FCA Makes Platform Switching Easier

The Financial Conduct Authority (FCA) have today announced some measures to improve competition in the platforms market. Experienced investors who use electronic trading platforms will be well aware of the problems of switching to another provider if they are dissatisfied with the service, wish to move to a cheaper provider or for other reasons such as consolidating on one provider or spreading their risk over several. It simply takes too long to move “in-specie” holdings from one platform to another ̶ it can take many months to transfer with endless chasing required.

Such transfers are also discouraged, resulting in an uncompetitive market, by the charging of exit fees by platforms. Together with the delays that investors face, this tends to lock in investors to their existing platform providers.

You can read my response to the FCA’s previous public consultation on this subject here: https://www.roliscon.com/Investment-Platforms-Market-Study.pdf . I mentioned my and others past experiences of delays of over 3 months on transfers.

The FCA is proposing to ban or limit exit fees. The FCA is also encouraging firms to take part in the STAR initiative (see https://www.joinstar.co.uk/) to improve the efficiency of the transfer process.

One particular problem with fund transfers is that sometimes a conversion of unit class is required, or it is preferable to move to a discounted class. They have set out proposals to mitigate that issue.

More information on the FCA’s proposals and a public consultation on the subject, to which I will certainly be responding, is here: https://tinyurl.com/yyjw2jpf .

At least one platform provider, AJ Bell Youinvest, has welcomed the FCA’s findings. They say a restriction on exit fees will not have a material impact on their business, and as a net receiver of assets they would expect to benefit from more transfers if they are made easier. Other platform providers may not be so happy, and may complain they won’t be able to cover their real costs of handling transfers. But there is little incentive to reduce those costs and reduce the complexity and delays in transfers at present. Therefore surely these are positive proposals that all investors should support. Everyone can respond to the consultation so if you have been affected by these problems in the past, please do so.

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

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FCA Views of the Financial Landscape

The Financial Conduct Authority (FCA) have published a document entitled “Sector Views” giving their annual analysis of the UK financial landscape and how the financial system is working – see https://tinyurl.com/yc492lkt . For retail investors there is a chapter on “Retail Investments” which is particularly worth reading.

But we also learn that the “FCA continues to plan for a range of scenarios regarding Brexit” which is good to hear. I somehow doubt it will be settled tomorrow in Parliament – I continue to forecast March 28th. We otherwise learn that cash is still king as a payment method with 40% of payment transactions, albeit falling; that 44% of consumers say nothing would encourage them to share their financial data (that has been encouraged by recent regulatory changes); that car insurance premiums are rising even though mine just fell which very much surprised me; that the ageing population presents a considerable challenge for pension savings and that mortgage borrowers are getting older (39% will have mortgages maturing when they are older than 65).

Cash ISA subscriptions continue to exceed Stock/Share ISAs by a wide margin, although the number of new cash ISA subscriptions fell last year. But only one third of the UK population hold any form of investment product. It looks like the rest are replying on pensions, state support or housing wealth to keep them in retirement.

They claim the investment platforms market is working well “in many respects” despite the fact that their use of nominee accounts for investors has disenfranchised retail investors. You can send them some comments on that via an email to sectorviews@fca.org.uk . But they do at least highlight the difficulty of switching platforms and they note that comparing pricing is also difficult.

Assets under management by the investment management sector grew to £9.1 trillion in 2017 with 20% managed for retail investors. The proportion of passively managed assets rose to 25% which continues the past trend.

Overall this review shows the size and complexity of the UK financial sector. At 36% of European Assets Under Management, it is much larger than any other European country. The next largest is France at 18% and Germany is only 9%. Let us hope it stays that way after Brexit.

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

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Blancco AGM and Regulatory Landscape

Today I attended the Annual General Meeting of Blancco Technology Group (BLTG). This technology company is now focused on the data erasure market which is surely a growing one. I have commented on this company before (see links below), particularly as the company, and its shareholders, seemed to be a victim of false accounting – an issue that is way too prevalent of late.

