New boards elected at Oxford Technology VCTs

Today all four of the Oxford Technology VCTs held their Annual General Meetings.

The meetings were well attended as Oxford Technology VCT (OXT) and Oxford Technology 3 VCT (OTT) previously had their VCT status withdrawn by HMRC, although this has now been temporarily “set aside” while an appeal is processed. ShareSoc formed a “Shareholder Action Group” with a committee of interested shareholders to make representations on this matter and protect their interests.

We also pushed for changes to the corporate governance of these VCTs including changes in the directors (see the note dated the 1st July on this web page: where the history of events is documented).

Today the boards of these companies elected new directors, with two new directors (Alex Starling and Richard Roth) on OXT and one new director (Robin Goodfellow) on OTT. Alex Starling will become the Chairman of OXT and Robin Goodfellow will become the Chairman of OTT. Shareholders voted overwhelmingly in favour of these changes and for all the other resolutions based on the proxy counts.

Lucius Cary, the fund manager has resigned as a director of OTT and OXT but will remain a director of the other two Oxford Technology VCTs.

ShareSoc Deputy Chairman Roger Lawson had this to say on the above changes:”I welcome these changes and the appointment of Robin Goodfellow, who was one of the Shareholder Action Group committee members, is particularly appreciated. This campaign, ably led by Tim Grattan, has demonstrated how effective a shareholder group can be in tackling problem companies and situations. But as I raised at the AGMs today, the boards of these companies do need to tackle the issue of the long term under-performance of these VCTs in addition to ensure the VCT status issue is satisfactorily concluded (as now seems likely).”

Note that ShareSoc will be issuing a full report, including more comments, on these AGMs which will be available on the ShareSoc Members Network and to campaign supporters as soon as possible. ShareSoc is one of the few sources of information on the AGMs of companies and these reports often contain a lot of useful information for shareholders.

Roger Lawson

Cyber threats and how to avoid them

The International Organisation of Securities Commissions (Iosco) has warned about the growing threats of cyber attacks to financial institutions. The Chairman, Greg Medcraft, has warned that there needs to be a much more concerted effort to tackle such threats. For example disruption of a stock exchange for any length of time could have serious consequences. Securities regulators who are members of Iosco are seeing increased attacks with more than half of securities exchanges being the subject of one or more.

The closure of a market might actually have less impact than one imagines. After all markets have been suspended in the past for lengthy periods of time. As we are commemorating the outbreak of the First World War, it’s worth noting that both the London Stock Exchange and the New York Exchange (NYSE) were suspended on July 31st 1914 and the latter remained closed until December. The latter fostered the creation of an “alternative exchange” called the New Street market so that people could continue to trade (the urge to do so is overpowering of course) but as an article by William L. Sieber on this topic reports: “New Street’s success implies that, from a public policy perspective, expensive back-up trading facilities are not required to preserve liquidity during a trading suspension in established markets. Back-up records of share ownership and transfer facilities, however, are crucial to maintaining liquidity.” 

But let us consider for one moment the biggest risk to private investors who trade on an “execution only” basis using electronic platforms. This is that your broker’s electronic trading platform is disabled by a cyber attack. For example, digital denial of service (DDOS) attacks against financial web sites are now very common. The attackers, often based in Eastern Europe, bombard the site with transactions thus overwhelming the system and blocking other normal users from accessing it. They then present a ransom demand for ceasing the attack. There is complex and expensive software that can be installed to thwart such attacks, but not everyone might be using it.

There are other ways to attack and bring down a web site so you might imagine that one obvious back up approach would be to revert to telephone dealing. But that’s easier said than done. It is unlikely that most brokers have the resources in terms of staff or telephone lines to fall back on in such circumstances.

Indeed it is quite remarkable how little information is available to clients of stockbrokers about their security measures, back-up systems and disaster recovery procedures. Perhaps they could argue that publishing such information might of itself be a security risk, but otherwise how does one pick out those who are likely to be at risk more than others?

