Intermediated Securities – You Need to Respond

The Law Commission is undertaking a review of Intermediated Securities. What’s this about and why is it important? It is important because the use of nominee accounts has undermined your rights as a shareholder in public companies.

Nominee accounts have made it difficult to vote your shares at General Meetings, taken away other rights, and defeated shareholder democracy. The inability of companies or anyone else to communicate with all shareholders has also made it exceedingly difficult to tackle management when they are paying themselves too much or are simply not acting in shareholders interests. Individual shareholders have been particularly damaged by the use of nominee accounts which have taken over from paper share certificates for most holdings.

Another issue is that an EU Directive will soon be mandating “dematerialisation” of share certificates. All trading will need to be done in electronic form which implies nominee accounts only unless you happen to have a Personal Crest account (of which there are only 5,000 now) or unless a new “name on register” electronic account is devised.

ShareSoc has issued some information on the Law Commission public consultation on Intermediated Securities which you can read here: https://www.sharesoc.org/sharesoc-news/law-commission-review-of-intermediated-securities-consultation/

IT IS REALLY IMPORTANT THAT AS MANY PEOPLE AS POSSIBLE RESPOND TO THIS CONSULTATION SO PLEASE DO SO!

You can read my personal submission to this consultation here: https://www.roliscon.com/Intermediated-Securities-Consultation.pdf

One interesting point made in the Commissions consultation document is that it says “intermediaries are obliged to offer investors the option of a segregated account” – see page 8. This is now EU law and I understand it is effective in the UK. That means that all ISA and SIPP holders should be offered the option of a segregated, i.e. designated,  account where your name and address are held on the share register and not just the nominee operator’s. Such accounts are much better than “pooled” nominee accounts which almost all brokers use at present and which are positively dangerous as your assets are not separately identified. That means that when your broker goes bust there is frequently a shortfall and recovery of your assets in full is not easy. I am looking into whether my ISA and SIPP operators actually are compliant with the EU legislation and do offer designated accounts. I will advise later on the answer.

However a designated nominee account is still not the ideal solution – all shareholders need to be on the share register of a company, which is what my consultation submission says.

PLEASE MAKE SURE YOU SUPPORT SHARESOC AND RESPOND TO THE LAW COMMISSION’S CALL FOR EVIDENCE

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

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Removing Directors, Ventus VCTs, Rent Controls and HS2

Replacing the directors of companies by shareholders can be enormously difficult. Although I have been instrumental in the past in helping that process in several companies, it takes enormous effort and a lengthy timescale to achieve it. ShareSoc director Cliff Weight has published a very perceptive article on the problems of doing so at the Ventus VCTs.

Problems faced by shareholders who are unhappy with the directors of a company are a) communicating with all other shareholders now that many are in nominee accounts and the costly process of writing to shareholders on the register via post (and processing the register into usable format for mailing); b) the existing directors of a company using the resources of the company (i.e. shareholders funds) to campaign actively against any change including the use of expensive proxy advisors to contact shareholders via telephone; c) the role of IFAs who advise their clients or who manage their portfolios and who can influence the shareholder voting; and d) the inertia of institutional investors (or to quote someone from the FT today: about 60% of company investors are passive shareholders and ‘don’t care’).

In the case of the Ventus VCTs, some shareholders are unhappy with the management fees as no new investments are being made by the company and are unhappy with the actions of the directors. They have tabled requisitions for the Annual General Meetings at Ventus VCT and Ventus 2 VCT on the 8th August to remove all the directors and appoint new ones. Of particular concern is the current two-year termination notice on the management agreement which is now being proposed to extend further. It is never a good idea for investment trusts to have long termination periods in contracts with the manager.

You can read Cliff Weight’s blog article here: https://tinyurl.com/y2de9vaa . There is also an article covering this topic in this weeks Investor’s Chronicle under the title “Limits of Influence”. It’s well worth reading.

How to solve these problems? I suggest the following: a) a reform to put all shareholders (including beneficial owners) on the register of companies; b) put shareholders email addresses on the register so that communicating with them can be done at reasonable cost – it’s surely unreasonable in the modern age to only have postal addresses which adds to costs enormously; c) limit how much can be spent on proxy advisors to oppose shareholder requisitions; and d) exclude passive institutional investors who have no interest as owners from voting.