The legal framework under which companies, their directors and the regulatory bodies operate just seems to be too weak to bring errant directors and auditors to account. This is not just obvious from this case but from the discussions at the recent ShareSoc/UKSA sponsored meeting with the Financial Reporting Council (FRC). See my previous comments on the Autonomy case in addition. As you will see below, no action seems to be being taken against the former directors of Blancco by the company, although complaints have been made to the FRC and to the Financial Conduct Authority (FCA) about past events and the latter may still be investigating – but as usual feedback is non-existent. As regards the complaint to the FRC, they have passed the buck to the ICAEW (the regulatory body for accountants) on the basis that it is too small a company to be bothered with.

There were about a dozen shareholders at the Blancco AGM in the City of London. The Chairman, Rob Woodwood, opened the meeting by introducing the board. That included new CEO Matt Jones who joined in March and new CFO Adam Maloney. Rob said the last year was a period of positive change for the company, which one can hardly dispute. He said after a turbulent year, they are on a positive track.

Shareholder Bruce Noble, first queried comments on the impact of currency movements (see page 9 of the Annual Report). The CFO admitted it could perhaps have been explained better.

Bruce then pointed out that the report made it clear that management controls had been avoided in the past as a result of which the accounts were false. This resulted in the management obtaining £400,000 and shareholders losing £135 million. The board responded that investigations were on-going and as result they were unable to comment about what is being done due to “legal privilege”. Both Bruce and I complained that we did not understand that comment, and I said that they were in breach of their legal obligations to answer questions put by shareholders at a General Meeting (see my past articles on similar issues at Abcam and Patisserie). As usual they refused to respond further due to “legal advice” so I suggested they should get better advice.

As I said to the Chairman after the meeting ended, we don’t expect him to disclose their conversations with the FCA or FRC, but there is no reason why they cannot pursue a civil case against the former management if there are justifiable grounds. They need to give reasons if they choose not to do so and simply saying they wish to concentrate on rebuilding the business is not good enough. I suggested I would be voting against his re-election in future (not on the agenda at this meeting) if he failed to take action on this matter.

The above is an abbreviated summary of what was a rather long discussion on this issue.

Bruce Noble also criticised the proposed re-election of Frank Blin, who was Chairman of the Audit Committee when the past events occurred. He asked him to do the “honourable” thing and step down, which Mr Blin refused to do. Bruce also criticised the appointment of PWC to take over from the former auditors (KPMG) when Mr Blin had a previous relationship with PWC and PWC had received criticism about other audits. Mr Blin responded that the relationship mentioned was more than 6 years ago and PWC had been appointed after an open tender process. Another shareholder suggested they might get better attention from a smaller audit firm but Blin responded that they did need a firm that could cover a complex international business particularly their operations in Finland and India. Comment: I don’t think having a smaller audit firm would help – Grant Thornton has had similar problems to larger firms. There is a more general problem with the overall quality of audits which has been recognised in the national media and by many investors.

I questioned the presentation of the income statement in the Annual Report, where “adjustments” are mixed in with normal “reported” figures and confuse the reader. They will look at this issue.

We then had a brief presentation from the new CEO Matt Jones. He is clearly an experienced manager of IT businesses. He said they have good customers and good staff but were spread too thinly. They need to focus more. He will be focusing on those with good growth opportunities, namely ITAD, mobile and enterprise solutions (note: they each represent about one third of current revenue).

There was a question about cash flow and operating margins. The response was that they are making investment this year to increase growth and hence margins will come down this year, but will grow thereafter. It was noted later that the investment will be mainly in R&D and to a lesser extent in sales and marketing. The CFO said the key was to avoid major exceptionals and improve cash flow.

One shareholder raised the issue about reliance on one customer at 11% of turnover but the board expressed no concerns and it might fall slightly this year.

I asked about the competitive landscape. Answer given was the main area for that was in mobile and they are working to improve their offering to meet that.

Another shareholder questioned their presence in 26 countries – are they spreading themselves too thinly? The answer was they are not planning any cut back in the geographic perspective. It transpired later than some of their locations are only very small sales operations, even though the CEO clearly spends a lot of time on planes (incidentally he mentioned he is based in California and works from home with an office above his garage). Modern communications methods assist a great deal.

The CEO said they have adequate sales/marketing staff and productivity is improving.

Lastly a question was raised as to the apparent votes from large shareholder M&G who abstained on some of the resolutions. Does the board know why? The answer was no, and it was not clear whether they had even been asked why although the Chairman did say he had been in communication with them and other large shareholders. Could it be I wonder that they were also unhappy with the openness of the board and their apparent failure to pursue past wrongdoing?

