Selftrade annoys its customers

Selftrade, the execution-only stockbroker, has annoyed a large number of its customers by sending out a form asking for a lot of personal information about themselves. For example, several ShareSoc Members have contacted us to complain about the intrusive nature of the questions (which they consider a breach of privacy) and about the difficulty in completing the form due to the amount of detail required. It also generated a vociferous series of negative comments on Citywire after they mentioned the story similar to the controversy when Hargreaves Lansdown changed their charges.

It is undoubtedly the case that Selftrade have an obligation under the Money Laundering Regulations to ask some questions about the source of funds and under the regulations that apply to all financial institutions under the obligations known as “Know Your Customer (KYC)”. However, in this case they have asked such questions as the total net worth of the customer, over what time frame the wealth was created, in which countries, and if wealth was created from employment the details of such past employment, plus if wealth came from other sources such as inheritances then details of those are also required.

In effect they are asking for a very detailed report of a customers financial history back to the year when they were born – at least that seems to be what is requested. They are even imposing this obligation on all members of investment clubs who may have a very small financial interest in the account.

Needless to say many of their customers do not have such records, and do not feel it is justifiable to spend time providing this information when they have been clients of Selftrade or its predecessor firms for many years. There seems to be no discrimination between the duration of the customer relationship with the company or the size of the account.

Not only that, if the customer refuses to return the form they are threatened with having their account frozen, withdrawals may be blocked, and in addition any transfers to another broker will be blocked. In extremis it could mean these accounts being declared “dormant” or in default which might give the company an excuse to treat the assets in the account as forfeit.

Even if you decide to transfer your account to another broker, after completing the form, there are substantial costs associated with doing so because of Selftrade’s charging structure.

Now Selftrade was closed to new business in January last year. This is usually a step taken because the FCA is unhappy with some aspects of its operations. This is what Selftrade said at the time:  “Following discussions with the FSA in December, Selftrade has raised a voluntary variation of permission with the regulator. The board of Selftrade has resolved to undertake a review to enhance some of the firm’s processes, which it is committed to completing as quickly as possible“.   Whether this is connected to the latest events is unknown but the extent to which such information is requested is usually “risk-based”, i.e. the company should take into account their past experiences, the known profile of their clients and other matters. It also means they should target those customers most likely to be dubious based on what information is known about them, but this they don’t seem to have done.

Some customers have already complained to the Financial Ombudsman Service and it may be worth complaining to the Information Commissioner who looks after privacy and data protection issues more generally.

But in essence the company does have a right to ask reasonable questions so it is perhaps best to complete the form as best one can and then consider moving your account to another broker.

One aspect that Selftrade customers need to be aware of is that stockbrokers are like banks. They rely on the trust of their customers and once that is lost you know what happens – customers tend to rapidly depart thus undermining the financial viability of the business.

In the case of stockbrokers where clients are all in nominee accounts (as probably applies to Selftrade), you need to consider what happens if the broker goes bust, or into administration. There have been a number of past examples of this, and it typically creates enormous difficulties because the first thing the administrator does is freeze all the accounts – sometimes for months if not years, while they sort out who owns what. In addition, there can be discrepancies between what the clients think they hold, what the company holds in their records and the information in the Crest system or on the share register of the company. There can be a shortfall in essence which can be difficult to resolve and may require court adjudication. One of the common reasons for companies being closed to new business is inadequate record keeping being identified after a review by regulators, which might give cause for concern in this case.

ShareSoc has consistently warned about the legal dangers of nominee accounts in the past, and we would like to see them discouraged, or at least clients who open them being warned about the dangers associated with them. In addition we would like to see those holding ISA and SIPP accounts not being forced into nominee accounts as at present.

One point to bear in mind is if you do move to another broker, try to pick reliable and trustworthy ones, not necessarily the cheapest. In addition if you have to use a nominee account it may be best to pick a broker that is publicly listed in the UK so you can easily monitor its financial stability – there are several of them. Selftrade is the trading name of Talos Securities Ltd, a private company registered in England and Wales.  It is reported as being a subsidiary of Boursorama, one of Europe’s leading online stockbrokers and part of the SociétéGénérale Group in France.