Rent Controls

The Mayor of London, Sadiq Khan, is intending to develop proposals for rent controls in London so as to “stabilise” or reduce property rents in London (or make them “more affordable” as he puts it). That’s despite the fact that he has no legal powers to do so and a Conservative government would likely block such proposals. But Jeremy Corbyn supports the idea. The Mayor clearly sees this as a vote winner for his re-election campaign next year as he claims 68% of Londoner’s support rent controls!

Some of my readers probably invest in buy-to-let properties so such proposals will worry them considerably. On the other hand, those who rent houses or flats in London are undoubtedly concerned about the cost of renting and the rapid rise in rents in London. Some are being forced out of London or have to move to smaller properties.

But rent controls never work and create all kinds of negative side-effects, or unintended consequences. When I moved to London in the 1960s, rent controls were in place and had been since 1945 in various forms (there is good coverage of the history of rent controls in London on Wikipedia). In the 1960s, unfurnished properties were almost impossible to find or were horribly expensive as landlords had withdrawn from the market. Rachmanism to force tenants out of rent controlled properties was also rife and what property there was available for rent on the market was often in very poor condition because landlords simply could not justify spending money on maintenance. We definitely do not want to return to the 1960s despite Jeremy Corbyn’s desire to put us there!

Rent controls are not the answer, as many studies of such schemes has shown. The Mayor needs to do more to tackle the housing problem in London by ensuring more home are built, encouraging movement of people out of London, and discouraging new immigration into the capital from elsewhere. But you can read the Mayor’s press release here if you wish to learn more about his plans: https://www.london.gov.uk/press-releases/mayoral/to-tackle-affordability-crisis

HS2 and Brexit

The latest report that HS2 may cost an extra £30bn, meaning it could cost as much as £85bn in total, surely makes it even less justifiable. Enabling a very few people to save a few minutes on the train journey time from London to Birmingham at that cost makes no sense, although there might be more justification for expanding capacity and speed on routes in the North of England. However, it would surely be much better to spend that kind of money on an improved road network where the benefits are much greater. The Alliance of British Drivers has just published an analysis of road expenditure versus taxation which includes a comparison of road versus rail expenditure. It’s well worth reading – see here: https://www.abd.org.uk/road-investment-and-road-user-taxation-the-truth/ .

Now the Office of Budget Responsibility (OBR) have recently suggested that a “no-deal” Brexit would blow a £30bn hole in the public finances. Even if you accept that is true, and many do not, there appears to be a simple solution therefore. Cancel HS2 just to be on the safe side.

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

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LoopUp Profit Warning and Brexit Party Policy

Conference calling AIM company LoopUp (LOOP) issued a trading statement this morning which contained a profit warning. At the time of writing the share price is down 47% on the day but it has been falling sharply in recent days which suggests the bad news had already leaked out.

This is an example of what happens when lofty growth expectations are revised downwards. Revenue is now expected to be down 7% on the previous market consensus and EBITDA down 20%. The company blames the shortfall on “subdued revenue across its long-term customer base” driven by macro-economic factors and diversion of sales staff into training new ones.

LoopUp is presenting at the ShareSoc seminar event on the 10th July so it will be interesting to hear what they have to say about this – see https://www.sharesoc.org/events/sharesoc-growth-company-seminar-in-london-10-july-2019/ . This news comes only a month after LoopUp held a Capital Markets Day when there was no hint of these problems. I did a report on that here: https://roliscon.blog/2019/06/07/broker-charges-proven-vct-performance-fee-and-loopup-seminar/

I do hold a few shares in LoopUp but thankfully not many.