In conclusion, it does seem that the Chairman and the rest of the board are at least taking sensible steps to rebuild the company. The new executives seem to be good appointments but we will have to wait and see whether they can actually produce the goods. In the meantime, investor confidence in the company may take time to rebuild but even so it’s still quite highly rated on the normal financial ratios. My concern is that revenue growth does not seem particularly high for this kind of business and the current valuation. But there is certainly business opportunities to pursue given the growing populations of IT and phone equipment that need erasure or disposal at some point.

https://roliscon.blog/2018/01/15/sharesoc-takes-up-blancco-complaints/ https://roliscon.blog/2017/12/20/lse-general-meeting-and-blancco-agm/

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

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Bioventix AGM, Babcock Attack and FCA Measures on CFDs

On Thursday (6/12/2018) I attended the Annual General Meeting of Bioventix Plc (BVXP) at Farnham Castle. There were about a dozen ordinary shareholders present. Bioventix develop antibodies for use in blood tests. Their Annual Report contains a very good explanation of the business.

This AIM company had revenue of £7.9 million last year and post-tax profits of £5.6 million. They did that with only 15 staff. Total director pay was £362,000 even though CEO Peter Harrison’s pay went up by 54% – but no shareholders even mentioned that. With consistent growth, good dividends and high return on capital, there’s not much to complain about here.

There is a copy of the last presentation the company gave to investors here: https://www.bioventix.com/investors/overview/ which gives you more information on the company.

I won’t cover the meeting in detail but there were a few points worth mentioning:

Peter explained that the Vitamin D antibody market is “plateauing”, i.e. unlikely to show the same growth as historically. The key product for future revenue growth is their new Troponin test for which there are high hopes, but take-off seems sluggish. This is a marker for heart attacks and is used to check when someone turns up in A&E with chest pains whether they are having a heart attack or some other problem, the former being much more serious of course and needing rapid treatment. The new Troponin test is faster and more accurate which helps speedy and more accurate diagnosis. However adoption of it to replace the older test is slow. This seems to be because hospitals are slow to change their “protocols”. There is also some competition but it is not clear how the company’s product stands against that in terms of sales. It would seem more education and promotion of the new product is required but Bioventix is reliant on the blood-testing machine partner (Siemens) to promote it and it seems there is little financial advantage in doing so to them – the new product is no more expensive than the old. That you might think makes it easy for customers to convert to the new, but also provides little motivation for the supplier to promote. However, NICE and others are promoting the new tests. That’s a summary of what Peter explained to the shareholders with my deductions.

It would certainly be of advantage to patients if the new test was adopted. Might have saved me hanging around in A&E for most of the night a few years back just awaiting confirmation I had not had a heart attack.

There are other antibodies in the R&D pipeline although it can take 5 years from R&D commencement to product sales, even if the product is adopted. All R&D is written off in the year incurred though.

There were questions on cash and special dividends which the company sometimes pays. The business is highly cash-generative but they like to keep about £5 million in cash on the balance sheet and no debt so that they can take up any acquisition or IP opportunities.

On Friday (7/12/2018), there was an interesting article in the Financial Times on the attack on Babcock International (BAB) by Boatman Capital Research – a typical type of attack by an anonymous blogger probably combined with shorting. The article quoted an investor as saying “Boatman made some valid points…..but there were whopping inaccuracies which seemed calculated to drive the share price down”. For example, the article mentioned claims about overruns on a contract to build a dry dock at Devonport – there is no such contract.

Babcock has been trying to find out who Boatman Capital are, but with no success at all. The organisation or its owners cannot be located, and their web site is anonymised. So Babcock cannot even sue the authors. They may well be located overseas in any case which would make it even more difficult. Babcock share price has been falling as a result and is down 20% since the Boatman report was published. See the FT report here: https://www.ft.com/content/c2780d6e-f942-11e8-af46-2022a0b02a6c

Comment (I do not hold Babcock shares): The Boatman report seems to be the usual mixture of a few probable facts, mixed with errors and innuendo as one sees in such shorting attacks. There have been a few examples where such reports did provide very important information but because of the approach the writers of such reports take it is very difficult to deduce whether the content is all true, partially true, or totally erroneous and misguided. The shorter does not care because they can do the damage regardless and turn a profit.

