Category: Laws & Regulations

Banking Made Difficult and Savings Rates Inadequate

Having a bank account into which you can pay money, or from which you can pay money out, is essential in the modern world. You can become a non-person if a bank closes your account. You can be cut off without notice and effectively instantly impoverished by a bank even if you have been a customer of theirs for many years and have a perfect credit record.

This has been happening to many people lately and not just to Nigel Farage. If you are judged to be a “Politically exposed person” (PEP) then you might have great difficulty opening a bank account and will certainly have to answer many questions about your activities and sources of funds. Just being related to a PEP is enough it seems to raise eyebrows and start an inquisition. Simply being involved in politics or having the wrong opinion on controversial subjects is enough it now seems to cause difficulties and result in a Kafkaesque proceeding.

In addition banks are closing accounts without giving clear reasons and without notice, although they dispute this. These problems have arisen recently because banks have become paranoid in adhering to FCA rules about “knowing your customer”.  

You may think this problem is not a common one. But it is. For example I am related to a Member of the House of Lords and she had this to say:

“Yes. Total nightmare with Nationwide, They just sent a rather ill spelt text about a year ago to say they were going to cut us off If we did not give them a huge amount of information in 24hrs. They wouldn’t say why, after to-ing and fro-ing for 6 weeks or so it was all sorted out and got profuse apology but meanwhile I removed all our cash immediately because of the threat to freeze the account. There’s been a great stink in the Lords because we’re all in the same position and finally the banks seem to have started to behave slightly better.

Nationwide had set up a new unit to pursue anybody with any likelihood of being a politically exposed person, It seems to be full of teenagers who couldn’t read or write so we thought it was spam. It wasn’t. Eventually sorted out but it was a year before I put any money in Nationwide again.

But it’s been dreadful for some people, totally unjustified”.

The other complaint about banks recently is that they raised mortgage rates in line with changes in interest rates but have not improved their savings rates on instant access accounts. The FCA have published a note on tackling this issue – see https://www.fca.org.uk/news/statements/fca-sets-out-expectation-fair-and-competitive-saving-rates.

It urges people to change banks to improve competition but will people do that if the process of opening an account is subject to tedious scrutiny and subsequent risk of closure?

The Treasury is apparently looking into this issue but bearing in mind this problem has been known about for many months, don’t expect any action soon.

Postscript: The latest news is that even Chancellor Jeremy Hunt was denied a Monzo account.

There surely needs to be some regulation of banks’ actions in this area.

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

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FCA’s Mistaken Policy over Long-term Asset Funds

The Financial Conduct Authority (FCA) have released a “policy statement” containing proposals for new long-term asset funds and their regulation. See PS23/7 (https://www.fca.org.uk/publications/policy-statements/ps23-7-broadening-retail-access-long-term-asset-fund ).

The plan is that distribution of these open-ended funds will be extended to mass market retail investors. Self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs) will be able to invest into an LTAF. 

The LTAF is a new category of authorised open-ended fund specifically designed to invest efficiently in long-term, illiquid assets. Illiquid assets include venture capital, private equity, private debt, real estate and infrastructure. The FCA claims that they can provide a useful alternative investment opportunity for consumers able to bear the risks of such investments. They also say that “an ability to invest in long-term illiquid assets, through appropriately designed and managed investment vehicles such as the LTAF, is also important in supporting economic growth and the transition to a low-carbon economy”. But don’t private equity investment trusts already provide this?

This is surely an accident waiting to happen, particularly as it is proposed to exclude such funds from the Financial Services Compensation Scheme (FSCS).

The FCA also states that “While these investments can have a higher risk of loss than diversified portfolios of listed equities or bonds, they can also potentially deliver higher long-term returns in exchange for less liquidity”. Where is the evidence for this? Selling illiquid investments to retail investors via open-ended funds is a recipe for mis-selling claims and significant losses as we have seen with some property funds for example.

The AIC has come out strongly opposed to these proposals – see their press release here: https://www.theaic.co.uk/aic/news/press-releases/selling-ltafs-to-retail-investors-could-prove-to-be-a-mistake . To quote from it: “As the underlying assets are hard to sell investors run the risk of being trapped in the fund in stressed markets. It could cause significant hardship if investors cannot access LTAFs held in pensions. The additional measures proposed by the FCA do not go far enough to secure reliable redemption and prevent these problems emerging”.

