in nominee accounts) are on the share register with an email address. This would save companies a large amount of money and improve communication between companies and their investors. The absence of an email address also thwarts the ability of shareholders to communicate with other shareholders at reasonable cost which was a basic principle of Company Law since Victorian times.

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

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A New Consumer Duty from the FCA

Just before Christmas I wrote a critical blog post on the proposals by the Financial Conduct Authority (FCA) to reform the Financial Services Compensation Scheme. It generated a lot of supportive comments. At the same time the FCA published a consultation paper (CP21/36) on a “New Consumer Duty”. This seems to have similar objectives in that it is an attempt to stop consumers from being provided with misleading information, being provided with unsatisfactory support or buying products that are inappropriate or harmful.

For “consumers” read “individual investors” in the investment sector.

The FCA therefore is proposing a whole new set of rules to enforce a new Consumer Duty and the consultation paper alone consists of 190 pages of convoluted text, even though it is supposed to be principle based. It is also clear that there was considerable opposition from the financial services industry particularly as they will incur substantial costs in adapting to the new rules and maintaining them. There is also doubt as to whether it will result in any benefit as there is already an obligation to treat customers fairly and a multiplicity of other rules are already in place.

It might even increase costs to consumers as firms pass on their additional costs, and increase the risk of litigation. One aspect of the proposal is however not to provide a Private Right of Action (PROA) for a breach of the new rules or principles so consumers would have to rely on the Financial Ombudsman for any redress. This is very unsatisfactory as that organisation is hardly very effective at present and takes way too long to deal with complaints.

An example of the sophistry in this consultation paper is the discussion of two possible Consumer Principles to underpin the conduct of firms: Option 1 – A firm must act to deliver good outcomes for retail clients; or 2 – A firm must act in the best interests of retail clients. Can you divine any difference?

What are the likely costs of the adoption of this new Consumer Duty and associated rules? The paper says total one-off direct costs to comply will be in the range of £688m to £2.4bn. Annual on-going costs will be in the range £74m to £176m. The paper is remarkably unclear on the likely cost benefits to consumers.

I don’t know how much labour was put into writing this paper but it must clearly have been very considerable. I consider it a waste of effort. I doubt that consumers will be much better protected by adoption of the new Consumer Duty. The problem with the FCA is not lack of adequate rules, but an inability to enforce them vigorously. Firms devise new products that are too complex, badly understood by consumers and yet the FCA does not stop them being sold. They also approve firms and their management who should not be and fail to step in when matters are clearly going wrong.

It’s a management problem in essence and inventing new rules will not help.

My detailed comments in response to the consultation are present here: https://www.roliscon.com/Consumer-Duty-Consultation-Response.pdf

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

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Discrimination Against High Net Worth Individuals?

The cost of the Financial Services Compensation Scheme has been increasing substantially in recent years, as more mis-selling scandals have proliferated and firms have gone bust. This has led to complaints from those firms who fund the scheme and has led the FCA to undertake a “Compensation Framework Review”.

This includes looking at possible changes to the scope of protection such as limiting it to “mainstream” products. But a more serious proposal is that High Net Worth or Sophisticated Investors be excluded from compensation. The FCA suggests such individuals might be expected to absorb losses, might be able to take their own private action against a failed firm, or would have a better understanding of the risks they were taking when dealing with authorised firms.

But this is a very dubious argument when High Net Worth persons only need to have liquid assets of £250,000 or more to qualify. Many moderately wealthy individuals would have more than that in direct shareholdings, ISAs and deposit accounts. But they would hardly be in a position to finance complex legal actions and FSCS compensation is limited to £85,000 already.

It is not clear what moral principle is being invoked here except that it would potentially save the FSCS scheme money.

I suggest that high net worth or sophisticated investors send in a response to the FCA’s review – go to this link for information  https://www.fca.org.uk/publications/discussion-papers/dp21-5-compensation-framework-review and an online response form.

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

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A Bumper Edition of Investors Chronicle

Over the Christmas period we were treated to a bumper edition of the Investors’ Chronicle. And I have to say that this magazine has improved of late under the editorship of Rosie Carr. Whether she has a bigger budget or is just picking better writers I do not know but she certainly deserved the job after working for the magazine for many years.

I’ll pick out a couple of interesting articles from the latest edition:

“What does it cost to be an effective private investor” by Stephen Clapham. He comments that “private investors are, in my experience, not nearly willing enough to invest in tools and education to improve the performance of their portfolios”. I would agree with that. They tend to rely on broker/platform recommendations, newspaper articles, or tips from bulletin boards instead of doing their own research using the tools that are available.

Stephen mentions services such as SharePad, Stockopedia, VectorVest and Sentieo. I am not familiar with the last two but I use both SharePad/Sharescope and Stockopedia as they provide slightly different functionality. Plus I use spreadsheets to record all transactions and dividends and to monitor cash. This enables me to manage several different portfolios held with multiple platforms/brokers comprising 80 different stock holdings with some ease. I have been doing this since my portfolios were much smaller and less complex so I would recommend such an approach even to those who are starting to invest in equities.