The basic problem is that with the internet it is easy to propagate “fake news” and get it circulated so rapidly that the company cannot respond fast enough, and regulators likewise – the latter typically take months or years to do anything, even if they have a channel they can use. We really need new legislation to stop this kind of market abuse which can just as easily involve going long on a stock as going short. Contracts for Difference (CFDs) are one way to take an interest in a share price without owning the underlying stock and hence are ideal for such market manipulations.

Which brings me on to the next topic. The Financial Conduct Authority (FCA) has announced proposals to restrict the sales of CFDs and Binary Options to retail investors. Most retail investors in CFDs lose money – see my previous comments here on this subject: https://roliscon.blog/2018/01/14/want-to-get-rich-quickly/ . The latest FCA proposals are covered here: https://www.fca.org.uk/news/press-releases/fca-proposes-permanent-measures-retail-cfds-and-binary-options

You will note it contains protections to ensure clients cannot lose all their money and positions will be closed out earlier. But leverage can still be up to 30 to 1. The new rules might substantially reduce losses incurred by retail investors, the FCA believes.

But it still looks like a half-baked compromise to me. If the FCA really wants to protect retail investors from their own foolishness, then an outright ban would surely be wiser. At best most CFD purchasers are speculating, not investing, and I cannot see why the FCA should be permitting what is essentially gambling on stock prices. It creates a dubious culture, and the promotion of these products is based on them being a quick way to riches when in reality it’s usually a quick way to become poorer.

You only have to look at the accounts of publicly listed CFD providers to see who is making the money – it’s the providers not the clients. Those companies seem to be mainly saying the new rules won’t have much impact on them. That is shame when they should do and shows how the FCA’s solution is a poor, half-baked compromise.

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

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Duty of Care or Fiduciary Duty to Investors?

The Financial Conduct Authority (FCA) have published two papers on their approach to consumers (i.e. retail savers/investors in their terminology). These cover whether a new “Duty of Care”, or a “Fiduciary Duty” (not the same thing) should be introduced.

Many people view financial market operators as paying more attention to their own interests than their clients, or that they do not take reasonable care to treat their clients fairly.

However there has been concern expressed that new obligations might lead to even more regulation than we have at present, which adds to the cost of investment substantially as more complex rules are introduced and more compliance officers hired to monitor the rules. For example, stockbroking charges have been rising recently due to more onerous regulation, some of it emanating from the EU.

This is not a one-sided debate in this writer’s view but a Fiduciary Duty would be simple to define as it is an established legal concept. A Duty of Care rather releases the clients of any obligation to take care of their own best interests.

The papers concerned are present below and the FCA would no doubt welcome your own comments on the subject.

Approach to Consumers paper: https://www.fca.org.uk/publications/corporate-documents/approach-consumers

Discussion Paper on a duty of care and potential alternative approaches: https://www.fca.org.uk/publications/discussion-papers/dp18-5-duty-care-and-potential-alternative-approaches

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

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Investment Platforms Market Study

The Financial Conduct Authority (FCA) have just published an interim report on their study of “investment platforms”. It makes for very interesting reading. That is particularly so after the revelations from Hardman last week. They reported that the revenue per assets held on the platform from Hargreaves Lansdown (HL) was more than twice that of soon to be listed AJ Bell Youinvest. HL is the gorilla in the direct to consumer platform market with about 40% market share. HL earns £473 per £100,000 invested while Youinvest earns only £209.

That surely suggests that competition is weak in this market. Indeed the FRC report highlights that investors not only have difficulty comparing the charges of different platforms, but they do not seem too concerned about high charges as they focus more on other aspects of the service provided. It also says on page 23 of the report: “Our qualitative research also found that consumer satisfaction levels are sometimes linked to satisfaction with overall investment returns, which tend to be attributed to the performance of the platform. This suggests some confusion about consumers’ understanding about platforms’ administrative function as opposed to the performance of investment products. So it is possible that consumers’ relatively high satisfaction levels with platforms could be influenced by the positive performance of financial markets in recent years”. In other words, the consumers of such services are very complacent about the costs they pay at present.

Another piece of evidence that this is not a competitive market obtained by the FRC was that they found that when platforms increased or decreased prices it had no significant impact on flows in and out of the platform. No doubt some platform operators will read that with joy, but others despair! 

