FCA Action, Shareholder Rights and Beaufort

Better Finance, the European representative body for retail investors have issued a couple of interesting announcements this morning. The first compliments the UK’s Financial Conduct Authority (FCA) for their action over “closet index trackers”. They are investment funds that pretend to be active managers and charge the higher fees that normally apply to such funds, while in practice they hug their benchmark index. Other European regulators have been less than prompt in taking action on this problem it transpires.

It’s not quite as positive as that though as although a number of UK asset managers have voluntarily agreed to compensate investors in such funds at a cost of £34 million, and enforcement action may be taken against others for misleading marketing material, this appears to be a voluntary scheme rather than a formal compensation arrangement.

Which are the funds complained about? I could not find any published list. But back in 2015, the Daily Telegraph reported the following as being the worse ones: Halifax UK Growth, Scottish Widows UK Growth, Santander UK Equity, Halifax UK Equity Income and Scottish Widows UK Equity Income – all bank controlled business you will note.

The second report from Better Finance was on the publication of the final draft of the EU Shareholder Rights Directive. This was intended to improve the rights of individual shareholders but is in reality grossly defective in that respect. Even if implemented into UK law, it will not improve the rights for UK investors. Indeed it might worsen them. For example Better Finance said this: “Important barriers to cross-border shareholder engagement within the EU virtually remain in place, since intermediaries will by and large still be able to charge higher fees to shareholders wanting to exercise their cross-border voting rights (admittedly subject to certain conditions) and beneficial owners of shares in nominee and omnibus accounts will still not have any voting rights (with the exception of very large shareholders), to name but two of the remaining issues.”

Let us hope that the UK Government and the FCA take more positive steps to improve the rights of UK investors which have been undermined by the use of nominee accounts and other market practices adopted in recent years.

Another recent news item from the FCA was about the forced administration of Beaufort Securities and Beaufort Asset Clearing Services. Beaufort specialised in promoting small cap companies such as those listing or listed on AIM to private investors. But the US Department of Justice investigated dubious activities in relation to US shares and has charged the firm and some individuals involved with securities fraud and money laundering. These allegations appear to be about typical “pump and dump” schemes where share prices are ramped up by active trading of the shares by the promoters of companies, such that the prices of the shares sold to investors bear little relation to fundamental value, and then the insiders sell their shares leaving private investors holding shares which the market rapidly revalues downwards. On twitter one person published charts showing the share prices of companies that Beaufort promoted to investors and it does indeed look convincing evidence of abusive practices.

These kinds of share promotions by “boiler rooms” staffed by persuasive salesmen were very common a few years back and they seem to be coming back into favour as there are a number of other companies promoting small cap or unlisted stocks to investors. Regulations might have been toughened, and such companies are more careful to ensure investors are apparently “sophisticated” or can stand the possible risks and losses, but the FCA still seems slow to tackle unethical practices. Should it really have taken US regulatory authorities to take down this company? The FCA has been aware of the market abuse in the share trading of AIM shares for some time but no action has been taken. It’s just another example of how small cap shares, and particularly the AIM market, attracts individuals of dubious ethics like bees to a honeypot.

If you have invested via Beaufort in stocks, are your holdings likely to be secure? As they may be held in a nominee account it rather depends on the quality of the record keeping by Beaufort. Past experience of similar situations does not inspire confidence. It can take years for an administrator to sort out who owns what and in the meantime the assets are frozen. The administrators are PricewaterhouseCoopers (PWC).

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

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RBS, GRG and Borrowing From Banks

I just had a read of the Financial Conduct Authority’s report on the Global Restructuring Group of the Royal Bank of Scotland (RBS). This was published by the Treasury Select Committee despite the fact that the FCA wished to delay it further. At 361 pages in length, it’s not exactly a quick read.

The operations of GRG have been the subject of many complaints – hundreds in fact from mainly smaller businesses. This was a part of GRG where borrowers in default were placed so as to “help” them. In reality their fees were raised and many of the financially distressed companies that went through the process ended up being put into administration.