Has the FCA consulted experienced private investors before proposing these measures? Or is it being supported solely by financial institutions wanting to sell more such funds?

The proposed regulations of LTAFs are very complex and are unlikely to be understood by private investors while it is not even clear that they will qualify for ISAs.  

Private investors should respond to the FCA’s public consultation on these proposals – available from the first link above.

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

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Should Pension Funds Invest More In Equities?

This article was prompted by an item in Investors Chronicle entitled “Should pension funds be used to prop up UK markets? I think the simple answer is NO. But apparently City Minister Andrew Griffith said at a conference that “the Chancellor is spending a lot of time looking at how we can better unlock the billions of pounds held in UK pension schemes”.

Certainly one major concern is that the share of the stock market now owned by pension funds and insurance companies has fallen in the last 25 years from 53% to 6%.

Before the last war, pension funds invested almost exclusively in fixed income bonds and shares. But in the 1950s and 60s this situation was reversed as high inflation made fixed income securities less attractive. George Henry Ross Goobey, pension manager of the Imperial Tobacco pension fund, was one of the leaders of this revolution.  In 1955, Ross Goobey persuaded the trustees of Imperial Tobacco’s defined-benefit pension fund, one of the largest pension funds in the U.K., to adopt an idiosyncratic investment policy investing exclusively in equities. Due to the subsequently stellar performance of the pension fund, Ross Goobey acquired a reputation as “one of the most successful professional investors of all time” and, through his public advocacy of equity investment by pension funds, as the “father of the cult of equity – see Reference 1.

But company directors and pension fund trustees have become much more risk averse in the face of tougher regulations and such scandals as the collapse of the BHS pension fund where company directors tried to get rid of their pension liabilities.

We have now swung to the other extreme where pension fund managers are looking to have guarantees that they can match their future pension liabilities with no risk. That typically means buying gilts. But this has meant that investment firms have adopted leveraged Liability Driven Investment schemes (LDIs) which aim to produce higher returns than gilts. This came to a sticky end when interest rates rose sharply and pension funds had to dispose of holdings to match their collateral liabilities.

There is no way you can avoid risk if you wish to get a decent return. Investing in equities is more likely to give a good long-term return that is better than fixed interest, particularly in periods of high inflation which is where we are now.

The cult of the equity may have gone too far in the 1970s but the reversal is just as disconcerting and has led to the lack of investment in UK companies that we now have.

How do you fix the problem of lack of investment? Obviously you could do it by juggling the tax system to provide more returns on risk investments like equities. But the Government needs to look at why pension fund trustees and managers have become more risk averse which has resulted in lower returns. Excessive regulation is certainly one issue to look at.

More direct intervention in what pension funds can invest in is surely a mistake. Bureaucrats always fail to pick the commercial winners and forcing more investment in equities will undermine the market equilibrium.

Ref. 1 Cult of Equity https://www.pensionsarchive.org.uk/19/records/45/Cult%20of%20Equity%20-%20Yally%20Avrahampour.pdf

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

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Should ISAs Be Simplified? And AJ Bell Results

This morning AJ Bell announced their interim results. It is one of the UK’s largest investment platform operators and has been very successful at growing its customer base through having low charges and a simple user interface, particularly for SIPPs.

Customers grew by 7% in the platform business and overall revenue was up 37% with profits up 61%.

But the CEO has promoted the idea of simplifying the ISA regime. He says “Over the years a once simple product has fragmented into multiple versions with different rules and benefits. In proposals presented to the Chancellor, we have outlined a system which combines the many current versions into one ISA product that would be easy for people to understand and would encourage more investment”.

I am all in favour of that proposal. The financial world is complex enough and the different ISAs can potentially confuse and discourage new investors.

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

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Young People’s Poor Knowledge of Investments

The AIC published an interesting press release last week. It was headlined “Young people more aware of cryptocurrency than any other investment”.

Young people they class as those aged 20-40 but it shows an astonishing ignorance of different types of investment. Even more astonishing is that they rely on web searches, Instagram, YouTube, Facebook and Twitter as sources of financial information.

Some 70% of survey respondents were aware of cryptocurrencies such as Bitcoin, but only 18% of investment trusts.

The fact that most of these media that young people rely on are motivated by the desire to sell something to investors shows how easy it is for young investors to get misled. You can see why new investors are so easily sucked into speculative investments of one kind or another.

See https://www.theaic.co.uk/aic/news/press-releases/young-people-more-aware-of-cryptocurrency-than-any-other-investment for the full press release.

