Tag: FCA

Regulating Cryptoassets

The FCA has published a consultation document on the regulation of cryptoassets – particularly stablecoins in the first instance. It should be of interest to anyone investing in cryptocurrencies or considering doing so. To quote from it:

5.9 If a cryptoasset custodian were to fail today, the lack of a clear regulatory framework could result in uncertainty that would likely cause harm to clients through delays in the return of assets, extra costs or, worst of all, loss of their assets. Without clear regulatory standards to which cryptoasset custodians are required to adhere, cryptoassets may not be safeguarded adequately, which may lead to losses should the cryptoasset custodian enter insolvency (whether due to being treated as assets of the custodian, or through operational errors). In addition to the harm to clients, an outcome that results in uncertainty in insolvency may impact confidence in the overall regulatory regime.

5.10 This was shown in the recent failures of Celsius Network LLC and the FTX group, both of which provided cryptoasset custody services. According to its recent bankruptcy filing, Celsius had misappropriated client assets and at the time of its insolvency owed $4.7bn to customers. In the case of FTX, at least $8bn of client assets were reported to be missing. According to filings in the US bankruptcy court for Delaware on FTX Trading, FTX’s practices included ‘potential commingling of digital assets…use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data…’ and ‘an absence of lasting records of decision-making.’

See https://www.fca.org.uk/publications/discussion-papers/dp23-4-regulating-cryptoassets-phase-1-stablecoins for details.

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

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IBP Special Administration and Thames Ventures VCT 1

I have a very small holding in Thames Ventures VCT 1 (TV1). This is the remnant of holdings in other VCTs originally invested from 1997 onwards and which have generated a total return of minus 58% to date according to Sharescope although I doubt that is accurate due to multiple consolidations and name changes. I would have sold the holding long ago if it was not for the roll-back of capital gains roll-over relief that would have been incurred.

Now we learn that TV1 held some of its listed shareholdings with IBP Markets Ltd which has been put into Special Administration by the FCA “due to concerns whether there were appropriate systems and controls in place to ensure adequate protection for client monies and client assets at IBP”. About 20% of VCT1’s assets are held by IBP.

More information here: https://www.investegate.co.uk/announcement/gnw/thames-ventures-vct-1–tv1/special-administration-of-the-company-s-custo-/7824992

and here: https://www.fca.org.uk/news/news-stories/restrictions-placed-ibp-markets-limited-and-firm-enters-special-administration

Needless to say this is all bad news. Are the assets still there, and what will the administration of IBP cost and will it be charged against the assets? Those are key questions. Also how long will it take to complete the administration and have the assets released – too long is no doubt the answer.

The whole future of TV1 is also brought into doubt by these announcements. The investment management was transferred recently to Foresight Group who have experience of taking on dead ducks but with net assets of £91.9 million according to the last annual report and the reputational damage from these events some vigorous decisions are clearly required.

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

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Diversity and Inclusion Consultation

Both the FCA and PRA have issued a public consultation, to which you can respond, on the subject of introducing a regulatory framework for reporting of diversity and inclusion in firms (CP23/20). The FCA suggests that “greater levels of diversity and inclusion can improve outcomes for markets and consumers. In particular by helping reduce groupthink, supporting healthy work cultures, improving understanding of and provision for diverse consumer needs and unlocking diverse talent, supporting the competitiveness of the UK’s financial services sector”. But they provide no significant evidence of that.

What they are proposing is an obligation on larger organisations to provide masses of data on the sexual orientation, ethnic status, even religious adherence of employees.

Proposals set out for firms include requirements to:

  • Develop a diversity and inclusion strategy setting out how the firm will meet their objectives and goals.
  • Collect, report and disclose data against certain characteristics.
  • Set targets to address under-representation.

Will there be targets set in due course for the number of bisexual employees? What utter nonsense.

Basically it means a whole mass of new bureaucracy which I personally consider a complete waste of time. The FCA and PRA have more important matters to deal with. Even responding to these consultations I consider a waste of time so I will not do so. But if you have an urge to do so please go here: https://www.fca.org.uk/news/press-releases/fca-and-pra-propose-measures-boost-diversity-and-inclusion-financial-services

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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FCA Sloth on Woodford Funds Compensation

The Financial Conduct Authority (FCA) have published a statement on what is happening on obtaining action and compensation from Link Group over the demise of the Woodford Funds.

They state: “Update on potential enforcement action against Link Fund Solutions. We are in advanced confidential discussions with Link Group and LFS to determine whether the FCA’s proposed enforcement action against LFS can be resolved by agreement. To assist a potential resolution, the FCA has provided time for Link Group to realise assets, including Link Group held assets, to meet the FCA’s concerns”.