Brexit Party Policy

I mentioned in a recent blog post that the Brexit Party is looking for policy suggestions to enable them to develop a platform for any prospective General Election. Here’s what I sent them with respect to financial matters:

  1. The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.
  2. The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.
  3. Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.
  4. The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.
  5. All the above tax simplifications would enable HMRC to be reduced in size and the time wasted in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.
  6. The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.
  7. The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.
  8. Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.
  9. The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.
  10. Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.
  11. Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.
  12. All the EU Directives on financial regulation should be scrapped (i.e. there should be no “harmonization” with EU regulations after Brexit). The MIFID regulations have added enormous costs to financial institutions, which have passed on their costs to their customers, with no very obvious benefit to anyone. Likewise the Shareholder Rights Directive might have had good objectives but the implementation has been poor because of the lack of knowledge on how financial markets operate in the UK. Other examples are the UCITS regulations which have not stopped Neil Woodford from effectively bypassing them, or the PRIIPS regulations which have resulted in misleading information being provided to investors.

Let me know if you have other suggestions, and of course the above policies might be good for adoption by other political parties in addition.

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

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Shareholder Rights Being Eroded

There is a good article in the Financial Times today (Saturday 22/6/2019) which is headlined “UK shareholder rights being eroded”. As the article says, almost no investors who buy shares legally own the shares they have bought, which rather surprises them. That’s because most of them buy via nominee accounts operated by stockbrokers and platforms. Not only that, but most nominee accounts are “pooled” accounts so even identifying who are the “beneficial owners” is not always easy.

Does it matter? Yes it does as investors apparently holding shares via Beaufort Securities soon found out, and there have been a number of similar cases. If brokers go bust or cease trading, your investments will be frozen and reclaiming them may not be easy. It also undermines your rights to vote, to attend AGMs and other rights that those on the share register of the company have as “Members”.

The Law Commission has announced a review of this system – see here for more details: https://tinyurl.com/yyhm3mf9 .

There are some good quotations from Cliff Weight of ShareSoc and Peter Parry of UKSA in the FT article. However there is this quote from Russ Mould of AJ Bell: “It is debatable whether this [nominee account system] makes it harder for shareholders to cast their votes any more than the old paper share certificate regime”. That is clearly wrong as those on the register can easily vote via submitting a paper proxy form or via the registrars’ on-line systems. Submitting votes if you are in a nominee account is rarely so simple and AJ Bell do not provide an easy to use method so it would require significant effort by investors to vote. The result is that most do not bother.

The other claim in the article is that the nominee account system has made trading easier and cheaper. That is not true either. The electronic Personal Crest system is a better alternative and as all trades go through Crest anyway (even those done via a nominee account), there is no cost difference in reality. The reason brokers and platforms have promoted nominee accounts is simply because there are other commercial advantages for them.

There is a lot more information on this subject which explains the real facts and includes a video from me on the subject on the ShareSoc web site here: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

A minimal if partial solution to this problem would be to have all beneficial owners on the share register. But in reality the whole system needs reforming so that investors are not forced into nominee accounts where they lose a lot of their legal rights, and shareholder democracy is fatally undermined.

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

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Royal Bank of Scotland AGM – How to Vote

Shareholders in the Royal Bank of Scotland (RBS) will have received their Annual Report and Notice of the AGM in the post today. The meeting is on the 25th April for those in a nominee account, and its being held at the RBS headquarters in Scotland of course.

There are 28 resolutions on the Agenda. Please ensure that you vote your shares. Resolution Number 28 directs the board to appoint a Shareholder Committee and was put forward jointly by ShareSoc and UKSA. The board has again opposed that resolution on spurious grounds. A Shareholder Committee would provide a say on such matters as director nominations, remuneration and strategy and that resolution should be supported by all thinking shareholders. See this document for more explanation and a list of the resolutions: https://www.investors.rbs.com/~/media/Files/R/RBS-IR/results-center/letter-to-shareholders-2019.pdf

Corporate governance at RBS is still poor and a Shareholder Committee would cure that. The Financial Times today highlighted one remuneration issue which is that the CEO, Ross McEwan will receive a pension contribution this year of 35% of salary, i.e. £350,000. This seems to be the latest wheeze to avoid scrutiny of high pay with other major UK banks paying similar amounts. So another recommendation is to vote against the Remuneration Report (Resolution No. 2).

Personally I will also be voting against the authorisation of share buy-backs (Resolutions 26 and 27), and against the resolution that permits General Meetings at 14 days notice (No. 24), as I always do.

I will also be voting against the Chairman Howard Davies (Resolution 5) for opposing Resolution 28.