How to solve this problem? Education is one key and at a young age. But anything taught in school at age 15 will soon get forgotten, and be swamped by clever marketing by financial promoters.

ShareSoc has been working on this issue via their “Investor Academy” (see https://www.sharesoc.org/investor-academy/ ) but it does not seem to be having a great impact so far. There is little incentive to learn.

The only way I can see this state of affairs improving would be if investors had to pass a qualifying examination before they could invest in some types of investments. Having “health warnings” on cryptocurrency investment schemes is not enough.

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

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IBPO Delisting – A Bloodbath for Investors

There was an interesting discussion last night at the Mello meeting on the recent announcement of a delisting from AIM of iEnergizer (IBPO). IBPO is controlled by 83% shareholder EICR (Cyprus) Ltd whose major shareholder is Anil Agarwal. So he will have no difficulty passing the required 75% votes for delisting.

Unlike common practice, there is no offer to take out the smaller shareholders at a fair price. The share price dropped precipitately on the announcement but has bounced back this morning. This seems to be on the hope that the dividends will be maintained and just one year’s dividends might pay for the shares.

I personally would not bet on that because there are many ways a controlling shareholder can take out value from a delisted company.

I have been a holder of delisted AIM shares in the past and one such case did end happily after a few years but others did not. The key is to avoid investing in companies that could put you into such difficult positions. Prevention is better than cure (the company is registered in Guernsey so should be subject to the Takeover Panel Code which might help but trying to block a dominant shareholder from doing what they want to do is very difficult).

I covered some of the warning signs in my book Business Perspective Investing. These are a couple of extracts from it:

Large or Small Director Share Stakes

Common abuses of corporate governance codes happen when one or more directors have a controlling stake in the business, i.e. own more than 50% of the equity. Even owning 40% usually means they can win any vote and effectively have control.

One danger of such large stakes is that they might be tempted to take a company private if they think the shares are undervalued or they are simply fed up with sticking to the rules required of public companies.

On the other hand, it is important for directors to have a significant interest in a company’s shares so as to align their interests with that of other shareholders. Having a substantial interest provides a powerful incentive to promote the success of the company.  This particularly applies to executive directors but even non-executive directors should have a non-trivial shareholding. It’s even better if the directors acquired their share stakes by purchasing shares in the market rather than simply being a beneficiary of nil-price share option scheme awards.

Share stakes of directors should be big enough to be meaningful and to provide good incentives but not so large that they can dominate the board and other shareholders.

Company Domicile

Where a company is registered is definitely worth checking because it affects the laws under which the company operates. Even in those more developed countries with stronger traditions of protecting investors, e.g. the USA, you may find that there are differences between states. Delaware is generally viewed as more friendly to companies and their management than to their investors.

UK listed companies whose operating base is overseas may not be subject to the Takeover Panel Code (an important protection for minority shareholders), and can often create legal difficulties when wrong-doing needs to be pursued.

It is unfortunately a fact of life that some countries are viewed as protecting investors better than others. For example, when problems with Chinese AIM companies arose in recent years, many investors found it was difficult to enforce their rights in law or take action against errant directors.

In general, for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [because company law is different and any shareholder meetings are likely to be held there thus discouraging attendance].

You might ask yourself why did this company register in the Channel Islands? There may be tax reasons why property companies/trusts do so but IBPO is not one such.

Another big question to ask is “do you trust the directors to act in the interests of all shareholders rather than just their own interests?”. Their recent actions clearly answer that question.

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

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Lying for Money – Book Review

With the long bank holiday I managed to finish reading the book “Lying for Money” by Dan Davies. This is one of the best books I have read on fraud.

It covers the history of fraud through the ages including most of the great cases and the most recent big ones. Fraud is still rampant despite many of the obvious ways it can be executed blocked by better laws in the last 100 years. For example, the FCA announced last week that three individuals have been convicted and sentenced to a combined 24 years for an “all-or-nothing” investment fraud. Punters were persuaded via cold calling to invest in binary options via a sophisticated online platform that appeared to show their funds being traded, however, this was manipulated to show trading activity when there was none.

His Honour Judge Hehir, remarked that ‘[BMG] was no more than a money-making machine, which operated to transfer as much of its unfortunate customers’ money into [the defendants’] pockets as possible’. ‘All 3 defendants were a loose confederation of criminally minded associates’ and ‘equally responsible’. He stated that they lived a lavish lifestyle from the money and often misery of the victims, including large cash withdrawals, expensive foreign travel, cosmetic dentistry, online gambling, property purchases, a wedding reception and partying in nightclubs. Binary options have subsequently been banned for retail investors.