Those companies whose web sites are poorly designed, or are not 100% reliable might be seen as most likely to be at risk. And one failure can be symptomatic of underlying problems. For example, when Royal Bank of Scotland (RBS) had outages that affected their bank clients (customers unable to withdraw their cash was one obvious symptom), it transpired that the technology platform in use was archaic with multiple overlapping systems (i.e. a “legacy” system as software professionals would call it). This meant that maintenance of the system was more difficult and it was even alleged that RBS had lost much of the expertise to do so by outsourcing the work.

So one aspect to look at is whether your broker’s web site is regularly “maintained” with minor improvements – but not continually changed whereby instability and insecurity might be introduced. Smaller stockbrokers might be more at risk than bigger ones because it now requires more investment to install and maintain IT security (that’s why lots of publicly listed companies providing IT security and services are doing so well).

If you are not only a client of the broker, but a shareholder in them when they are a listed company, you might get more information on some of these matters by reading their Annual Report or attending their AGM and asking a few questions.

One particular danger is of course where your shares are held in a nominee account (as is commonly the case), as there is no independent record of your holdings. If the brokers systems fail, or the data therein corrupted, you might have no other evidence of your holdings. For this reason ShareSoc has consistently opposed nominee accounts and recommended the use of Personal Crest Accounts where possible. Your holdings in that case are recorded in the Crest system and on the register of the companies so there is no doubt as to ownership. But it is of course always worth ensuring that you have your own record of all your holdings, and don’t simply rely on the brokers web site to tell you what you are holding. Likewise keep copies of statements of holdings issued by the broker in electronic form on your own PC, or in paper form.

The other aspect to be aware of is how to protect your account from being accessed and fraudulently used – for example by the withdrawal of cash. Broker systems are now generally more sophisticated in this area than they used to be – which is why logging in gets ever more complex (Charles Stanley were going to tighten up even more by checking IP locations and devices logged in from but further news on this failed to appear – perhaps they had second thoughts, after this writer gave them some comments).  Whether brokers’ IT systems hosting the data are as secure as they should be though is impossible to tell.

But the biggest weakness and risk to your account is the failure of users to keep their own PC and software secure and follow some simple steps. These are:

  1. Install and maintain a good quality anti-virus and firewall system, e.g. from companies such as Symantec (Norton) or McAfee.
  2. Choose passwords that are long and complex and differ from site to site (use an “autofill” software product to save you remembering them all – so you only have to remember one).
  3. Do not use third party public PCs or networks to access your account (key logging software can identify what you type in) and these systems are likely to be relatively insecure.

You also need to be very wary of “phishing” attacks, where people send you emails pretending to be from one of your banks or brokers. Do not respond to them or open any links in them. Go direct to the web site of the company (which should be stored as an address in your “favourites” to make sure it is the right address) to see if there is any message if in doubt.

In general if your stockbroking account was defrauded as a result of the  brokers defective security measures, they would be liable. But if your own lapses caused the loss, the position might be very different.

Roger Lawson

Outrage in the Cayman Islands

There is reportedly outrage in the Cayman Islands after they were included in a list of “high risk jurisdictions” by the Financial Conduct Authority (FCA). The Islands Government has expressed “great consternation” at its inclusion in the list, which only became public after a Freedom of Information Act request for the list. 

But anyone familiar with publicly listed companies that were or are registered in the Cayman Islands might not be that surprised. The Cayman Islands was a favourite location for companies that wished to conceal who their owners were or help to avoid tax. Companies that ShareSoc has commented on in the past that were registered in the Cayman Islands were Orchid Developments (a Bulgarian property company subsequently wound up after a petition from two of its own directors) and Leaf Clean Energy (a renewal energy investment trust, the subject of an activist campaign for reform after substantial losses). It was also mentioned as the likely destination of funds from Japanese company Olympus after a massive fraud. See the February 2013 ShareSoc newsletter for more comments on Cayman Islands regulation.

In essence surely those in the Cayman Islands complain too much although there have been moves to tighten regulation lately. But any investor should examine carefully those companies and their directors who choose to register in the Cayman Islands.

Roger Lawson

Good news from Hargreaves Lansdown

Hargreaves Lansdown (HL) have issued a press release announcing changes to their Vantage service. It mentions that they “listen carefully to their feedback” from clients and invest heavily in improvements. Some of the latest changes that may be of particular interest to readers include the following (refer to the HL web site for the complete list) :

– Removal of the recently introduced corporate action fee including the charge for voting shares.