For more information see the ShareSoc blog item here: https://www.sharesoc.org/sharesoc-news/vote-for-rbs-agm-special-resolution-28-shareholder-committee/

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

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Placings at Gordon Dadds and Blue Prism

There were two placings announced yesterday. The first was by legal firm Gordon Dadds (GOR). I held a very few shares in the company. This company had already annoyed me by suspending the listing of the shares for several months while they finalised an acquisition deal. Totally unnecessary. If Northern Rock could remain listed while in their death throws, the propensity to suspend shares simply because there is more uncertainty about the business is not justified. This annoyance also arose at Patisserie (CAKE) recently. Investors can decide for themselves whether they want to hold the shares, and possibly take more risk, or not.

The placing by Gordon Dadds was also annoying. Apart from the dilution of 25%, it was a placing at a price of about 25% below the market price. Needless to say, this was taken up by institutional investors very promptly indeed while, as usual, private investors had no opportunity to do so. There did not seem to be any great urgency in this fund raising as it was simply to provide “financial flexibility” for their acquisition strategy. So why no full rights issue or open offer?

I simply do not wish to hold shares in companies that treat their investors this way. Those that do tend to be repeat offenders. So I sold the shares I held.

Another interesting placing was in Blue Prism (PRSM) a fast-growing supplier of office automation software, which I do not hold. The company also announced their full year results for the year to October. Revenue more than doubled to £55 million, but losses went up in a similar proportion to £26 million. The market cap is now an incredible £939 million (i.e. 17 times sales revenue).

Their placing was aimed at raising £100 million and was got away at 1100p (no significant discount to recent price but way down on a few months back). The purpose of the placing was given as this: “The Group is seeking to capitalise on the market opportunity available by accelerating its investments in distribution, its product and platform whilst maintaining its thought leadership in the RPA market.”

So it’s interesting to compare this approach with the position of Cloudcall (CALL) previously discussed who might expand faster if they raised more funds but are also loss making. Clearly Blue Prism intend to take the US approach and try to grab market leadership in a relatively new and potentially large market, i.e. it’s a land grab. This can work but the risk is that competitors who are more cost efficient can erode market share and often they all end up losing money until reality sinks in. Is what Blue Prism is doing that difficult to replicate by competitors? I do not know enough about their product to judge that but the share price and risk are too high for me.

It’s worth bearing in mind that in the software world you can sell almost anything with a good story if you spend enough. Whether such sales are really profitable can be very difficult to judge when money is also being spent at the same time to expand the business.

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

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Bellway AGM for Early Risers Only

Should Annual General Meetings of companies be held at reasonably convenient locations and on convenient dates and times so that as many shareholders as possible can attend? Most private shareholders certainly think so. But Bellway (BWY) seem to be taking the opposite approach.

Their 2016 AGM was at the very sensible and easily achievable time of 2pm in the afternoon so all shareholders hoping to attend could actually meet the directors and ask questions. They could travel from all over the country and even have time for lunch!

But this year’s AGM kicks off at 8.30 am on Wednesday 12 December 2018 at Jesmond Dene House Hotel, Jesmond Dene, Newcastle upon Tyne NE2 2EY.

So what changed….Do directors at Bellway not want shareholders any more….maybe the huge remuneration at housebuilders and recent furore at Persimmon has made directors devise cunning plans to avoid awkward questions and attention from the media.

This anti-shareholder mindset seemed to set in last year with an early morning start at 9.30 am in Newcastle but still six shareholders made it through the doors. That must have been too many for the directors because this year they have moved it even earlier. They have moved it closer to breakfast for those who like to vote whilst eating their cornflakes.

Here’s hoping that the 2019 AGM is not held at 7.30am and that at least one shareholder will make it through the early morning fog on the Tyne !!

But it is simply not acceptable for boards to take this approach. There are too few shareholders attend AGMs already without deliberately making it difficult for them. I suggest that perhaps the UK Corporate Governance Code should be modified to include coverage of when and where AGMs should be held and other aspects of how they are run (such as the answering of questions which I covered in a previous article).

Thanks to David Stredder for notes on the above events.

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

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