There is a particularly good chapter under the heading “Cooked Books” on stock market fraud. These paragraphs are from it: “There are many reasons one might want a crooked set of books — to present an image of financial soundness to the victim of a long firm, for example, or to pretend that a sum of money has been spent honestly rather than embezzled. But the most common one is that you want to show your crooked accounts to investors so that they give you money. For this reason, any discussion of accounting fraud needs to be put in the context of stock market fraud, because one is usually the point of the other. With that in mind, here’s how one steals money by lying to the stock market.

A public financial market provides the same service to liars that it provides to honest businesses — it converts stories into cash. If you own a profitable enterprise in an economy with functioning stock markets, you hold a form of ‘Supermoney as the fund manager and auditor George Goodman noted in a book of that name. Super how? Not only does the business provide a steady stream of income; the stock market offers a way to acquire and spend years of future profits before you make them”.

If a company is trading on a prospective p/e of 30 then it is multiplying its future profits by 30 in terms of market capitalisation.

This book should be essential reading for all investors and for all auditors as it covers the most common types of frauds. Does the book help you to spot frauds? Perhaps in that there are often warning signs. Such as high growth rates and consistently better financial performance than similar competitors (Madoff investment funds or Patisserie Valerie).

But here is one warning in the book: “Small investors in the stock market legitimately expect that they ’re going to have a chance to make a profit; if, instead, they’re systematically going to be filled up with the duds, then they are going to find something else to do with their savings and/or gambling money. And even in the modern world of huge fund managers and high-frequency robot traders, retail investors are more important than you might think.

Retail investors have one hugely attractive property when considered by a professional – they’re dumb money. Not only are they unlikely to have private information, a lot of the rime they haven’t taken care to consider all the public information. When the party on the other side of the trade is a small investor (or a lot of orders from small investors all over the country, ‘bundled’ by a retail stockbroker), you can be reasonably sure that you’re not taking too big a risk that the person selling stock to you knows something about it that you don’t.

This makes retail orders very valuable to the market. One of the reasons why stock brokerage commissions are so cheap these days is that retail brokers have actually realised how valuable they are. They charge a quite substantial fee to players like the high-frequency traders for the privilege of dealing against their order flow, and they rebate some of this fee to their customers. But the retail orders would eventually dry up if the customers lost too much or felt that they weren’t being given a fair chance. And without a steady flow of ‘dumb money’ lubricating the wheels, the professionals would find it a lot harder to trade, as they’d always suspect each other’s motives for buying or selling”

The book is an easy read and does not get too bogged down in the technicalities of fraud (even the complexities of VAT carousel fraud). Most frauds are quite simple in essence – lying about assets, revenues or profits.

Altogether a highly recommended book of 300 pages.

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

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Parliamentary Petition and Rio Tinto AGM

A new Parliamentary petition has been raised to give all shareholders a voice by bringing Company Law into the 21st Century. It includes the requirement to make email a requirement for shareholding registration which is an important way to improve shareholder communication both from and to shareholders.

See https://petition.parliament.uk/petitions/636051 . PLEASE SIGN IT!

Today I watched the Annual General Meeting of Rio Tinto Plc (RIO) – all two and half hours of it. I no longer attend meetings in person, particularly FTSE-100 company ones, due to physical incapacity and an unwillingness to be bored.

The Chairman said they are now more aligned with societal aspirations and have a critical role to play in energy transition. But there are environmental dilemmas arising in a critical industry. It was later mentioned that the world needs to produce more copper in the next 20 years than has ever been produced! They cannot overstate the scale of the challenge.

There was an interesting precis of the history of this 150-year-old company. The company had a Return on Capital Employed of 25% last year but has not always been so careful about its capital investment as one shareholder pointed out who was concerned about rising debt levels.

Most of the questions from attendees, including those on-line, referred to local issues in Arizona, Serbia, Australia and Mongolia, particularly environmental protection issues. The Chairman seemed to handle them well and the meeting was generally well run. There were no surprises.

I am happy to continue holding the shares. Current forecast p/e is 8.5 and dividend yield 7.4%.

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

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A Digital Pound – Do We Need It?