The FCA report certainly supports many of the complaints. It says one in six of the cases it examined RBS had caused “material financial distress”. They suggest there were major failings in GRG’s “governance and oversight arrangements” where narrow commercial objectives were paramount. The interests of their customers were ignored and the stated objectives of GRG to support the turnaround of potentially viable customers was not pursued. In summary they conclude there was “widespread inappropriate treatment of customers”.

In other words, the interests of RBS took precedence. Bearing in mind that this was the culture in RBS under the leadership of Fred Goodwin, it’s not that surprising. I saw this myself where RBS was involved with public companies in some difficulties. The other stakeholders seemed to be ignored by RBS who pursued their own interests regardless. But should borrowers have ever expected a bank like RBS to take account of their interests?

Regrettably small businesses often rely on bank lending to fund their working capital. This is a very dangerous practice when working capital can swing violently in response to market circumstances. Even larger companies often go bust when they take on too much debt unwisely and simply run out of cash – the latest example being Carillion of course.

Since the financial crisis of 2008, people have lowered their trust in bankers. They are now rated alongside estate agents and used car salesmen. But past trusts in bankers was always misplaced. Bankers are there to make money from you or your company. When you have lots of assets and cash, they are happy to lend on good terms. When you really need the funds, they will be reluctant to lend and if they do charge high fees and impose onerous terms. The moral is: businesses should be financed by risk capital, i.e. equity or preference shares.

Companies that gear up their balance sheets with debt rather than equity (and RBS itself was a great example of the problem of little equity to support its business back in 2008), might apparently be improving the “efficiency” of their financial structure and enable higher profits but in reality they are also increasing the riskiness of the business. Investors should be very wary of companies with high or increasing debts. It might look easy to repay the interest due out of cash flow now, but tomorrow it might look very different.

You can read the full FCA report on GRG here: http://www.parliament.uk/documents/commons-committees/treasury/s166-rbs-grg.pdf

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

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ShareSoc Takes Up Blancco Complaints

As a small shareholder in Blancco Technology Group (BLTG) I reported on the events at their AGM in a previous blog post. This company had to restate their accounts following discovery that some of the previously recognised revenues were invalid. It calls into question the competence of the past audits of the company and the management of the business.

ShareSoc has now taken up the issues and has requested both the Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) to investigate what happened. See this press release that ShareSoc issued for more information: https://www.sharesoc.org/sharesoc-news/sharesoc-requests-investigation-affairs-blancco-technology-group/

Shareholders in this company have lost substantial capital as a result of the failure to recognise revenue correctly, a failing all too common in IT companies and which, for some reason, auditors seem unable to spot.

If you were or are a shareholder in Blancco, you can register your interest in this matter on the ShareSoc web site so that you are informed of future news.

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

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Want to Get Rich Quickly?

Do you sincerely want to be rich? That was the sales slogan used by fraudster Bernie Cornfeld which attracted many. Or perhaps even better, do you want to sincerely get rich quickly? That is in essence the sales pitch used by many promoters of CFDs (Contracts for Difference).

CFDs are geared investments in stock market shares, bitcoins, commodities or any volatile instrument where you can magnify your profits many times. Or of course magnify your losses. You can, to put it simply, lose all your money and very quickly. Last week the Financial Conduct Authority (FCA) wrote a stern letter to CFD distributors saying in essence that their review revealed substantial failings in the rules that they should have been following.

CFD products are complex and risky and are not suitable for inexperienced or unsophisticated investors. But 76% of retail customers for CFDs lost money in the year to June 2016 according to the FCA which clearly indicates that there are plenty of suckers out there who are being exploited. One of the many problems that the FCA discovered was inadequate client qualification with many relying on broad descriptions of “sophisticated” and “financially literate”. Indeed, they often relied solely on the client’s words about their knowledge and experience and their qualification to be classed as “elective professional” clients which effectively relieves the seller of any responsibility for the advice they give.