As the article mentions, half the members of ShareSoc have a portfolio of over £1m and may be representative of private investors so they may be making profits of well over £50,000 per year from their investments, particularly of late. A few hundred pounds per year to help them manage their portfolios and do research should not be rejected if it helps them to improve their portfolio returns by just a fraction of one percent, which it should surely do.

Altogether the article is a good summary of what a private investor should be using in terms of services to help them.

The other interesting article is entitled “The Generation Game” by Philip Ryland. It highlights the declining performance of UK stock markets since the 2008-09 financial crisis. He shows graphically how the FTSE-100 has fallen way behind the S&P 500 and the MSCI World Index. It makes for pretty depressing reading if you have been mainly investing in UK large cap stocks in the FTSE-100.

It reinforces the message that if you want a decent return from your equity investments you need to include overseas markets in your holdings and small and mid-cap companies in the UK. That is what has worked in the last few years and I expect it to continue to be the case.

Why? Because the growth is present in those companies while the FTSE-100 is dominated by dinosaurs with no growth. Technology stocks are where growth is now present when there are few in the FTSE-100. In fact the market cap of Apple now exceeds the whole of the FTSE-100.

The UK has become particularly unattractive for technology stock listings due to excessive regulation and over-arching corporate governance rules that divert management time. Meanwhile the UK economic environment still relies a great deal on cheap labour provided often by immigrants while our education system fails to encourage technical skills.

The Government has taken some steps to tackle these issues but not nearly enough while politicians have spent time on divisive arguments about how to deal with the Covid epidemic and about trivia such as Christmas parties and redecoration of the Prime Ministers apartment.

There are of course bright spots in this economic gloom and generalising about the state of the country is always going to lead to mistaken conclusions. We are probably no worse than most countries if you examine their politics and the UK economy does seem to be relatively healthy.

But the key message is that if you want to make real money investing in equities you need to be selective and not just follow the crowd, i.e. don’t just rely on index trackers.

Those are my thoughts for investment in the New Year.

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

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Bulb Collapse, Telecom Plus Results and FCA Globo Action

Yesterday energy supplier Bulb collapsed and was put into Special Administration. Bulb has 1.7 million customers and is the largest of 20 alternative energy suppliers to go bust recently. Most of their customers have been taken on by other suppliers but apparently nobody was willing to take on Bulb’s so effectively the company has been nationalised.

These companies have all been hit by the rapid rise in gas prices while the price cap imposed by Ofgem meant they could not raise their prices to their customers. Established suppliers such as Telecom Plus (TEP) consistently complained that the newer energy suppliers were building a customer base by selling at less than cost and the irrational price cap proved to be their undoing. Forcing businesses to fix their customer prices when input prices are based on market whims is a recipe for financial disaster in any market.

Coincidentally Telecom Plus, which I hold, published their half-year results this morning. They are a likely beneficiary from suppliers disappearing from the market. They reported “Net customer growth in October of over 15,000 and they are expecting around 10% growth in customer base during H2 with double-digit annual percentage growth thereafter”. There is always someone who benefits from financial disasters.

They also made these comments: “Over twenty energy companies have ceased trading since the summer, leaving over two million customers dependent on the safety net provided by the market regulator, Ofgem, to maintain their supplies and protect their credit balances through the Supplier of Last Resort (SOLR) mechanism.  These corporate failures take the total number of suppliers that have exited the market in the past five years to over 50, with further failures expected over the coming months.

Whilst primarily blamed on rising wholesale prices, this catalogue of failures, and the associated billions of pounds of costs that will ultimately be borne by consumers, reflect a regulatory regime that encouraged a clearly unsustainable ‘race-to-the-bottom’ approach to competition.  The resultant price war has eroded consumer trust and caused significant financial detriment, as the cost of these failures will need to be recouped through higher energy bills over the coming years.

Ofgem’s recent open letter to energy suppliers is therefore a welcome statement of intent to reform the regulatory framework towards one that genuinely fosters sustainability, investment, good service and fair competition amongst properly resourced and differentiated suppliers.

It is clear that the retail energy market has undergone a paradigm shift, bringing an end to the unsustainable practices which had become widespread over the last seven years of selling energy below cost to attract new customers, using customer credit balances as working capital, and failing to accrue for regulated renewable obligation payments.

In that environment, it stands to reason that an established, well-capitalised energy supplier benefiting from a sustainable cost advantage that is derived from bringing consumers a highly differentiated ‘all your home services in one’ proposition, should thrive.   As the dust settles on the prolonged energy market price war, we believe we are better positioned than ever to grow our market share significantly over the coming months and years”.

Other news today is a report in the Financial Times that the FCA have filed an action in the High Court against the former CEO and CFO of Globo (GBO). That company collapsed in 2015 after the accounts were shown to be a complete work of fiction with the claimed cash on the balance sheet non-existent and revenue also fictitious. It was a similar case to the more recent one of Patisserie Valerie also audited by Grant Thornton. The FRC declined to take action over the audit of Globo but it is good to hear that after so many years the FCA is finally taking some action.