Anyone with an interest in the financial world should take a look at a consultation paper issued jointly by the Bank of England and HM Treasury on proposals for a “Digital Pound: A new form of money”.

A digital pound would be a new form of digital money for use by households and businesses for their everyday payments needs. As part of the wider landscape of money and payments it would sit alongside, not replace, cash – a digital counterpart to familiar, trusted banknotes and coins, subject to rigorous standards of privacy and data protection.

Unlike crypto assets and stable coins, the digital pound would be a central bank digital currency or CBDC – sterling currency issued by the Bank of England and not the private sector.

As the Paper says: “This is part of the Government’s vision for a technologically advanced, sustainable, and open financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses, and powering growth across all four nations of the UK. A UK central bank digital currency – a ‘digital pound’ – would be a new form of digital money for use by households and businesses for their everyday payments needs.

A digital pound would help to ensure that central bank money remains available and useful in an ever more digital economy, continuing to bolster UK monetary and financial stability while safeguarding the UK’s monetary sovereignty in a changing global financial system. Any future digital pound would be a major piece of national infrastructure which would likely take several years to complete. Its launch would require deep public trust in this new form of money – trust that their money would remain safe, accessible, and private”.

But do we need it? Our money is already digitised. Banks do not hold stacks of paper bank notes or gold coins. Our bank holdings are simply records in digital ledgers. We can make digital payments by simply instructing our bank to do so, or by using debit/credit cards or phones.

Introducing a central bank digital currency would introduce privacy and security risks which might have much wider impacts than individual banks at present.

But relying on commercial organisations to provide open payment systems when they might prefer to build private monopolies is a risk that should be avoided.

The consultation paper does provide a good overview of the existing use of money and payment systems.

One aspect of the proposals is that there should be quite low limits on the amount of digital pounds that any one person could hold (as little as £5,000 or up to £20,000). It is not clear why there should be such a limit.

I have not personally responded to this consultation but readers may care to do so.

Consultation Paper:  https://www.gov.uk/government/consultations/the-digital-pound-a-new-form-of-money-for-households-and-businesses

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

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Woodside Energy Results and Climate Report

Woodside Energy (WDS), an Australian gas and oil producer, issued their results this morning. I hold some shares in the company as a result of my holding in BHP when WDS acquired their oil interests.

The financial results were very positive helped by “realised prices” for their products increasing by 63%. They are continuing to expand production so as to meet demand.

Alongside their results they issued a 65 page “Climate Report” which explains what they are doing to control carbon emission. This is similar to other reports produced by major oil/gas companies and attempts to justify their actions in the face of those who would like to see all oil/gas production shut down.

This is what their CEO had to say: “As we have seen in the wake of the invasion of Ukraine, significant volumes of gas and other fossil fuels cannot simply be removed from our energy systems without consequence, let alone be switched off altogether overnight.

We need all options on the table if we are to successfully change the way we produce and consume energy and limit global temperature rise.

Energy security and the energy transition therefore should not be seen as alternatives. It is increasingly clear that they both require effective management and substantial investment.

In the Asia Pacific region, major economies such as Japan remain clear that they need Australia to continue as a secure, affordable supplier of energy, including liquefied natural gas (LNG). Investment in new LNG supply can help meet demand at affordable prices. And LNG can help Asia to decarbonise, for example by replacing coal, supporting renewables, and in hard-to-abate uses.

There have been reasons for optimism during 2022. The energy crisis has not deflected the world’s resolve to meet the goals of the Paris Agreement, which were reaffirmed at the Sharm elSheikh climate summit in November. Major economies introduced supportive new policies, such as the United States’ Inflation Reduction Act, and Australia legislated its climate targets.

But this is not uniform. The public discourse on the energy transition can be polarised and ideological, particularly in Australia. We believe this is to the detriment of careful analysis of climate science and delivery of practical solutions. We seek to rebalance this through this report and our broader advocacy”.

Comment: This seems eminently sensible and I will be happy to support the company’s position on this. I am likely to continue holding the shares while many institutions dump them in the face of ESG concerns.

On another subject, the FT has today reported that City of London Minister Andrew Griffith has attacked the impact of the Financial Conduct Authority’s consumer duty measures. He suggests that it could damage the sector and trigger a wave of spurious lawsuits.

I agree and said it was a complete waste of time and would add substantially to the costs of financial services firms which they would pass on to consumers. See my consultation response here: https://www.roliscon.com/Consumer-Duty-Consultation-Response.pdf

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

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