This problem extends not just to CFD providers but historically has been a big problem in the promotion of shares in unlisted companies, the small cap companies listed on AIM and in some overseas markets. If reliance is placed on what the client says about their competence and ability, it’s rather like asking a motorist whether they are a good driver – they will all say yes.

In essence there surely needs to be a better way to tackle this issue. If that cannot be devised then the FCA is likely to get much tougher in policing the market for CFDs.

But the FCA should not be too concerned. If those who speculate in CFDs lose the ability to do so, they’ll just move onto something else like trading in bitcoins or forex – and there are lots of promoters of those around. The problem really comes down to basic financial education. Folks need to learn at an early age that there are no quick ways to get rich. If they do not then they will fall for the latest scam regardless of the actions of regulators.

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

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ULS Technology, Keystone Law and Collusion on IPO Pricing

Yesterday I attended an interim results presentation by ULS Technology (ULS). They have been listed on AIM for a couple of years and have grown both from organic increases in revenue and from acquisitions which is often a good formula. They operate in the legal conveyancing and estate agency market where volumes have not been great of late – it seems house prices have made it difficult for folks to move plus changes to stamp duty and buy-to-let taxes have deterred transactions. But they seem to be prospering regardless.

I first became interested in this company, and acquired some shares, when I noticed that Geoff Wicks have become a director. He has also just been made Chairman. Geoff used to be CEO of Group NBT which was one of my most successful technology investments and he did a great job of sorting out and then growing a failing dotcom business.

I did perhaps amuse the CEO of ULS, Ben Thompson, by noting that I don’t really like companies with unmemorable three letter acronym names (ULS, NBT for example). Investors can never recall what they do. ULS used to be called United Legal Services but needed a new “umbrella” name so came up quickly with ULS. Should have used a branding consultancy I suggest. Unless you are a really big company, like IBM or BAE, establishing name recognition for such “brands” is hard work.

So ULS it is for the present, but understanding what they do and how they make money is not necessarily easy. Attending the seminar helped with understanding that. In summary, ULS aim to make house moving easier by making conveyancing easier, quicker and lower costs. They use web technology to support that. So if you are looking for a conveyancing solicitor they can help, and they have partnerships with other businesses in the house buying space such as mortgage brokers/lenders so that their service is offered when required. For example, Lloyds Bank is one of their largest partners. In addition they have a specialist comparison web site for when you are looking for an estate agent (includes price and performance comparisons).

For the conveyancing service they get paid by solicitors to which customers are referred, who pay 5 days after the legal completion with a fixed fee (does not vary with house price cost). The customer saves on paperwork such as filling out multiple forms. The customer introducers are many small mortgage brokers, large financial networks and others such as Moneysupermarket.com and Home Owners Alliance. They do seem to have some competitors but these are generally smaller in size and have nowhere near the same size of “panel” containing solicitors to which referrals are sent. The market generally for conveyancing services is still very old fashioned and dominated by “cottage industry” firms. ULS have only 2.6% of the conveyancing market but have a desire to become much larger. It certainly seems a market that is ripe for technical disruption.

Estateagent4me.com is their estate agency comparison site where you can search for agents and select on the basis of: the Fees they will charge; Average time to sell a property like yours; How close they might get to achieving an asking price; and How successful they are at selling similar homes. I asked whether they had received any legal threats from Purplebricks who apparently were not happy at all about some reviews that were published on their service, but it seems they have not.

The company expects to grow by: 1) Organic growth; 2) M&A (already done some of those); 3) Future new product development. They are not rushing to move outside the UK although there might be opportunities there. In essence they seem to be aiming for a conservative, profitable growth strategy which is often the kind of company I like, rather than betting the farm on a very rapid expansion as per Purplebricks. Return on capital is what matters, not empire building at huge cost.

There were a number of good questions from the audience of private investors (organised by Walbrook) but I’ll only cover one that arose. The accounts show a very low “current ratio” because the current liabilities, particularly the “Trade and other payables” figure is high at £7.8 million. This does include two earn-out payments due from past acquisitions of £5.2 million and taking those out makes the ratio look more reasonable. It would seem they do have a credit facility lined up to cover those payments, but this will add to the gearing of the company of course, at least temporarily even if operating cash flow is positive as it appears to be. They may wish to raise more equity also I suspect, particularly if other acquisitions are contemplated.