Roger Lawson

Barclays wins vote on pay

Barclays Bank Annual General Meeting yesterday showed how difficult it is to get excessive pay awards voted down. Despite strong opposition from PIRC, F&C and Standard Life (the latter actually spoke at the meeting which is unusual for institutions), only 24% of votes were cast against the Remuneration Report with an even lower number against the Remuneration Policy. There were a number of shareholders who abstained so the media commonly reported 34% of shareholders  as failing to support the board, but in essence the vote against was a long way from being won.

The key issue was the increase in bonuses when profits were falling. But the Chairman simply said they needed to increase them to pay competitive rates and avoid their staff being poached in New York. The general level of remuneration versus the dividends paid to shareholders was also an issue – there is a strong feeling the company is being run in the interests of highly paid bankers rather than shareholders.

Only recently Vince Cable wrote to FTSE-100 remuneration committee chairmen warning them that unless pay is curbed then more Government action is likely. He intends to review the position after the current pay round. Comment: Remuneration policies under the new legislation are now being set for the next 3 years. It is very clear that the excessive and complex bonus schemes that have accelerated pay levels for senior staff out of all proportion in the last few years are not being downsized at all. The new legislation is having a marginal impact as ShareSoc forecast because shareholders (most of whom are institutions) have no great incentive to control it. They would prefer to have a cosy relationship with the directors and therefore find it difficult to vote against pay awards plus of course they often swim in the same pool.

Although the new pay legislation has its positive aspects. For example, it does enable shareholders to see pay figures more clearly and gives them a binding vote. In reality, when directors effectively continue to set their own pay, while advised by remuneration consultants who also have an interest in high remuneration levels, nothing much will change. Remuneration committees need more independent representatives on them, or remuneration should be decided by a supervisory board containing other stakeholders (such as employees).

Although the Barclays case is one example that has been in the spotlight, the reality is that those companies where there is less obvious controversy are not controlling pay as hoped. For example, I attended the AGM of Elementis yesterday, a FTSE-250 company. The adopted Remuneration Policy gives a short term cash bonus of up to 1 times basic salary, plus an LTIP of share awards worth up to 150% of salary. It was supported by over 97% of shareholders who voted (on a relatively high turnout of 73%). Plus ça change as the French say. There is a full report on the Elementis AGM on the ShareSoc Members Network and nobody raised the remuneration issue in the meeting, perhaps because the company is doing reasonably well and total pay for the executive directors did come down due to failure to get their full bonuses last year. But the use of complex pay structures that have ramped up overall pay in recent years is still prevalent.

I would certainly urge Mr Cable to take another look at this problem because better pay reporting and a vote on pay is not enough by themselves to tackle this issue.

Roger Lawson

Quindell – and how to avoid the shorters

Quindell, a company operating in the insurance sector, came under attack yesterday by Gotham City Research LLC, an investment analysis firm. Quindell’s shares ended down on the day by 39% and were down more than 50% at one point.

Gotham City make numerous allegations in a 74-page document which is available from their web site. Without a lot more knowledge of this company and a detailed study of these allegations, it is impossible to comment on the substance of them, but some of the main claims are about the quality of the profits, the fact that cash flow as a result is lower than one might expect, and that some of their acquisitions seem to have little substance.

Quindell immediately issued an announcement rejecting the allegations as being “highly defamatory” and “deliberately misrepresentative” and rejecting the conclusions that are made. They will be giving a more detailed response later this week and in the meantime are consulting their legal advisors. They also stated they were confident of meeting or exceeding market expectations in 2014.

Without doubt this is a shorting attack by Gotham City because their document says “You should assume that as of the publication date of this report, Gotham City Research LLC stands to profit in the event the issuer’s stock declines“. Other shorting specialists have also apparently jumped on the bandwagon.