– Free live share prices.

– An on-line tax centre to help with tax returns.

– Customised log-out time-outs so you can make it longer than 15 minutes (let us hope other on-line stockbrokers copy that!).

and coming soon will be:

– A stock screening tool.

– Watch lists that will synchronise between PC, smartphone and iPhone Apps.

ShareSoc did of course complain publicly about the introduction of a fee of £10 to vote shares in an HL nominee account, and we did have a meeting with HL to discuss this and how to make it easier for investors to take up their rights. The latter remains to be tackled but the £10 charge was particularly obnoxious. It is good to see that HL have been listening to both ShareSoc and their clients.

Roger Lawson

AIM and other regulatory changes

Effective from the 11th August, there are additional requirements under AIM Rule 26. Rule 26 covers what information is required to be published on a company’s web site – for example the listing prospectus and last Annual Report. In future a company must disclose what corporate governance code the company is using, or not as the case may be. Currently AIM companies often refer to the Quoted Companies Alliance (QCA) Corporate Governance Code for Small and Mid-Size Quoted Companies, some use the main UK Corporate Governance Code that main market companies have to “comply with or explain”, but many do not use any specific code.

In future they will also need to include at least the last three years Annual Reports (previously only the latest) and they will also need to update information on the number of securities in issue and significant shareholdings at least every six months.

In addition there is a new requirement to indicate whether the company is covered by the City Code on Takeovers and Mergers which provides significant additional protection for investors. Most foreign registered companies are not so covered.

These changes are surely beneficial for investors, but it seems odd that information on significant shareholdings and number of shares in issue can still be as much as six months out of date.

Other prospective regulatory changes

Effective from the 6th October, share trade settlement is moving to T+2 (currently T+3), which means you should get the cash credited to your accounts on a share sale a day earlier.

The FCA is also consulting on the abolition of interim management statements (i.e. quarterly reports). If you have any views on that subject please let ShareSoc know.

Roger Lawson

Members’ Conference Call

ShareSoc is keen to engage with its members. We appreciate that it is not always easy for all our members to get to our members’ meetings, which are the primary forum for discussion about the issues we are tackling on behalf of our membership, and the services we offer.

Therefore, we would like to offer our full members the opportunity to communicate their wishes and concerns via a telephone conference call. This will take place at 7pm on 10th September. Full members will be emailed with details of the call.

At the start of the call, our chairman, Stan Grierson will summarise ShareSoc’s recent activities, thereafter directors will participate and be available to answer questions and discuss matters of concern. Stan will moderate the call. Time permitting, there will be an open forum after the pre-submitted questions have been dealt with.

Roger Lawson

Best Execution is Not Always the Best

The Financial Conduct Authority (FCA) have undertaken a review of “best execution”. This is a simple principle enforced as part of the FCA’s Rule Book that requires your stockbroker to always obtain the best execution if you give them an order. That primarily means obtaining the best price where there are multiple markets on which the trade can be dealt but speed of execution, settlement terms and certainty of execution can also be taken into account. A stockbroker should be acting on your behalf and in your interests, not their own or that of a third party. This means “A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors” to quote from the Rule Book.

Why is this important? Because otherwise a broker could place an order at an unfavourable price to you based on receiving a kick-back of some kind, or simply to their drinking pals. For example, market makers might pay for “order flow” to encourage brokers to place orders via them rather than some other market maker. Payment for order flow (PFOF) is severely restricted under the current FCA rules.

But the FCA’s review found that “many firms do not understand key elements of our requirements and are not embedding them into their business practices” and “most firms are not doing enough to deliver best execution…..”.  Reading the Review report makes it clear that some firms are continuing to ignore the rules or trying to devise ways around them.

As a retail client, you may not be aware of any failings and the price discrepancy as against the “best price” may not be large on an individual trade. But costs can mount up. For example, it has been suggested that 0.1% of the value of transactions is lost from inefficient share trading, so this matter is not totally trivial.

The failure to stick to the rules surely reflects the sharp practice that is still rampant in the City despite other recent scandals.

Roger Lawson