See full announcement here: https://www.fca.org.uk/news/statements/update-potential-enforcement-action-against-link-fund-solutions

Comment: The Woodford Equity Income Fund was suspended in 2019 when it became apparent that the fund’s holdings were way too illiquid and could not meet likely redemption requests. It has taken over three years for the FCA to enforce any action against Link who were allegedly responsible for failing to regulate the fund managers.

The wording of the announcement hardly suggests a vigorous action to force Link to pay compensation to investors and soon. The FCA is too slow and ineffective as usual. Why should they be seeking “agreement”? They should be laying down the law to force compensation. It could be another few years before this is resolved while many elderly investors might actually die in the meantime.

Note: I have never held an interest in any Woodford funds. I would advise those who did to register with the ShareSoc campaign for legal action. See: https://www.sharesoc.org/campaigns/woodford-campaign/ . Relying on the FCA is pointless.

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

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FCA on Getting to the Gamers

On Friday the Financial Conduct Authority (FCA) published a fascinating article on the views of people on the risks of investment offers under the title “Getting to the Gamers”. It included these comments:

“Consumers can now easily invest in high-risk investments. Some of these promotions use popular ‘gamification’ techniques to encourage people to participate. Gamification uses elements of game playing, like score-keeping, competition and league tables, to encourage people to take part. High-risk investments can be a valid part of well diversified portfolios, but we are concerned that many investors don’t recognise all the risks involved”; and:

“First, we had to find out more about these investors, what attracts them to these offers and where they see them. Our research found they tend to be aged 18-40 and are often driven by emotional and social factors. They enjoy the ‘thrill’ and feeling of ‘being an investor’. 78% said they relied on their gut instincts to tell them when to buy and sell. 

But nearly half of them – 45% – didn’t realise that losing money was a potential risk of investing, and over 60% relied on social media when researching investments. They were also disproportionately attracted to offers and platforms that used gamification”.

See FCA article here: https://www.fca.org.uk/about/getting-gamers

Comment: it is certainly plain to see that in the last few years a lot of new investors have been attracted into stock market investment. They have never been through a bear market and their perceptions of risk are therefore inadequate.

What can the FCA or anyone else do about this? Encouraging investors to get some experience before making big bets on shares is one thing to do and more education before they even start to invest are surely the things to look at. Some education should be a pre-requisite before being allowed to invest in the stock market.

Warnings about reading or listening to social media posts on investment topics would also not go amiss and tougher regulation in general of investment web sites would help.

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

Future Disclosure Framework, Revolution Beauty Case and Performance of Slater Growth Fund

Having concluded that the existing KIDs are not fit for purpose, with which I totally agree, the FCA are consulting on the “Future Disclosure Framework” for investments, i.e. what investors should be told before they splash their money out. You might think this would be a relatively simply matter to define but it is not – or at least the FCA wishes to make it complex as usual.

You can read their consultation document which they recently published here: https://www.fca.org.uk/publication/discussion/dp22-6.pdf

I have submitted a response which you can also read here: https://www.roliscon.com/Future-Disclosure-Consultation-Response.pdf

One particular point to note is that they fall into the common trap of suggesting the riskiness of an investment can be simply measured by the volatility of the share price. This is nonsense. Warren Buffett has said that stocks are more volatile than cash or bonds, but they’re safer to own in the long run, and he is quite right. The riskiness of an investment is a function of many other factors than price volatility. Major risks are the trustworthiness of the investment manager – the case of Revolution Beauty is discussed below as an example of what investors would have liked to know before they purchased the shares.

Revolution Beauty

The shares in Revolution Beauty (REVB) were suspended in September 2022 after the auditors raised concerns. On Friday (13/1/2023) all the bad news was revealed.

One of the issues is that larger than normal sales were booked to three distributors in the last month of the financial year. Payment for these orders was delayed. Two of the distributors returned some of the stock at a later date. This is a classic example of “channel stuffing” to improve a company’s financial reports. This is a very well known method of improving a company’s financial figures and is a fraud on investors. It’s a clear example of orders being booked in the expectation that they would never be delivered but reversed out in the next financial period.

There were also personal loans from two of the directors to the distributors or their affiliates and also loans made to some of the non-exec directors and senior managers which were not disclosed to the board.

We wait to see what action is taken against the directors who orchestrated this conspiracy but I suspect it won’t be as severe as I would like to see.

Slater Growth Fund

I have been monitoring the performance reports of other investors last year to see who did worse than me. Another recent example reported is that of the Slater Growth Fund run by Mark Slater. He is usually a sound manager – performance of +23% in the last five years well ahead of the relevant index and that includes a negative 25.5% last year. Last year was definitely not a good year for “growth” funds and my portfolio was certainly focussed on growth companies at the start of 2022. Similar problems were faced by the Fundsmith Equity Fund and the CFP SDL Buffettology Fund.

