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 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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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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