Who are Gotham City Research you ask? Is this some arm of the Bruce Wayne empire of Batman fame? Not quite. Very little seems to be known about it. The company was incorporated in Delaware in February 2013, but no phone number or street address is given on their web site, and all it says about the business is that “Gotham City Research LLC focuses on due diligence-based, special situation investing. As of the publication date of our articles, we may have long or short equity positions in the companies covered.”

However it is known that they have been involved in other such attacks on EBIX (for tax reporting), on Tile Shop and on Blucora (a.k.a. Infospace) which was also attacked by Prof Edelman of Blinkx fame for alleged click fraud.  The owners or principals of Gotham City are unknown.

It seems pretty clear that these kinds of attacks, which first came to public notice by the activities of Muddy Waters, will continue on vulnerable companies unless the SEC and FCA takes steps to reign them in. As the Editor of respected journal Techinvest had this to say about the Blinkx affair: “The ferocity of the blitzkrieg-style assault launched by the coordinated shorters was a first-ever novelty shock for London market participants. Having tasted blood once, you can bet the attackers will be back, except this time it will be a different victim“. He was certainly right there.

How do you avoid becoming a victim of such shorting attacks?

You can use stop losses to ensure you minimise the impact when such an event occurs, but as the editor of Techinvest found out, you only have to be absent from monitoring your portfolio for a very short period of time for the damage to be done (a few minutes in the case of Quindell). You might try an automatic stop loss but they are very tricky unless monitored closely.

The real key is to avoid investing in stocks that are likely targets for shorting attacks. These are typically smaller companies with high liquidity (i.e. a high volume of trading). It is no surprise that Quindell is one of the most actively traded stocks on the London market, and a favourite of speculators.

Shorters need liquidity in a stock or they won’t be able to acquire and close out their positions. Smaller stocks are preferable because they are less likely to attract the attention of regulatory authorities. AIM listed UK stocks are ideal because of the “light touch” self-regulation of the AIM market by the LSE. But the market cap cannot be too small or it’s not worthwhile for the shorters.

Stocks that are favourites of momentum traders and have been driven up to high levels on fundamental ratios as a result are also ideal for shorters. If they can be tipped into negative momentum then the same traders will drive the stock down.

Any companies with questionable cash flow (e.g. profits not turning into cash), suspect revenue recognition, changes of auditors, or chequered past histories are also ideal to attack, even if the shorters can only raise doubts rather than actually produce evidence.  So investors really do need to study the companies they invest in and do analysis of their financial accounts. An in-depth understanding may help you to avoid those companies that may be the subject of shorting attacks, and enable you to determine whether the allegations have substance if you do happen to hold them.

One obvious risk control approach is never to let your high risk investments exceed more than a certain percentage of your overall portfolio. You may then be able to weather any storm that appears. This is not the first time Quindell has been the subject of a shorting attack – it recovered from a previous one in 2013.

Comment: there does seem to be a problem in that claims can be made by those out of the easy reach of UK libel laws, for both legal and practical reasons, and where any rebuttal is going to take days at least to publish. That is all the shorters need to generate large profits. So the substance of the claims can be weak but still enable them to make money.  With any largish business, particularly one that has grown rapidly and by acquisition, it’s not difficult to pick holes in its accounts or operations. One only has to look at the problems of FTSE-100 companies in the last few years to see this. Numerous allegations of mis-selling and fraud in banks, criminal activities and environmental disasters alleged against oil companies, dubious associations with foreign individuals or organisations in mining and oil companies, bribery in pharmaceutical and aerospace/defence companies, one could go on at length on this subject. It’s only because these are powerful and wealthy businesses with some innate trust in them by investors that enables them to avoid shorting attacks.

Some people consider the activities of shorters as healthy to control excessive up-side speculation in inherently poor quality companies, but that is not solely this writers view. Shorting is one thing and should not be made illegal, but when it is combined with public attacks which no responsible analyst or newspaper would allege then it goes beyond what is ethically reasonable. When made by anonymous authors beyond UK legal jurisdiction, it is dubious in the extreme.