But as an individual investor I could quickly exit some of my holdings when I saw the way the wind was blowing while fund managers would have had more difficulty in moving rapidly as a few large sales would have depressed the share prices of companies they were selling. The other issue is that open-ended fund managers may have to sell holdings to meet redemption requests when investors want to withdraw their money which many did as gloom spread through markets. This is why I prefer closed-end investment trusts to open-ended funds – the former managers can make their own decisions about whether it is a good time to sell or hold on.

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

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Transparency Task Force Attacks FCA and Sophisticated Investor/HNWI Status

Following on from the BBC Panorama programme on the Blackmore Bond scandal the Transparency Task Force have launched an attack on the incompetence of the Financial Conduct Authority – see https://www.transparencytaskforce.org/letters-to-mps-about-blackmore-bond/ . It includes a letter you can send to your Member of Parliament asking for some reform.

I agree with most of their recommendations on how matters can be improved.

One issue I would also raise is that the Panorama programme made it clear that risky and unregulated investments were sold to individuals who would not normally have qualified as “sophisticated investors” or as high net worth individuals, as is required.

It is possible to ‘self-certify’ yourself as a HNWI or a sophisticated investor. To self-certify as a HNWI you have to earn at least £100,000 per year or have net assets (excluding your property, pension rights and so on) of at least £250,000.

To self-certify as a sophisticated investor you must: have been a member of a business angels network for at least six months; or have made at least one investment in an unlisted security in the previous two years; or have worked in a professional capacity in the provision of finance to small- or medium-sized businesses in the last two years or in the provision of private equity; or be or have been within the last two years a director of a company with a turnover of at least £1m.

These are quite low hurdles and as the investor is only making the declaration with no checks necessary or evidence provided it is wide open to abuse. The company accepting the certification only has to have a reasonable belief that it is correct.

I suggest the HNWI limits should be raised and that those who claim to be sophisticated investors actually pass a simple examination on financial matters or have a recognised business/accounting qualification to prove what they are claiming.

There are simply too many cases of dubious investments being sold to widows and retired folks who have no way to judge the prudence of the matter.

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

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Panorama Attacks FCA over Mini-Bond Failures

The BBC’s Panorama programme last night did a good job of pointing out the failure of the Financial Conduct Authority (FCA) to prevent fraud on investors in “mini-bonds”. In this case the focus was on the collapse of Blackmore Bond where 2,000 people lost £46m when the company collapsed. But there have been several other similar cases.

Mini-bonds are unregulated investments so should only be sold to “sophisticated” investors who might understand the risks. In this case people who clearly were not were persuaded to invest in property developments with “guaranteed” returns of up to 10%. Who was providing the guarantees? A company based in Costa Rica. A lot of the investors’ money was wasted on marketing costs and management fees paid to the directors. The investors were lured into putting money in via boiler rooms and internet advertising.

The FCA were told about the abuses but apparently did very little to stop it. Andrew Bailey who headed the FCA at the time failed to act. He subsequently has been made Governor of the Bank of England – a reward for failure it seems.

For more details see:  https://www.bbc.co.uk/news/business-62504445

Comment: It is surely wrong for the FCA not to have taken action on this matter when it was first brought to their attention. Many investors put money in after that and when it was obviously a dubious investment scheme.

The FCA simply says it was outside their remit to step in as it was not a regulated business registered with the FCA but that is not good enough. In fact the promotion of mini-bonds is a regulated activity. But any action taken by the FCA was too little and too late. See https://commonslibrary.parliament.uk/research-briefings/cbp-9272/ for more background.

This is in essence another example of the managerial incompetence of the FCA in the same way that it has failed to prevent a number of frauds on stock market investors, or tackle them when they have become apparent. Likewise the promoters of the Blackmore Bonds do not appear to be facing any legal penalties.

SNP MP Peter Grant said this in Parliament: “in 50 years from now or 100 years from now, our successors will be in the successor to this Parliament bemoaning the fact that billions of pounds have been taken out of the pockets of hard-working people and used to fund a luxury lifestyle for charlatans, crooks and conmen”. That’s a fair summary of the reality.

How to ensure you don’t fall victim to such promotions? I suggest the following:

  1. Don’t put all your life savings into unregulated investments and diversification is the key.
  2. Don’t fall for promises that are unlikely to be achieved – such as promising a “safe” return of near 10% when big financial institutions are offering much less. This tells you that they are high risk investments.
  3. Make sure you have widespread investment experience before you dabble in unregulated investments such as in mini-bonds and EIS companies.
  4. Don’t trust anyone, however glib they are. Make sure they have a track record of managing money responsibly.
  5. Flashy web sites and glossy literature are warning signs, not positive endorsements.

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

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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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