Also yesterday a legal firm named Keystone Law Group Plc listed on AIM. I think this is only the second of two commercial legal firms to list (Gateley Holdings, GTLY, was the first). Keystone promptly went to a premium over the listing price. I’ll have to read the IPO Prospectus which is available on the company’s web site under AIM Rule 26. Keystone are different to many law firms in that most of their solicitors are effectively freelances and they only get paid when the client pays (yes they are part of the new “gig” economy). The prospectus should make interesting reading as I have been a client of theirs in a libel action I have been pursuing of late which you should hear more about very soon. But buying shares in new IPOs is generally something to avoid.

Meanwhile the Financial Conduct Authority (FCA) FCA has accused fund managements of colluding on IPOs. The regulator alleges Artemis, Newton, River and Mercantile and Hargreave Hale shared the prices they were willing to pay for shares. This story should run and run as it attacks the informal nature of conversations in the City of London about deals under consideration. But colluding on pricing is a breach of competition law as anyone in business should surely know.

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

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Barclays Stockbroking Complaints

Several newspapers and on-line news services have reported this week on the debacle at Barclays. They launched a new “Smart Investor” site to replace their Barclayshare share trading service. The complaints range from failure to advise new account log-in details, support service uncontactable, old features missing (or perhaps simply moved elsewhere and not easily found in some cases), higher charges (fees restructured), to some account types or share holdings being no longer permitted.

Barclays have integrated it with their on-line bank account service which probably makes sense, but they clearly got some basic things wrong with this kind of migration which are:

  1. Beta testing of the new software on real customers must have been limited in scope, if done at all.
  2. All clients were moved at the same time and forcibly. No parallel running, no options for clients to choose when to migrate, etc.
  3. If possible, avoid “big bangs”. Changes to systems should be done gradually and in stages to avoid massive new learning processes by clients.

When will IT teams learn that folks get “habituated” to software and get very unhappy when it’s changed, even when the new system works well and has more features (and in Barclays case, it obviously had some problems). It’s like moving the products on the shelves of supermarkets so the customers can’t find their favourite foods any more. Now Paypal did a similar migration recently, and the new menus were hopeless to begin with, but they allowed you to drop into the old menus for some time. So only some minor cursing was the result. But Barclays may lose some of their 200,000 stockbroking clients from this debacle it seems.

Stockbroking platforms are really important to get right as they involve large value transactions by often sophisticated traders but there have been several examples over the years of new platforms failing to meet the basic needs of clients.

What do you do when this happens? Move your account to someone else? If only it was that simple.

From several experiences of doing this, all I can say is that you won’t have much difficulty finding someone to take it on, but the process often takes months with endless hassles along the way.

Indeed I have complained to the Financial Conduct Authority (FCA) about this in the past – see https://www.sharesoc.org/blog/regulations-and-law/stockbroker-transfers-more-evidence-of-unreasonable-delays/

Anyone who meets this problem should also complain to the FCA and encourage them to tackle it. If you can switch a bank account in 7 days (and that’s mandated), why not a stockbroking account?

The complexity partly arises from the use of nominee accounts and the problems with funds rather than direct shareholdings, but these difficulties are surely fixable if we had a decent share and fund registration system and stockbrokers were motivated to get the issue sorted out. Needless to point out that stockbrokers don’t like to make it easy to switch so won’t do so unless pushed because they like to lock their clients in (hence the use of nominee accounts also of course).

In the meantime, if you do decide to switch you may find it easier to move all your holdings into cash first – but you need to be wary about the tax implications of doing so.

This FCA web page tells you how to complain about Barclays new service, and about delays in transfers, here: https://www.fca.org.uk/consumers/how-complain . But if you wish to complain about the general lack of action on broker transfers, you could write to David Geale, Director of Policy, FCA, 25 The North Colonnade, London, E14 5HS.

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

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