Such activities effectively encourage the view that the stock market is only for speculators rather than investors, which damages everyone in the long term.

For the avoidance of doubt, I have never held an interest, short or long, in Quindell and have no views on the claims made by Gotham City.

Roger Lawson

Postscript 24/4/2014: the Financial Times reported some more information on Gotham City subsequently. They suggest that it is linked to a person named Daniel Yu. They also said “It’s the Muddy Waters  model – go short then go public”, which well summarises their modus operandi.


Letter in the FT regarding dematerialised share registration system


A ShareSoc Member, Michael Coulson, had a letter published in the Financial Times this morning. It points out that there is a tried and tested electronic share registration system called CHESS already in use in Australia. It provides direct share registration for shareholders in a dematerialised form. Mr Coulson suggests it be adopted in the UK rather than have a lengthy and uncertain process of developing a similar system. See


It would surely be a better system than the prevalent use of nominee accounts for retail investors in the UK which means most of them are disenfranchised and cannot vote.

Roger Lawson

Changes to Company Regulations

Today on Bank Holiday Easter Monday, the Government announced some changes to company regulations. Does this show how they work all the days of the year to improve the UK business environment, or they thought it a good time to announce controversial proposals? You can judge for yourselves the answer to that question after reading what follows. But as most of the proposals were well flagged in advance by past public consultations, they may only be controversial to those companies who have more work to do as a result.

The announcements are contained in two documents available from the BIS Department’s web site under the titles of “Company Filing Requirements – Red Tape Challenge” and “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business“.  They follow previous public consultations to which ShareSoc responded.

Most of the proposals only affect private companies registered in the UK rather than publicly listed companies so I will summarise them in brief.

Company filing requirements will be simplified. For example the need to file an Annual Return at a set point in the year will be dropped. So if any other changes are made (such as the appointment of a new director), you will simply be able to confirm other information held by Companies House is still correct at the same time. There will be more checks on new directors to confirm they have agreed to be appointed and there will be more emphasis on electronic communication (a company’s email address will also be recorded).

Those who own or control more than 25% of shares in a UK company or limited liability partnership as a “beneficial interest” (i.e. via a nominee or trust) will need to be recorded on a publicly available register at Companies House. However public companies who already disclose ownership under the FCA’s Disclosure and Transparency Rules or other similar regulated market rules will be exempt. Companies will likewise have to maintain a register of such beneficial owners.

Note that ShareSoc’s response to the consultation suggested that everyone hiding behind a nominee name should disclose their interest, so it is disappointing that only those holding more than 25% will be affected. With enforcement of disclosure also currently weak, and not likely to improve, this may not help much to improve the transparency of ownership in public companies. In addition it might simply encourage registration of companies in jurisdictions such as the Cayman Islands and Bermuda where transparency is negligible.

Bearer shares will be prohibited, with existing such shares converted to registered shares over a period of time. Corporate directors will also be banned, although there will be some exceptions to that rule. The rules for the disqualification of directors will also be toughened.

The new rules are intended to tackle tax avoidance and the evasion of legal responsibility by avoiding traceability of ownership. They may go some way towards ameliorating those problems, and therefore must surely be generally welcomed.

Roger Lawson

Directors’ Share Purchases at Chrysalis VCT

Would you be happy if you saw that the directors of a listed company had apparently purchased shares at an advantageous price? In other words had purchased shares in the market  at a price that was not available to anyone else?

On Thursday the 17th April, I chose to purchase 3,000 shares in Chrysalis VCT. This followed an announcement by the company on the 14th April that the company had achieved two successful exits from portfolio companies which had increased the company’s Net Asset Value (NAV) to 96.5p (an uplift of over 15%).

This is of course a typical VCT where trading in the shares is extremely thin, and even more so than most because the company has a policy of not doing routine market buy-backs. As a result the share price is usually on a large discount to NAV – for example, 33% on the mid-price at the time of writing – and there is usually a large bid/offer price spread. The spread quoted on the 17th April was 60-70p (all day so far as I am aware).