As a former shareholder in Globo I have an interest in this matter and did provide some information to the FCA but there has been no contact from them since 2019. I am trying to find out more about the nature of the legal action now pursued (there is nothing on the FCA web site).  

Globo well demonstrates the weakness of UK audits, the poor enforcement by the FRC and FCA, the lack of transparency over what they are doing and the length of time it takes for those bodies to take action.

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

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COP26, Regulatory Arbitrage and Greenwashing

COP26 finished last week and many readers may have lost interest in the issues it discussed long before it closed. There is just so much one can take from the scaremongers of global warming when most of us have more immediate concerns about health and wealth. But there was one announcement by Chancellor Rishi Sunak that could be seriously damaging to your wealth in the next few years.

This was his announcement that the UK will be the world’s first net zero financial centre. This will not just be political gestures but he is proposing the following to quote from his Treasury statement: “Under the proposals, there will be new requirements for UK financial institutions and listed companies to publish net zero transition plans that detail how they will adapt and decarbonise as the UK moves towards to a net zero economy by 2050”.

“To guard against greenwashing, a science-based ‘gold standard’ for transition plans will be drawn up by a new Transition Plan Taskforce, composed of industry and academic leaders, regulators, and civil society groups”.

In other words, this will not be another “greenwashing” exercise but impose specific obligations on companies. The fact that meeting net zero carbon is an impossible task for many companies in any realistic timescale it seems is likely to be ignored. Even attempting to meet that target will impose enormous costs on companies even those who are not big generators of carbon emissions. If you extend it to Scope 3 emissions (those include all indirect emissions that occur in a company’s value chain) then the reach will affect all sectors of the economy.

This will certainly put the UK in the lead in the attempt to restrict global warming whether you believe it is practical or not. But if such regulations are introduced in the UK one can imagine exactly what will happen as it seems unlikely that other major economies will follow that lead. China, the USA, Russia and India are very unlikely to impose such draconian measures. As many UK listed companies have an international focus they have no great need to be listed in the UK. They could just as easily be listed in the USA or other countries with more friendly or easy-going regulatory frameworks.

You might think this is just an attack on oil/gas and mining companies but it will have a much wider impact in reality. For example, one of the big consumers of oil are ships transporting goods around the world so anyone importing products for sale, such as retailers, would need to persuade the shipping companies to avoid using oil.

One thing is certain. Companies such as BP and Shell may simply consider that it is easier to move their listing to another jurisdiction or accept a bid from a private equity player who does not have concerns about their environmental credentials.

This is what Jeremy Warner had to say in the Daily Telegraph: “However much we might wish it otherwise, oil and gas will long remain our primary source of life enhancing energy. And yet the industry is being driven underground by politicians and regulators too cowed to stand up to the hysteria of the climate change activists. The enemy within is almost as bad as the holier than thou pressures from without; oil company boards, together with those of their bankers, are these days stacked with well meaning do-gooders more focused on bowing to the campaigners than the demands of shareholder value”. If you are a shareholder in BP or Shell (I am not) you may sympathise with such comments.

Such moves of listing may already be evident from the decision of BHP to move to a single listing in Australia rather than the dual listing at present.

Unfortunately with such companies being the bedrock of the dividend paying FTSE-100 companies there are few alternatives for some investors such as big pension funds to choose.

Personally I have been investing in alternative energy generating companies and battery companies because the latest announcements from the Government tell me that the hysteria over achieving net zero is now so widespread that it will have a big impact on the financial world. In addition the Government plans to spend many billions of pounds in financing green initiatives and not just in the UK. We have already contributed £2.5 billion as the biggest donor to Climate Investment Funds. Such funding imposes a heavy burden of taxation which will add to the above woes of companies domiciled in the UK.

The irrationality of the general public over climate change in the UK has no bounds. For the last 30 years the young have been taught in schools an extreme agenda which has also been promoted by the national media, particularly the BBC, and politicians are now pandering to the mood of the public. This scenario is going to make the UK a poor location for investment funds in comparison with other countries. Private investors should surely rebalance their portfolios to have less emphasis on the UK. At least that is the case while the mania continues.

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

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Open Letter re New FCA Chairman

An open letter to Rishi Sunak, Chancellor, has been created by the Transparency Task Force concerning the appointment of a new Chairman of the Financial Conduct Authority (FCA). That body has clearly been ineffective in recent years in protecting retail investors from fraud and scams. The letter calls on any new appointment to be not another City insider but someone with true independence.

You can read the letter here: https://www.transparencytaskforce.org/wp-content/uploads/2021/11/Open-Letter-regarding-regarding-replacement-to-the-Chair-of-the-FCA-3.pdf

I ask you to support the letter by adding your name to it as I have done. Just send an email to the contact person at the foot of the letter confirming your support.

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

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