Progress on the Kay Review

Back in 2011 the Government commissioned Prof. John Kay to review the operation of UK stock markets. There were concerns about “short-termism” by investors, poor corporate governance in companies, excessive executive pay, lack of engagement by investors with companies, high investment charges and excessive intermediation in the investment chain. The resulting report was a very good analysis of the defects in the way the market operated and the recommendations in the report for change were generally accepted by the Government.

The Government (namely the BIS Department) has now published a review of the progress on implementation. Here’s a summary of the key points:

– The FRC have published an updated “Stewardship Code” and the Government claims there has been encouraging progress on stewardship and engagement. In addition institutional investors have created an “Investor Forum” (see  http://www.investorforum.org.uk ), although this writer suggests it’s been slow in getting into operation and having any impact. The Government promises to continue support of this initiative.

– A report of independent research into metrics and models used to assess company and investment performance by long-term investors has been published. The Government is to convene roundtables to agree some practical outcomes from this research.

– The report claims that the reforms to the governance of company directors’ remuneration (such as binding votes on pay) is having an impact, that engagement on this matter has improved and there are “signs of restraint in the terms of levels of remuneration and moves towards longer-term pay structures“. Further monitoring of this is to take place.

– There has been the development of various industry good practice and regulatory measures to improve transparency of costs and charges in the investment chain.

– There have also been improvements to the FRC’s UK Corporate Governance Code (and to the codes published by the AIC and QCA).

– The Kay Review said “The Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register” and there is a commitment to continue this work bearing in mind the CSDR regulations and the requirement to abolish paper share certificates by 2025. It promises consideration of whether the system for holding dematerialised securities (namely mostly the nominee system at present in the UK) works effectively and efficiently for both investors and issuers. ShareSoc’s view is of course that it does not. It mentions the BIS Department are commissioning research to improve their understanding of how both institutional and individual investors hold their shares and whether reform would be desirable – you can guess ShareSoc’s stance on that!

One important aspect of the CSDR regulations that it highlights (see pages 31/32 of the report) is that “CSDR also mandates for the first time that direct participants in Central Securities Depositories, such as CREST, must offer their clients a choice of both individually segregated (‘designated’) and omnibus (‘pooled’) accounts on reasonable commercial terms and disclose the protections afforded and costs of each level of segregation they offer. This is intended to provide greater choice and transparency in the system of intermediated shareholdings“. That would certainly improve the lot of nominee shareholders if no better solution can be agreed, although the details of how this is implemented will be key.

In summary this is a useful review of progress and covers a wide range of areas (more than can be mentioned in this brief note), so it’s well worth reading if you have an interest in these matters.

Roger Lawson

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