Well I managed to purchase the 3,000 shares at about 8.50 am via Charles Stanley Direct, without manual intervention, at a price of 66p which I was not too disappointed with as it was nearer the mid price point than the quoted offer price.

I was rather surprised to see an RNS announcement later in the day that four directors had purchased a total of 70,000 shares in the company all at 61.5p.  That included 27,000 shares purchased by Chairman Peter Harkness. These were in fact apparently reported as taking place at 11.58 am as one single trade, but as a “delayed” trade on the Stock Exchange trade reporting system – but that normally means they have simply been delayed by up to an hour rather than reported within a few minutes as normal.

Having seen the RNS announcement, I contacted another broker (Stocktrade part of Brewin Dolpin) after 4.00 pm via telephone and asked them to get a dealer to talk to the market maker and request a price for the purchase of 10,000 shares. The best they could obtain was 69p, which I declined.

So it would seem that the directors, or someone acting for them, managed to obtain shares at a price not available in the open market on that day.  Of course it is possible that they obtained the shares not from a market maker but from some other source. It’s also worth noting that sometimes holders of VCT shares or their executors have large numbers of shares which they wish to sell and which the market maker cannot easily absorb. That might have been brought to the attention of the directors or the Company Secretary. But is it appropriate for Directors to take advantage of their position in this way if that is what happened?

Note that I experienced a similar situation some years ago with Northern Venture Trust – another VCT. It did not happen there again after I complained.

I have written to the Chairman asking for an explanation of these events. It is surely wrong that directors can purchase shares at an advantageous price as against anyone else if that is in fact what happened.

 Roger Lawson

Remuneration at Barclays and Persimmon

Barclays Bank Annual General Meeting is due next week on the 24th April. Pay of bankers is always controversial and Barclays is no exception. Pay has been going up but performance has gone down, and a rights issue is required to strengthen the company’s balance sheet. The CEO, Antony Jenkins, has waived his bonus for last year, but that has not placated investors. The bonus pool has been increased and “Role Based Pay” introduced to avoid restrictions imposed by the new CRD regulations.

 In addition a new “Remuneration Review Panel” has been introduced, and the ratio of variable to fixed remuneration for “Code” staff (i.e. senior managers) is proposed to go up from a maximum of 100% to 200%.

A new director and prospective head of the Remuneration Committee, Crawford Gillies, was announced on the 15th April. This simply looks like another attempt to head off complaints at the forthcoming AGM.

Institutional investor advisor PIRC has recommended voting against both the Remuneration Report and the Remuneration Policy, against the change for Code staff and against the re-election of Sir John Sunderland – the outgoing Remuneration Committee Chairman.

They also recommend voting against Mike Ashley as a non-executive director because he is a former KPMG partner and allegedly involved in aggressive accounting standards. To quote PIRC:  “This is particularly relevant given that aggressive accounting techniques have been associated with high levels of executive pay, which the Barclays Board does not appear to have mitigated“.

PIRC even suggests voting against the Annual Report & Accounts because there is no vote on the dividend. It’s normal practice to have such a Resolution and not many shareholders ever vote against it, but this writer sometimes does so. For example, paying out a dividend when the company is having to raise capital from shareholders to improve its balance sheet might be seen as illogical.

Shareholders in Barclays may surely be wise to follow PIRC’s lead on these issues if you are attending the AGM or have not yet submitted your proxy vote.


Housebuilders Persimmon held their AGM yesterday. There were significant votes against their remuneration last year due to concerns about the bonus scheme, but this year there were only 9% of proxy votes against the Remuneration Policy and even less against the Remuneration Report. With about 100 shareholders present, only one person put their hand up against these votes after the Chairman explained that there had been some misunderstanding over the bonus scheme. With housebuilders doing financially very well at present, opposition was almost bound to be muted. But Barclays may be a different case altogether.

Roger Lawson