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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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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Diversity – But at What Cost?

The Financial Conduct Authority (FCA) have published a public consultation on “Diversity and inclusion on company boards and executive committees”. This summer I seen to be spending a lot of my time responding to FCA consultations and this one seems to yet another that will impose costs on publicly listed companies with no clear benefit while diverting management time. As I pointed out in my response to the Primary Markets Effectiveness Review, the imposition of more corporate governance regulations is one reason why public listings are falling as company management decide that it’s easier to remain private. That is the negative outcome of over-regulation.

What’s the latest consultation proposing? They propose to change the Listing Rules so as to “require companies to disclose publicly in their annual financial report whether they meet specific board diversity targets relating to gender and ethnicity on a ‘comply or explain’ basis”.

They also propose that companies publish standardised data on the composition of their board and the senior levels of executive management by gender and ethnic background; and to encourage a broader consideration of diversity at board level, they are also proposing to amend the corporate governance rules to expand reporting requirements to wider diversity characteristics. This could include ethnicity, sexual orientation, disability and socio-economic background.

They may also “seek to widen the scope of the targets to levels below executive management”, i.e. This means not just the board and top management will be covered in future.

In the short term the rules will require:

  • At least 40% of the board should be women (including those self-identifying as women).
  • At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)) should be a woman (including those self-identifying as a woman).
  • At least one member of the board should be from a non-White ethnic minority background.

Although there is wide acceptance that more diversity on some boards may be preferable. By avoiding the all-white, male and elderly boards that were so common in the past, one can ensure more understanding of the modern world. And it is certainly the case that there may be some social justice in avoiding unfair discrimination against some characteristics. But is there any evidence that more diverse boards actually improve company performance?

The FCA report covers this issue in Section 3.27 onwards where they review the evidence. The evidence is not clear so they say: “Our own literature review of academic and other research published alongside our DP concludes that, overall, the empirical evidence for the impact of diverse workforces and boards on financial performance is inconclusive”. In essence the imposition of more regulation in this area may have no benefit while the disadvantages of loading management with extra responsibilities is ignored.

What concerns me most is that instead of picking the best candidates for board or senior management positions, they may be selected based on sex or ethnicity, i.e. there will be discrimination against others, which is of course illegal.

There is also a rather peculiar focus on factors that have no obvious relevance to fitness for a role. One of the oddities of public companies is that anyone with no qualifications or experience can be appointed. There is no requirement to have a business or accounting qualification. No requirement to know the basics of company law or to have had any training for the role of being a company director. Is this not most perverse?

For example I have attended several General Meetings of companies in the past where it was clear that the directors did not understand the basics of company law.

You also get peculiar results at present where the keenness to appoint more females results in some directors with little obvious qualifications for anything. They tend to end up chairing remuneration committees for example where they are dominated by executive management.

Would it not be preferable to regulate to ensure directors had basic competence in law and finance rather than happening to have the right skin colour? That is likely to be much more effective in improving company performance.

One of the most laughable aspects of the proposed new regime is that to meet the new rules on gender diversity all that needs to be done is for a current male member to “self-identify” as female. Will management be required to inquire into the details of sexual orientation when recruiting?

If we are going to start regulating management composition based on their characteristics, should we also not be ensuring a balance of ages, heights, physical fitness (no fatties allowed) or other relevant characteristics?

There are better alternatives to improving the diversity of boards other than using quotas. Education and structured experience programmes are more likely to produce a better outcome.

In summary I suggest this proposal is a complete nonsense and should be withdrawn. Readers should submit their own responses to the consultation to avoid responses being biased by the thoughts of those who wish to be politically correct.

You can see my detailed responses to the consultation questions here: https://www.roliscon.com/Diversity-Consultation-Response.pdf  

FCA Paper: Diversity and inclusion on company boards and executive committees. Consultation Paper CP21/24: https://www.fca.org.uk/publication/consultation/cp21-24.pdf

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

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