Indeed when I made some comments on Citywire effectively saying I thought it suspicious that there were so many positive comments about Hargreaves Lansdown in response to an article reviewing the Hardman news, particularly as they were clearly much more expensive than other platforms who provided similar effective services (I use multiple ones) I was bombarded with comments from lovers of the HL service. Bearing in mind that platform charges can have a major impact on overall returns in the long term from stock market investments, you would think investors would pay more attention to what they are being charged.

One particular problem is that switching platforms is not only difficult and a lengthy process but can also incur charges. This is clearly anti-competitive behaviour which has been present for some years and despite complaints has not significantly improved.

The FRC summarises its findings as:

  • Switching between platforms can be difficult. Consumers who would benefit from switching can find it difficult to do so.
  • Shopping around can be difficult. Consumers who are price sensitive can find it difficult to shop around and choose a lower-cost platform.
  • The risks and expected returns of model portfolios with similar risk labels are unclear.
  • Consumers may be missing out by holding too much cash.
  • So-called “orphan clients” who were previously advised but no longer have any relationship with a financial adviser face higher charges and lower service.

That’s a good analysis of the issues. The FCA has proposed some remedies but no specific action on improving cost comparability and the proposals on improving transfer times are also quite weak although they are threatening to ban exit charges. That would certainly be a good step in the right direction. Note that a lot of the problems in transfers stem from in-specie transfers of holdings in funds and shares held in nominee accounts. Because there is no simple registration system for share and fund holdings, this complicates the transfer process enormously.

One interesting comment from the AIC on the FCA report was that it did not examine the relative performance of different investment managers, i.e. suggesting that lower cost investment trusts that they represent might be subject to prejudice by platforms. They suggest the FCA should look at that issue when looking at the competitiveness of this market.

In summary, I suggest the platform operators will be pleased with the FCA report as they have got off relatively lightly. Despite the fact that the report makes it obvious that it is a deeply uncompetitive market as regards price or even other aspects, no very firm action is proposed. But informed investors can no doubt finesse their way through the complexities of the pricing structure and service levels of different platform operators. I can only encourage you to do so and if an operator increases their charges to your disadvantage then MOVE!

The FCA Report is present here: https://www.fca.org.uk/publication/market-studies/ms17-1-2.pdf

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

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Aviva Preference Shares – FCA Announcement

Readers who take any notice of financial affairs will be aware of the furore over the threat by Aviva to redeem their preference shares by a “share cancellation” process – they claimed that is a different legal process, even though the shares were described as “irredeemable”. The shares concerned dropped in price to a significant extent because their high coupon interest rate meant they were trading at a premium when cancellation would have meant redemption at the original par value. Aviva have reconsidered the matter, but the interesting aspect today was a response from the Financial Conduct Authority (FCA) to a letter from the Treasury Select Committee. You can read it here: https://www.investegate.co.uk/financial-conduct/rns/fca-response-to-tsc-on-aviva-plc-preference-shares/201803280704471964J/

It basically gives lots of reasons why they cannot yet respond to some of the questions as they are still looking into the issues, but in response to Question 4 they seem not to concede that they should be involved in “the resolution of the legal questions”. In other words, they would be quite happy to leave it to an enormously expensive law suit by investors to resolve the key questions.

They do not seem to accept that they have an overriding objective to ensure a fair market for securities and that investors should not be prejudiced by small print, concealed or opaque legal terms and other sharp practices.

The response to Question 6, seems to try and excuse the problem by saying the shares were issued more than two decades ago and the FCA has taken subsequent action “in order to restrict the retail distribution of regulatory capital instruments….”. This is surely not an adequate excuse. The shares concerned were and are publicly traded and there is nothing stopping any investor (at least a “sophisticated” one) from trading in them. But even sophisticated private investors and some institutions were caught out by the unexpected threat from Aviva.

The FCA is again proving to be toothless in the face of seriously unethical practices. In other words, they are not doing their job competently and should be reformed in my personal opinion. I believed the FCA adopted an objective of more “principle-based regulation” a few years back but now seem to have abdicated that responsibility and are quite happy to let lawyers argue over the wording of a prospectus while ignoring the ethical issues. Just as they did with the RBS and Lloyds cases. It’s simply not good enough to issue the kind of response they have to the Treasury Select Committee.

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

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